Merrill Lynch Sours on More Regional Banks With Fresh Analyst Downgrades

Banking, finance, and taxes

Published: July 11, 2019 10:35 am

Last Updated: January 30, 2020 6:44 pm

With the Federal Reserve now leaning toward cutting the federal funds rate in 2019 and with the inversion of the yield curve normalizing ahead, many investors are thinking it’s probably a good time to go shopping for bank stocks that are down from their highs. Merrill Lynch has issued a new sector report on U.S. mid-cap regional banks, and the firm is lowering earnings estimates and some key ratings, and it even noted that downside risks remain in place.

The Merrill view is that second-quarter bank earnings will be a mixed bag. The firm expects a negative impact on earnings per share from lower net interest margin. A company’s margin outlook on the back of an inverted yield curve is said the be the key area of focus in this sector call.

On the bright side, healthy loan growth and strong mortgage banking results should help to offset some of the caution. The analysts even expect that credit trends should continue to normalize without much broad-based credit deterioration.

Several regional bank downgrades stood out, with exposure in Texas and the South, but there was a rather positive view on a New York-based community bank stock that has lost 40% of its value over the past four years.

Comerica Inc. (NYSE: CMA) was among the larger banks covered on Thursday, and the firm downgraded its rating to Underperform from Buy in the call. Merrill’s Erika Najarian downgraded Comerica as it is expected to continue lagging peers as the Federal Reserve cuts rates. She lowered her price objective to $71 from $85, and the new 2019/2020 earnings estimates now account for three Fed-induced rate cuts. Comerica is also singled out for a lack of ability to defend its net interest margins given the level of deposit costs. While the downside risks are said to be limited here, there is a tough case for multiple expansion. Comerica was last seen up 0.3% at $71.70 a share, in a 52-week range of $63.69 to $100.64.

Cullen/Frost Bankers Inc. (NYSE: CFR) was downgraded to Underperform from Neutral and the price objective was cut to $87 from $102. The firm sees downside earnings risks despite already being 5% under consensus for 2020 earnings estimates. With a premium valuation and anemic balance sheet growth, Cullen/Frost is expected to have limited room to lower its funding costs and is expected to have few expense offsetting measures. Its shares were down 0.4% at $92.00 on Thursday, in a 52-week range of $81.87 to $116.45.

Hancock Whitney Corp. (NYSE: HWC), which investors had known as Hancock Holding Company prior to mid-2018, was downgraded to Neutral from Buy as the firm sees the risk/reward as balanced at the current time. Its price objective was cut to $42 from $46. The Gulfport, Mississippi-based bank has just over 200 full-service banking and financial service offices spread around parts of Mississippi, Alabama, Louisiana, Florida and a concentration in Houston, Texas. Its shares were down just 0.3% at $38.95 on Thursday morning, in a 52-week range of $32.59 to $53.00.

New York Community Bancorp Inc. (NASDAQ: NYCB) saw its price objective lowered to $12 from $13, but Merrill has a Buy rating and said that NYCB should be among the largest beneficiaries from potential Fed rate cuts as the decline in market yields should serve as a tailwind on its net interest margin. The firm has modestly increased earnings expectations, despite a negative impact from lower prepay income and slower loan growth. Shares were last seen trading up 0.8% at $10.29 on Thursday, in a 52-week range of $8.61 to $12.72.

Regions Financial Corp. (NYSE: RF) was downgraded to Neutral from Buy, and Najarian lowered her price objective to $16 from $18 in the call. The call cited a deceleration of earnings and its capital ratios nearing targets in an area where they don’t see capital returns accelerating. Also noted was net interest income expected to remain under pressure, even if Regions can sustain the low-end of the net interest margin range. Shares of Regions Financial were last seen down 0.7% at $14.95. The 52-week range is $12.39 to $19.99.