Top 3 regional bank stocks to bet on amid macro headwinds
The banking sector has been in the spotlight recently following the Fed’s rate hike. Being the Fed’s first interest hike since 2018, Wall Street analysts expect the increase could boost banks’ net interest income (NII). Additionally, Federal Reserve Chairman Jerome Powell signaled that the Fed was not opposed to raising rates another 50 basis points to continue controlling inflation.
While this is good news for investors in banking stocks, Wedbush analyst Peter Winter believes the outlook for the banking sector in the first quarter was hampered by uncertainty due to the fallout from the war. of Russia against Ukraine. This has led to “higher inflationary pressures and a higher risk of recession as the Fed fights inflation; the flattening of the yield curve may be a reflection of this increased risk,” argued the four-star analyst.
Winter believes that while interest rate hikes could benefit banks’ NII, banks’ fee income could be weaker due to pressures on “mortgage banking, investment banking, wealth management in due to the decline in the stock market and lower service charges on deposits”.
In this scenario, Winter expects regional and mid-cap banks to benefit. The analyst selected three regional banking stocks that could benefit from macroeconomic changes. Regional banks are commercial banks with assets under management (AUM) between $50 billion and $500 billion.
Regional banks are expected to benefit more compared to other big names in the banking sector due to higher interest rates, as a greater share of their income comes from traditional loans.
Let’s take a look at these three actions.
Citizens Financial Group (NYSE:CFG)
Citizens Financial Group, headquartered in Providence, Rhode Island, offers a wide range of retail and commercial banking products and services.
As of December 31, 2021, the bank had $188 billion in assets while deposits stood at $154 billion.
This regional bank is on Wedbush’s Best Ideas list and analyst Winter expects the bank’s three recent acquisitions (JMP Securities, HSBC and ISBC) could be about 5% accretive to the bank’s profits in fiscal year 22.
The analyst is also positive that the bank’s management has transformed CFG “from an underperforming regional bank with substandard profitability measures to a more competitive regional bank in just over 5 years.”
Winter noted that the bank has a “much stronger deposit deductible”, increased commission income and an expanded product offering when it comes to commercial and consumer products.
As a result, the analyst is bullish and has a price target of $62 on the stock, closer to Street’s high price target of $63. The winter price target implies a potential upside of 32.5% from Thursday’s pre-market levels for the stock.
The rest of Wall Street, however, is cautiously bullish, resulting in a moderate buy consensus rating on the stock based on nine buys, three holds and one sell. Meanwhile, the average CFG stock forecast is $58.50, implying upside potential of 25% from levels seen before markets opened on Thursday.
Fifth Third Bancorp is a Cincinnati, Ohio-based financial services company that operates four primary businesses. These include branch banking, commercial banking, consumer lending, and wealth and asset management. FITB is the “indirect parent of Fifth Third Bank, National Association, a federally chartered institution”.
The company managed assets worth $554 billion as of December 31, 2021.
Analyst Winter noted that at a recent conference, FITB management said it expects lending to grow at the upper end of its range between 1% and 2%, due to its “large portfolio of companies and the improvement in the line utilization rate” and the increase in commercial and industrial loans. loans (C&I).
The analyst also endorses the bank’s positive operating leverage (POL) in 2021 and its expectation to generate “POL in 2022, even without the benefit of rate hikes.” POL is considered a good indicator for a bank because it indicates that the bank is increasing its income faster than its expenses.
Winter has a price target of $51 on the stock, implying upside potential of 15.2% from levels seen before the market opened on Thursday.
However, other street analysts don’t share Winter’s optimism, resulting in a moderate buy consensus rating on the stock based on six buys and five holds. Meanwhile, the average forecast for FITB shares is $51.65, implying upside potential of 16.6% from levels seen before the market opened on Thursday.
Huntington Bancshares, founded in 1866 and headquartered in Columbus, Ohio, is a regional bank that offers a full range of wealth management, banking, payments and risk management products and services.
This is another stock that is on Wedbush’s Best Ideas list. In June last year, the bank completed its acquisition of TCF Financial Corp. in an all-stock deal worth $22 billion. Since the acquisition closed, the bank’s management said at a recent conference that “the conversion of TFC’s systems is complete,” according to analyst Winter.
The bank’s management reiterated that it was optimistic about 2022 and that it was ready to increase its income. Winter noted that “new customer acquisition and cross-selling into TCF’s customer base and loan growth is poised to accelerate thanks to strong new customer demand and strong loan pipelines, while by being well positioned to benefit from higher rates“.
Winter has set a 12-month price target of $18 for the stock, closer to its highest price target of $20, and implying potential upside of 20.9% from observed levels. before the market opens on Thursday.
Other analysts, however, are cautiously bullish with a Moderate Buy consensus rating on the stock based on six buys, four holds and one sell. Meanwhile, the average forecast for HBAN shares is $17.73, implying an upside potential of 19.1%.
Based on analyst Wedbush Winter’s list, it looks like these regional banks are poised to benefit from higher interest rates and a better rate of loan growth this year.
However, the analyst warned that he remained concerned that “ongoing global unrest could disrupt consumers and businesses, prompting them to reduce their investment and lending needs.”
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