Regional banks are healthier than they look

  • By Lawrence C. Strauss,
  • Barron's
  • Banking
  • Exchange-Traded Funds
  • Banking
  • Exchange-Traded Funds
  • Banking
  • Exchange-Traded Funds
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Regional banks have been hammered this year, thanks to worries over rising interest rates and whether their very healthy loan portfolios can be sustained.

The Invesco KBW Bank exchange-traded fund (KBWB) has lost about 9% this year, some 10 percentage points behind the S&P 500 (.SPX), which itself is barely positive, including dividends.

Nevertheless, there was good news in the sector this week this amid the broader market rout, including several upgrades by analysts and some solid earnings results. Though the bears still have the upper hand, there are some encouraging signs of growth.

Nomura on Wednesday upgraded Fifth Third Bancorp (FITB) from Reduce to Neutral. The Cincinnati-based bank announced in May that it will merge with MB Financial (MBFI), a Chicago-based bank, in a deal valued at roughly $4.6 billion. Nomura said that integration risk remains a concern but that “we now believe fears are fully discounted in [the] valuation.”

Fifth Third’s stock trades at 9.4 times the $2.66 a share analysts expect the company to earn next year, compared with its five-year average of 11.7 times, according to FactSet.

Citizens Financial Group (CFG), based in Providence, R.I., was upgraded recently by two analysts, as Barron’s noted on Tuesday (“Citizens Bank Stock Gets Two Upgrades, but Still Doesn’t Rally”).

In a note on Wednesday, Wedbush made positive comments about several regional banks. The firm raised its fourth-quarter profit estimate for Salt Lake City–based Zions Bancorporation (ZION) to $1.03 a share, up from 99 cents, “to reflect the solid [third-quarter] results driven by margin expansion and lower-than-forecast expense growth.”

It has a Neutral rating on the stock.

Zions earned $1.04 a share in the third quarter, beating the consensus by 7 cents, according to FactSet.

Wedbush noted that Birmingham, Ala.–based Regions Financial (RF), which it rates Outperform, had “solid improvement” in its efficiency ratio, which measures a bank’s noninterest expense to revenues.

For the regional-bank sector as a whole, credit quality has been strong, with net loan charge-offs at very low levels. There are worries, however, that the benign credit environment won’t last, given the current recovery’s advanced age. If conditions deteriorate, it would force banks to significantly boost their loan-loss provisions and pressure earnings.

Another concern is that while banks have benefited from the Federal Reserve’s tightening regimen since late 2015, there’s not a lot of upside as banks deposit costs go up.

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