Equity analysts name top US bank picks for 2021

Following a tumultuous year due to the COVID-19 pandemic, equity analysts have bullish outlooks for the performance of the U.S. banking sector in 2021.

U.S. bank stocks jumped following promising COVID-19 vaccine news in November 2020, and several analysts project continued outperformance in their "top pick" reports to kick off the New Year. Barclays analysts project more than 50% EPS growth over the next two years, reflecting a decline in loan loss provisions and accelerated share repurchases. Raymond James analysts highlighted several catalysts for 2021: lower loan loss provisioning, modestly stronger net interest margins, Federal Reserve approval of capital distributions, accelerated M&A activity and stronger loan demand.

While 2021 looks smoother than 2020, there are still several headwinds for the sector, including difficult pre-provision net revenue growth given ballooned asset levels, prolonged low interest rates and difficult fee income comparisons, according to Baird Equity Research analysts.

"We would expect the group to remain somewhat volatile as market participants juxtapose the benefits of an economic recovery with a generally challenging environment for industry PPNR growth," the analysts wrote.

Small-cap banks

Raymond James analysts wrote in a note that smaller banks have more upside than their larger peers due to stronger growth potential, an improved credit outlook, less regulatory risk and more M&A activity. "We currently favor those banks that are set up well for post-pandemic life," the analysts wrote.

The Raymond James analysts chose Carmel, Ind.-based Merchants Bancorp, Dallas-based Veritex Holdings Inc., Aurora, Ill.-based Old Second Bancorp Inc., Leawood, Kan.-based CrossFirst Bankshares Inc., Mountlake Terrace, Wash.-based FS Bancorp Inc., Los Angeles-based PCB Bancorp, and Pittsburgh-based TriState Capital Holdings Inc. as their top banks below $10 billion in total assets.

Stephens Inc. analyst Matt Olney also chose TriState Capital Holdings as a top pick. "We are naming [TriState] our best idea for 2021 driven by its ability to produce meaningful growth throughout the year," the analyst wrote in a note. Olney expects double-digit loan and revenue growth for the bank, as well as margin expansion. The bank's branch-lite model positions it well for an extended zero-interest rate environment, the analyst wrote.

Mid-cap banks

Analysts at Raymond James, Wells Fargo Securities, Stephens and Wedbush Securities all named New York-based Signature Bank as a "top pick" or "best idea" in 2021, predicting the bank could be a top beneficiary of the COVID-19 vaccine rollout. By the second half of the year, vaccines could enable a return to offices in New York City, helping the office properties, restaurants, retail, condos and multifamily properties backing much of Signature Bank's loan portfolio, Wedbush Securities analysts wrote. Signature Bank could achieve a valuation of 2x tangible book, according to Wells Fargo Securities analyst Jared Shaw.

Phoenix-based Western Alliance Bancorp. also stands to "meaningfully" benefit from COVID-19 vaccines given the bank's hotel exposure and expectations that occupancy levels could return to somewhat normal levels in the second half of 2021, according to the Wedbush Securities analysts. Analysts at both Wedbush Securities and Stephens named Western Alliance as a top pick.

Some analysts looked to M&A activity for top ideas. Analysts at Stephens and Raymond James named Ameris Bancorp as a top pick. The Atlanta-based bank should generate above-average loan growth given in-market disruption from the Truist Financial Corp. merger and new hires resulting from the MOE, the Stephens analysts wrote.

Wedbush analysts named Columbus, Ohio-based Huntington Bancshares Inc. a top pick following its strong net interest income growth in the third quarter of 2020 while other banks' NII was flat to down, lower-than-expected net charge-off guidance for 2021 and its recently announced acquisition of TCF Financial Corp.

Compass Point analysts named newly public Eastern Bankshares Inc. as a top pick for 2021. The Boston-based bank recently completed its standard de-mutualization and began trading in October 2020 with the third-largest bank IPO since the Great Recession.

Large-cap banks

Analysts at Stephens Inc. and Baird chose Minneapolis-based U.S. Bancorp as a top pick. "We feel current valuations offer large-cap investors an attractive entry point to a profitable and high-quality company," wrote Stephens analyst Terry McEvoy in a note. Both McEvoy and the Baird analysts noted the bank's diverse business model and anticipated expense reduction from branch closures. Digital adoption and economic recovery will benefit the bank's payments-related revenue, McEvoy wrote.

"The company has moved past its regulatory compliance investment while signaling more commitment to positive operating leverage, and we expect [U.S. Bancorp] to deliver more expense discipline ability as the top-line outlook remains challenging," wrote the Baird analysts, who also pointed to the bank's higher-fee business lines as "attractive characteristics in this low-rate environment."

McLean, Va.-based Capital One Financial Corp. was also a top pick for the analysts at Baird. The bank "modestly outperformed peers in 2020," the analysts wrote, but "shares still offer an attractive risk/reward." Credit risk could be an issue for Capital One if the economy does not improve, but stimulus and tighter underwriting will help "at least lower cumulative losses," the analysts wrote.

The Baird analysts also chose Wells Fargo & Co. as a top pick. The bank has underperformed recently, providing "significant long-term upside," the analysts wrote. The company has a strong capital position and opportunity to reduce expenses by exiting non-core business lines such as student loans, according to the analysts. They wrote that buybacks should resume by mid-2021. "Despite recent challenges, the foundation of the franchise is intact and still very attractive," the analysts wrote.