Improved credit outlook, mergers and acquisitions, rising interest rates and loan growth drive U.S. regional banks to upgrade

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Raymond James analyst Micahael Rose upgraded three regional banks on Thursday and cut his opinion on one in anticipation of a mostly positive outlook for the sector out to 2022.

“We have become increasingly bullish on the banking sector over the past year,” Rose said.

Key catalysts include improving credit, an accelerated pace of mergers and acquisitions, higher interest rates and a return to loan growth.

In total, 77 of the 139 banks covered by Raymond James are rated strong buy or outperform.

“We see similar catalysts for the sector heading into 2022 as we did in 2021, which we believe will likely lead to positive EPS revisions throughout 2022,” Rose said.

Net interest margins are expected to increase as banks deploy excess liquidity and demand from commercial and industrial borrowers improves.

See also: Why the recent wave of regional bank mergers is far from over – and you could profit from it

Raymond James upgraded CrossFirst Bankshares CFB,
+1.08%
to a strong buy from an outperformer, with a price target of $18 per share.

“Loan growth will be supported by continued hiring efforts across its footprint, its recent entry into Phoenix, and a deepening presence in Texas, which we believe will support elevated loan growth in a figure until 2023,” Rose said. “Also, we view the recent appointment of Ben Clouse as CFO as an additional positive given his experience at a larger company (former CFO of Waddell & Reed Financial Inc.”

SouthState Corp. SSB,
+1.81%
and Atlantic Capital Bancshares Inc. ACBI,
+1.67%
improved to outperform the market, ahead of the merger of the two banks which is expected to be finalized by the end of the first quarter. Raymond James has set a price target of $90 for SouthState.

SouthState’s tailwinds include its “solid” loan growth potential in the mid-to-high numbers, benefits from its June merger with CenterState Bank and a boost from its pending acquisition of Atlantic Capital Bancshares, a- he declared.

Read: Mid-cap banks are healthy but see downward pressure on overdraft fees and increased regulatory scrutiny

On the negative side, Raymond James downgraded Prosperity Bancshares Inc. PB,
+0.18%
to market performance from outperformance. “We see few material catalysts to improve its relative valuation against its peers in the nearer term,” Rose said.

Raymond James’ rating changes come after a strong year for bank stocks, with the KBW Nasdaq Bank Index BKX,
-0.31%
up 36% in 2021, including Thursday’s gains.

Read: Mid-cap banks are healthy but see downward pressure on overdraft fees and increased regulatory scrutiny

CrossFirst Bankshares stock has gained 41% in 2021, including a jump of nearly 5% on Thursday. SouthState is up about 11% this year, including a 2% rise on Thursday. Prosperity Bancshares is up 4.3% this year.

See also: UBS names Bank of America top pick in glowing view of banking stocks

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