Regions: Financial Winner

NEW YORK (TheStreet) -- Regions Financial (RF) was the winner among large financial services companies on Friday, with shares rising over 2.4% to close at $7.18.

The broad equity indexes rose after a letter sent on Wednesday by Federal Reserve Chairman Ben Bernanke to House Committee on Oversight and Government Reform Committee chairman Darrell Issa (R., Calif) was released, raising hopes of additional economic stimulus by the central bank.

In response to a question from Issa on whether further quantitative easing could foster economic growth given the low interest rates across the entire Treasury yield curve, Bernanke wrote, "there is scope for further action," referencing the use of nontraditional policy tools, such as balance sheet actions, which would expand upon the Fed's simultaneous purchase of long-term securities and sale of short-term securities, to narrow the yield curve.

In answer to a question on whether it was premature to consider further action in light of the "long and variable lags," in the effect of policy actions, Bernanke said that because monetary policy actions operate with a lag, the stance of policy must necessarily be set in light of a forecast of the future performance of the economy.

The KBW Bank Index (I:BKX) rose 1% to close at 47.17, with all but three of the 24 index components rounding out the week with gains.

Regions Financial's shares have now returned 67% year-to-date, following a 38% decline during 2011. The shares trade for nine times the consensus 2013 estimate of 80 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 72 cents.

Regions went through a major transition during the second quarter, redeeming $3.5 billion in preferred stock held by the government for bailout assistance received in 2008 through the Troubled Assets Relief Program, after selling its Morgan Keegan subsidiary and raising $900 million in common equity during the first quarter.

The company reported second-quarter earnings available to common shareholders of $284 million, or 20 cents a share, increasing from $145 million, or 11 cents a share during the first quarter, and $55 million, or four cents a share, during the second quarter of 2011. The second-quarter earnings were reduced by $71 million, or five cents a share, from the accelerated discount accretion on the redeemed TARP preferred shares.

KBW analyst Jefferson Harralson on Wednesday reiterated his "market perform" rating for Regions, while raising his price target for the shares by a dollar to $8, saying that after a meeting with Regions CFO David Turner, he "came away feeling better about our current EPS expectations and RF's ability to more actively manage capital levels."

Harralson also said that the company will head into the Federal Reserve's annual stress tests next year "with a much greater position of strength," and that "we are modeling for the quarterly dividend to increase from $0.01 to $0.04 beginning 2Q13--thus we are expecting a $0.13 dividend payout next year," with "a $200 million buyback" of common shares.

The analyst also said that "RF will soon be back in the M&A game and could look to acquire banks, asset generators (i.e., non-banks) and sees opportunities in mortgage servicing as well."

KBW estimates that Regions will earn 76 cents a share for all of 2012, and matches the consensus with an EPS estimate of 80 cents for 2013.

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