Banking, finance, and taxes
5 Mid-Cap Regional Banks Undervalued by 20% or More
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With the promise of higher interest rates coming and with less financial regulation already underway, much focus has been given to the higher future earnings capacity of the banking industry. Tax reform still seems to be a dream, and interest rates have not come up very much, but all in all the lower regulation will be a boon for many of the small and mid-sized banks.
Wedbush Securities has launched coverage on 15 regional mid-cap banks. While the firm has nine of these rated with Neutral ratings, there were five new Outperform ratings and one Underperform rating handed out in this call.
24/7 Wall St. has decided to focus on the Outperform banks because Neutral ratings are interpreted by new investors as “no reason to buy and no reason to sell.”
24/7 Wall St. compared Wedbush’s target prices to the Thomson Reuters consensus analyst targets, and we included what the implied upside is. On average the Outperform ratings had just above 20% in implied upside, which is about double what traditional new Buy and Outperform ratings offer for upside in competing analyst calls. We have also included a quick hit versus the last book value versus the current share price.
The Wedbush note said of the banking industry call:
We have a more positive bias on the mid-cap banks relative to the regional banks since mid-cap banks have experienced better loan growth with improved business sentiment actually translating into increased loan demand, which contrasts with the regional banks. With the exception of loan growth, we expect other fundamental trends to be very similar to the regional banks, including net interest margin expansion, decent deposit growth, and a benign credit quality outlook. Furthermore, we expect the mid-cap banks to benefit to the extent Trump’s policies get enacted, including fiscal stimulus through infrastructure spending, regulatory reform, tax reform, and healthcare reform …
As a reminder, with the Dow and S&P indexes right at all-time highs, most new analyst calls with Buy and Outperform ratings currently come with 8% to 15% upside at this stage in the bull market. Traditional new analyst calls in Dow stocks in general have implied upside that is closer to 8% for Buy and Outperform-rated stocks, sometimes less. More aggressive analyst calls in S&P stocks are generally coming with up to 15% upside.
Webster Financial Corp. (NYSE: WBS) is almost a $5 billion bank by market value, and its stock was given an Outperform rating and was held out with health care reform in particular. The $60 target price from Wedbush is almost 20% higher than the $50.13 closing price noted on the call, but the consensus analyst target is $51.67. Webster’s current value is about 1.9 times its book value. The reason for that is simple: Webster is the parent of HSA Bank, the top independent financial source for the Health Savings Accounts that have been touted under all Republican health care reform goals. Wedbush’s report said:
Our Outperform rating is based on our expectation that Webster’s HSA Bank subsidiary should spearhead extraordinary growth for the company for years to come. Webster’s HSA Bank subsidiary is the second-largest HSA administrator in the country, and we believe the shift to consumer-directed healthcare through HSAs could ultimately be as significant as the shift from pension plans to 401k plans by corporations over the past few decades – and Webster is in prime position to benefit from this transition.
East West Bancorp Inc. (NASDAQ: EWBC) was started as Outperform with a $68 price target, versus a $56.21 prior close. East West has an $8.4 billion market cap, and the consensus target price is closer to $61.50. It is valued at 2.3 times book value, a larger premium than the best money-center banks. Wedbush said:
We view East West Bancorp as the premier Asian-American bank in the US, which stands to benefit from substantial expected growth in the Asian-American population in coming decades. We expect East West Bancorp’s positioning as the go-to bank for bridging financial transactions between the East and the West to become an even bigger differentiator for the company as this trend plays out. We believe East West deserves a premium valuation given strong expected loan and deposit growth, and this should lead to an expanding multiple given it trades in-line with peers.
First Republic Bank (NYSE: FRC) was started as Outperform with a $121 price target, more than 20% higher than the $99.10 closing price. The consensus target price is $100.95. Wedbush likes the top notch client service as a winning strategy. First Republic targets affluent cities: San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland, Boston, New York City, Greenwich and Palm Beach. It also has the highest price-to-book ratio of the group here at almost 2.5 times book value. Wedbush said:
We view First Republic Bank’s business model as the gold standard in banking given its success in wooing the highly desirable affluent client base, which generates not only core spread income, but also wealth management fees. The company is one of the fastest-growing large banks in the nation with loans and deposits growing six fold over the past 10 years, and more recently, increased EPS and revenue north of 20% in 2016. We expect First Republic Bank’s consistent approach and proven value proposition to deliver continued strong growth through 2017/2018.
Signature Bank (NASDAQ: SBNY) also was given an Outperform rating and it was assigned a $165 price target, up about 21% from the $136.06 share price. That target is actually under the consensus target price of $167.32, and Signature Bank has a $7.6 billion market cap and is valued at almost twice book value per share. Wedbush sees strong growth leading to higher valuations ahead, and the firm said this:
We view Signature Bank’s business model of supplementing its core banking franchise with the hiring of seasoned banking teams from competitors as a successful recipe for continued growth. Signature has been an impressive organic growth story since its IPO with assets growing over 11-fold since 2004 to $40 billion, and it continues to generate above-average loan and deposit growth. Although we acknowledge the challenges the company faces with a liability sensitive balance sheet, intense competition in the multifamily market, and regulatory scrutiny surrounding its CRE exposure, we believe Signature Bank presents a compelling investment opportunity given its above-average loan and deposit growth while it trades at a discount to peers.
Wintrust Financial Corp. (NASDAQ: WTFC) was given an Outperform rating, and its $89 price target was over 21% higher than the $73.15 prior close. The consensus target price for Wintrust is $76.59, and its market cap is $4.1 billion. Wintrust is valued at about 1.5 times its book value per share. The firm said that its community banking model is driving solid growth at the bank. Wedbush’s report said:
Our Outperform rating is based on Wintrust ’s strong organic loan and deposit growth relative to peers, its highly asset sensitive balance sheet, and its strength in generating fee income which represents 31% of revenue vs. midcap peers at 16%. The company’s two-year CAGR for loans and deposits is 11.6% and 10.7%, respectively, compared to our midcap peer group of 10.4% and 8.4%. We expect growth to remain above the industry average particularly as WTFC implements as yet undisclosed growth initiatives in the second half of 2017.
Wedbush’s other new regional and mid-cap bank ratings were shown below, and even their Neutral ratings generally had between 5% and 10% upside to the price targets compared with the stated share prices in Wedbush’s report. These were shown as follows:
- BankUnited (NYSE: BKU), $35 target
- Cathay General Bancorp (NASDAQ: CATY), $39 target
- CVB Financial Corp. (NASDAQ: CVBF), $22 target
- Hope Bancorp Inc. (NASDAQ: HOPE), $20 target
- MB Financial Inc. (NASDAQ: MBFI), $48 target
- PacWest Bancorp (NASDAQ: PACW), $49 target
- SVB Financial Group (NASDAQ: SIVB), $192 target
- Umpqua Holdings Corp. (NASDAQ: UMPQ), $20 target
- Valley National Bancorp (NYSE: VLY), $12 target
TCF Financial Corp. (NYSE: TCF) had the sole Underperform rating, and the $14 price target was under the last shown price of $14.99. Wedbush’s analyst report on TCF warned:
Our Underperform rating is based on TCF’s below-average loan and deposit growth relative to peers, rising net charge-offs in its auto finance portfolio, and ongoing battle with the CFPB related to opt-in rules on overdraft charges. The company’s two-year CAGR for loans and deposits is 4.3% and 4.6%, respectively, compared to our midcap peer group of 10.4% and 8.4%. We believe TCF should trade at a wider discount to peers given our concerns.
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