Citadel Follows Paulson in Pre-Rout Bet on Regions Financial

Citadel LLC and Lansdowne Partners Ltd. boosted stakes in Regions Financial Corp. in the second quarter, mimicking earlier bets by hedge fund Paulson & Co., before the bank led this month’s rout in U.S. financial stocks.

The three firms, along with Capital Research Global Investors, Fairholme Capital Management LLC and Arrowstreet Capital LP, held a total of $1.21 billion in shares of Birmingham, Alabama-based Regions as of June 30, according to the companies’ regulatory filings this month. Regions has plunged 31 percent this month, leading a 21 percent slide in the 24-company KBW Bank Index.

The firm, whose results improved in the first and fourth quarters, drew investors with a stock “inexpensive versus its normalized earnings power,” said Thomas Brown, chief executive officer of Second Curve Capital LLC and a Bloomberg Television contributing editor. The situation changed this month when U.S. regional banks tumbled on concern they’ll be hardest hit by a slowing economy and extended low interest-rate environment, said Jefferson Harralson, an analyst at KBW Inc.

“The regional banks rely more on the business of taking in deposits and making loans,” Harralson said. “Right now deposits have little value because rates are so low and the loan demand is very minimal.”

The Federal Reserve announced last week that it would keep its benchmark interest rate at a record low at least through mid-2013. The persistent low rate is preventing regional banks from turning an increasing deposit base into earnings growth because of flatter yields, Harralson said.

Regional Banks Decline

SunTrust Banks Inc. and Salt Lake City-based Zions Bancorporation both slid 28 percent this month. BB&T Corp., based in Winston-Salem, North Carolina, and Cincinnati-based Fifth Third Bancorp are also among August’s worst performers, declining 23 percent and 24 percent, respectively. Cleveland-based KeyCorp has fallen 22 percent.

Citadel, Lansdowne, Capital Research and Arrowstreet were among firms that reported the largest purchases of Regions stock during the second quarter, according to data compiled by Bloomberg. Fairholme, led by founder Bruce Berkowitz and Regions’s largest holder, and Paulson largely maintained positions they had built before the period began. The six firms held about 16 percent of Regions stock as of June 30, Bloomberg data show.

Regions fell 35 cents, or 7.7 percent, to $4.19 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have fallen 40 percent this year.

Regions’s Profit

KBW has a 12-month price estimate of $7 for the stock. Regions also is on the firm’s most recent list of lenders that are likely to attract buyer interest and have a “greater than average” chance they could be sold, Harralson said. Evelyn Mitchell, a spokeswoman for Regions, declined to comment on the stock price.

Regions, the 10th-largest U.S. bank by deposits, reported a third consecutive profit as loan-loss provisions declined in the second quarter. The lender last posted an annual profit in 2007 and has written off more than $3 billion in loans since the start of 2009, as developers, house builders and mortgage borrowers in the U.S. Southeast struggled to make payments. Regions hasn’t repaid a $3.5 billion U.S. bailout.

If economic growth is 1 percent or less in the next one to two years, profit estimates for large U.S. lenders including several regional banks may be slashed as much as 30 percent, according to analysts at Deutsche Bank AG. U.S. gross domestic product, adjusted for inflation, slowed to 1.6 percent in the second quarter from a year earlier.

‘Sluggish’ Revenue Growth

“This pretty much solidifies that revenue growth is going to be very sluggish for the industry through this year at least,” said John Pancari, an analyst at New York-based Evercore Partners Inc.

With lower-than-expected loan growth, regional lenders will continue cutting costs, Pancari said. In the second quarter, Regions posted a $77 million charge partly related to the consolidation of about 40 branches later this year, Chief Financial Officer David Turner said in July. The bank operates about 1,800 offices in 16 states.

Even with slower loan growth, regional banks’ credit quality is improving, and they should set aside less to cover bad loans in the third quarter, Second Curve’s Brown said. Regions’s second-quarter credit-loss provision was $398 million, 39 percent less than a year earlier. Still, investors’ concern that the economy will fuel loan losses is weighing on the industry’s shares, he said.

Investors Cut Holdings

“Their portfolios have been scrubbed,” said Brown, who doesn’t hold shares in Regions. “What I’m surprised at is that people would be so worried about additional loan losses at the banks that have already had major loan losses, like Regions.”

Total credit-loss provisions among U.S. banks plunged 60 percent in the first quarter this year from the same period in 2010, according to Bloomberg data.

Some of Regions’s largest investors slashed holdings in the lender in the second quarter, including New York-based JPMorgan Chase & Co. and Fidelity Management & Research LLC.

John Paulson’s hedge fund didn’t change its Regions holding in the second quarter even as it cut stakes in other lenders, including Bank of America Corp., Citigroup Inc., and Atlanta-based SunTrust.

Citadel’s holdings totaled $72.9 million on June 30; Fairholme held $768 million; Capital Research $78.7 million; Arrowstreet $110 million and Lansdowne $60.8 million, Bloomberg data show. Paulson held a $120 million stake in Regions at the end of the second quarter, according to the data.

Troubled-Debt Disclosure

Armel Leslie, a spokesman for New York-based Paulson & Co., Chuck Freadhoff of Capital Research, and Devon Spurgeon, a spokeswoman for Chicago-based Citadel, the $11 billion hedge fund run by Ken Griffin, declined to comment.

Tom Murray, a spokesman for London-based Lansdowne, the biggest hedge fund in Europe, Charlotte Powell of JPMorgan asset management, and Fairholme’s Hedda Nadler declined to comment. Michael Stanton, a spokesman for Boston-based Arrowstreet, didn’t return calls seeking comment.

Following guidance from the Financial Accounting Standards Board, Regions will being reporting newly identified troubled debt restructurings, or TDRs, on Sept. 30, the lender said in a regulatory filing this month. The amount of new TDRs could be as much as $1 billion, which is related to commercial and investor real estate loans, Regions said. The bank doesn’t expect its loan-loss allowance to materially change as a result of an increase, according to the filing.

‘Elevated Risk Profile’

The TDR disclosure could be exacerbating the stock’s decline, Pancari said.

“While I agree that Regions is on the right trajectory and is making gradual progress, you can’t disregard the elevated risk profile from certain things like the TDR disclosure,” he said. Pancari said he doesn’t expect an increase in net write-offs or loan-loss provisions if TDRs climb.

Chief Executive Officer Grayson Hall, 54, has said that Regions’s core businesses continue to improve as the bank builds its consumer loan portfolio to balance commercial business.

“What’s going to cause the stock to go back to book value is, are they going to put the credit problems behind them and make money?” Brown said.