Analyst notes
The Federal Reserve's 25-basis-point rate hike on March 16 is a "negative" for U.S. banks, B. Riley Securities analyst Steve Moss wrote in a note.
The rate hike, which flattened the yield curve and inverted the 5-year and 10-year Treasuries, coupled with the Fed's decision to delay an active quantitative tightening program until at least May is "a significant negative given the potential benefits of dollar strength (deflationary), and a perceived increase in the Fed's credibility to fight inflation, both of which combined could reduce the pressure to sharply increase short-term rates and invert the curve," Moss wrote.
Ongoing inflation adds risk to banks via credit and mark-to-market risk on investment securities, according to the analyst.
That being the case, Moss favors banks with niche business lines or unique growth opportunities. He named Silvergate Capital Corp., Customers Bancorp Inc., Triumph Bancorp Inc. and Meta Financial Group Inc. for their fintech businesses, and Axos Financial Inc., First Foundation Inc. and Preferred Bank for their "conservative underwriting and growth."
In the same note, Moss downgraded Zions Bancorp. NA on the belief that EPS upside from interest rate hikes is already priced into the stock. The analyst lowered the company's stock rating to "neutral" from "buy." He raised his 2022 EPS estimate to $5.25 from $5.15 but he lowered his 2023 estimate to $5.70 from $5.90. His price target remained $77.
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Conversely, Raymond James analysts held a positive outlook on the Fed's rate hike for U.S. banks.
This rate hike will benefit "nearly all" bank EPS, but even more so for those with large commercial and industrial loan concentrations, they wrote.
Additionally, London interbank offered rates have already begun to rise as well, so some asset-sensitive banks will start to see benefits to their net interest income and net interest margins in the first quarter, according to the analysts.
With the hike, banks can immediately increase their lending rates on variable-rate loans, particularly C&I loans. Short-term securities and certain commercial real estate, consumer and specialty finance loans could also be positively impacted, they wrote.
While higher deposit rates could offset the higher asset yields, pressure to raise deposit rates could remain muted through the first few hikes given high levels of liquidity, the analysts wrote.
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Janney Montgomery Scott analysts Feddie Strickland and Christopher Marinac also view higher rates and the potential for tapering as a "significant positive" for "most banks."
The analysts specifically pointed to the over 3.1% gain in the NASDAQ Bank Index yesterday after Chairman Jerome Powell "asserted his confidence in the strength of the economy" compared to just a 2.2% gain in the S&P.
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Jefferies analysts Ken Usdin and Casey Haire analyzed the impact of a rising rate environment and found that the cycle will favor banks with more variable-rate loans, shorter average life securities books, low loan-to-deposit ratios, high excess liquidity positions relative to history, a high percentage of noninterest bearing deposits and low historical deposit betas.
The analysis found that Comerica Inc., JPMorgan Chase & Co., Fifth Third Bancorp, M&T Bank Corp. and Regions Financial Corp. "screen well" among large-cap banks and Cullen/Frost Bankers Inc., SVB Financial Group, First Horizon Corp., Texas Capital Bancshares Inc. and Commerce Bancshares Inc. do so among mid-cap banks.
Downgrades
Wolfe Research analyst Bill Carcache downgraded McLean, Va.-based Capital One Financial Corp. and Stamford, Conn.-based Synchrony Financial to "peer perform" from "outperform" to reflect a "faster normalization" of net-charge off rates closer to 2019 levels.
Carcache said that rise in gasoline prices, as a result of Russia's invasion of Ukraine, may exacerbate credit normalization headwinds. The analyst said that Capital One and Synchrony Financial "experienced the greatest stimulus-driven improvements in their DQ rates and will likely face greater credit normalization headwinds as stimulus benefits abate."
The analyst noted that he was bullish on credit card issuers as the year started, but the invasion has heightened concerns over higher inflationary pressure on issuers, such as Capital One and Synchrony Financial, with elevated exposure to the low-end consumer.
The price target for Capital One was lowered to $140.00 from $194.00, while that for Synchrony Financial was reduced to $41.00 from $62.00.