Wells Fargo analyst Timur Braziler recently downgraded four U.S. regional banks, while sharing his top picks for the sector. Despite the fact that the group is historically inexpensive, Braziler noted that it lacks significant catalysts, apart from a few alpha opportunities among select names. As a result, he emphasized the importance of remaining nimble in a market characterized by above-average volatility.
Braziler identified four top picks: Western Alliance Bancorp, F.N.B. Corp., Pinnacle Financial Partners Inc., and East West Bancorp. These stocks were all rated overweight, indicating their potential for strong performance.
Western Alliance Bancorp and F.N.B. Corp. were praised by Braziler for their healthy deposits, which he believes will contribute to an earnings “beat and raise story.” East West Bancorp, on the other hand, is well-positioned to benefit from higher interest rates and possesses a robust credit profile. Pinnacle Financial offers less exposure to commercial real estate, an industry that has been weakened due to the decrease in demand for office space as a result of remote work.
In contrast, Associated Banc-Corp, First Horizon Corp., Banc of California Inc., and First Interstate Bancsystem Inc. were all downgraded by Braziler from overweight to equal-weight.
Overall, Braziler’s analysis provides valuable insights into the U.S. regional banking sector, highlighting key picks and downgrades based on various factors such as deposits, interest rates, and exposure to commercial real estate.
Banking Sector Facing Challenges Amidst Mergers and Competition
Banc of California and First Horizon are experiencing hurdles in their respective acquisition and merger attempts, while Associated Banc-Corp and First Interstate are facing difficulties due to higher interest rates and credit issues. These challenges highlight the vulnerability of banks with high loan-to-deposit ratios and rapid asset growth.
A key theme in the banking sector is the normalization of credit trends, as well as the potential for future merger deals. However, given the impact of interest rates, credit issues, and accumulated other comprehensive income (AOCI), near-term merger activity is expected to be subdued. AOCI, a measure of unrealized value, has been under pressure due to rising interest rates.
In related news, Jared Shaw, a notable figure in regional banking coverage at Wells Fargo, has left the firm.
Also read: Bank stocks end Q3 with mixed results as Citi analyst hits buy button on ‘attractive entry point’ for sector