Keefe, Bruyette & Woods (KBW) on Thursday upgraded four bank stocks and cut its view on two as it surveys the effects of a brutal selloff in recent weeks after the collapse of Silicon Valley Bank and ahead of first-quarter earnings updates starting Friday, April 14. The KBW Nasdaq Bank Index rose 1.2% on Thursday, helped by comments from St. Louis Federal Reserve President James Bullard saying he was seeing reduced stress in the financial system in recent days. The Index is down around 20% so far in 2023, compared with a 6.2% increase in the S&P 500 and 14% in the Nasdaq. Bank stocks.
KBW said it expects bank stocks to be affected by relative balance-sheet performance on deposits, liquidity and capital as key factors as looks toward first-quarter results. KBW cut its median 2023 earnings estimates for banks by 8% and reduced its 2025 collective earnings view by 11%.
“KBW’s most recent look at industry deposit data points to stabilization in small bank deposits,” analysts said. “But deposits and liquidity levels will be area of focus in earnings reports.”
“The primary risks that could affect our earnings outlook and price target include an unexpected increase in credit costs, reduced loan demand, and margin pressure,” KBW said.
Upgrades
Fifth Third Bancorp (FITB)
- KBW upgraded Fifth Third Bancorp’s stock to outperform from market perform, while lowering its price target to $34 a share from $38. (31.9% potential upside to FITB’s last close).
- The ratings change reflects the stock’s current discounted valuation, against KBW’s expectation that Fifth Third will generate better returns than its peers.
- Analyst David Konrad noted that Fifth Third has better upside. “Improved profitability from Dividend Finance in H2 2023, capital generation and under 1% CRE office exposure should drive outperformance in the stock.”
- EPS estimate changes: 2023E/2024E cut to $3.70/$3.60 from $3.90/$4. P
- Fifth Third primary risks faced include unexpected increase in credit costs, reduced loan demand and margin pressure, KBW said.
- Fifth Third stock rose 2.5% Thursday
Huntington Bancshares (HBAN)
- KBW also upgraded Huntington Bancshares Inc. to market perform from underperform.
- PT reduced to $13 from $13.50 (17.8% potential upside to HBAN’s last close).
- KBW analysts said recent stock underperformance has brought Huntington’s valuation more in line with the peer group and expectations.
- “The premium is appropriate given stronger-than-peer liquidity, strong capital and lower volatility to earnings,” said KBW’s Konrad.
- EPS estimate changes: 2023E/2024E cut to $1.45/$1.40 from $1.52/$1.45.
- Primary risks facing Huntington Bancshares include unexpected increase in credit costs, reduced loan demand and margin pressure, KBW said.
- Huntington Bancshares rose 1.8% Thursday.
Popular Inc (BPOP)
- KBW upgraded Popular Inc. to outperform from market perform
- PT unchanged at $74 (32.5% potential upside to BPOP’s last close).
- “The crux of our call is two-fold: 1) TBVPS growth that is 2-3x peers, and 2) cheap valuation,” said analyst Kelly Motta.
- Popular, Inc. is the leading financial institution in Puerto Rico, by both assets and deposits, and ranks among the top 50 U.S. bank holding companies by assets.
- EPS estimate changes: 2023E/2024E cut to $8.21/$8.21 from $9.29/$9.65.
- Popular Inc.’s stock rose 3.5%.
Columbia Banking System (COLB)
- KBW raised its view of Columbia Banking System Inc. to outperform from market perform.
- The company has the fourth highest tangible book value per share among stocks in the KBW Nasdaq Regional Banking Index (KRX) at 45%, analyst Christopher McGratty noted. New York Community Bancorp (NYSE:NYCB), which McGratty reiterated at Outperform, has a 53% TBV/share the second highest in KRX.
- “Because of the recentness and significance of mark-to-market of COLB and NYCB’s balance sheet, both companies have optionality to proactively manage the balance sheet with little/no impact to capital/ earnings,” the note said.
- Return on tangible common equity of the median bank in KRX (KRX) stood at 14%. That compares with COLB’s 20.8% ROTCE and NYCB’s 15.6% ratio in McGratty’s revised 2024 estimates.
- McGratty also raised his 2023 EPS estimate for NYCB, which acquired failed lender Signature Bank on March 19. McGratty raised his 2023 EPS estimate to $1.22 from $1.15 vs. $1.26 consensus (12 analyst estimates)
- Columbia Banking System’s stock rose by 6.2% Thursday
Overweight
KBW said it’s recommending overweight position in Western Alliance Bancorp $WAL, First Citizens Bancshares Inc. $FNCA, Cadence Bank $CADE, Metropolitan Bank Holding Corp. $MCB and The Bancorp Inc. $TBBK
KBW is also recommending a “pair trade” of overweight U.S. Bancorp and underweight PNC Financial Services Group Inc.
Downgrades
PNC (PNC)
- KBW downgraded PNC to underperform from market perform and cut its price target to $125 a share from $157.
- KBW said PNC’s stock is trading at a “outsized premium valuation” while offering lower earnings visibility.
- “Although we consider PNC a high-quality super-regional bank, we believe the current 27% premium to the group is stretched (10% historically) given expectations of lower-than-peer returns and a higher enhanced loan-to-deposit ratio vs. peers,” KBW said.
- Shares of PNC rose 1.5% on Thursday.
Atlantic Union Bankshares (AUB)
- KBW downgraded Atlantic Union Bankshares Corp. to market perform from outperform and cut its price target to $36 a share from $42. (6.2% potential upside to AUB’s last close).
- “Given the risk for downward revisions in guidance at [Atlantic Union], and in light of its outperformance and premium valuation, we believe a neutral rating is more appropriate at this time”.
- EPS estimate changes: 2023E/2024E cut to $3.05/$3.20 from $3.50/$3.45.
- “We see little upside to valuation from here as we believe AUB will need to lower guidance from higher funding costs, slower growth and more reserve build,” said KBW analyst Catherine Mealor.
- Atlantic Union Bankshares fell 1% Thursday.
The KBW Nasdaq Bank Index (Index) is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and Nasdaq, Inc. and is composed of large national US money centers, regional banks and thrift institutions that are publicly traded in the US. The Index is rebalanced and reconstituted quarterly. The KBW Bank Index is focused primarily on banking and its components are selected by a committee consisting of five individuals. Four of the committee members are employees of KBW, while the fifth member is an employee of the NASDAQ Exchange.
Source: KBW
From The TradersCommunity Research Desk