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Regions Financial’s return on equity is lower than its peers

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Mar. 23 2015, Updated 11:04 a.m. ET

Improved returns on equity

Regions Financial’s (RF) return on equity, or ROE, over the last five-year period improved from -4.4% in 2010 to 6.6% in 2014. Despite marginally higher net income for 2014, the bank’s ROE actually declined compared to 2013. This was due to the higher equity base used in the calculation. At the end of 2014, Regions Financial’s average equity was higher—compared to the previous year.

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ROE lower than its peers

Although Regions Financial’s ROE improved, it’s lower than its peers. The above graph compares Regions Financial’s ROE with its peers. Regions Financial’s ROE is the second lowest in the peer group. One of the factors contributing to its lower ROE is excess capital. While the ROE for U.S. Bancorp (USB) and Wells Fargo (WFC) is well beyond 12%, the ROE is lower than 6% for Zions Bancorporation (ZION). Together, these three banks form ~11.5% of the Financial Select Sector SPDR ETF (XLF).

Regions Financial’s capital plans

The bank has higher capital levels compared to its peers. This is also reflected in its Tier 1 Common Capital Ratio. The ratio measures the bank’s core equity capital compared to its total risk-weighted assets. Core equity capital includes common equity, retained earnings, and certain qualifying preferred stock. Regions Financial’s ratio is higher compared to its peers.

The bank’s top priority is to return excess capital to its shareholders. There are two ways that the bank can to do this. It can increase dividends or repurchase shares. These plans need regulatory approval under CCAR (Comprehensive Capital Analysis and Review)—the Fed’s annual test to review large banks’ capital plans. Earlier, the bank got approval for its 2013 and 2014 capital plans under CCAR.

Regions Financials is also seeking other strategic opportunities to deploy the excess capital. This might include mergers or inorganic growth.

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