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3 Bank Stocks Most Likely to Up Dividends and Beat the Recession
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3 Bank Stocks Most Likely to Up Dividends and Beat the Recession

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Recently, the Federal Reserve Bank announced the results of the Dodd-Frank Act Stress Test. This test is important in the current volatile macro environment as it measures the liquidity of banks, specifically regional banks. Let us look at three banks that fared well in this test and what Wall Street analysts are saying about these bank stocks.

The U.S. economy appears to be firmly in the throes of recession even as U.S. stocks last week seem to have snapped a recent losing streak. Even with this silver lining, inflation shows no sign of abating and is currently at a 40-year high of 8.6%. In a bid to control this inflation, the Fed has been on an interest rate raising spree.

A hike in interest rates is more likely to be beneficial to regional banks as these banks do not have other businesses like trading desks, which are provided by large banks. In an environment of rising interest rates, banks are more likely to see an uptick in revenues in the form of Net Interest Income (NII).

In such an environment with rising interest rates, it is also important for banks to reduce the risks related to their loan and securities portfolios and be well-capitalized. It is here that the Dodd-Frank Act Stress Test (DFAST) and Common Equity Tier 1 (CET1) ratio come into the picture.

The DFAST looks at how the capital levels of banks could be affected as a result of financial shocks and severely adverse economic conditions over the course of nine quarters. The CET-1 ratio looks at the bank’s Tier-1 capital, which primarily consists of liquid bank holdings, including stock and cash, against its assets.

Earlier this month, the Fed released the results of this Dodd-Frank Act Stress Test.

According to analysts from Wedbush, this test does not pass or fail a particular bank but stresses the fact that banks should not fall below “a minimum requirement of 4.5% CET-1 ratio + stressed capital buffer (minimum is 2.5%), determined in the DFAST exam.”

This test indicated that all 34 banks that are under Wedbush coverage are well-capitalized. Let us look at three of the best-performing regional bank stocks in the DFAST test and what Wall Street analysts, besides Wedbush analysts, are saying about these bank stocks.

U.S. Bancorp (NYSE: USB)

U.S. Bancorp is a Minneapolis-based company with around 70,000 employees. The company had assets worth $587 billion as of March 31 and its businesses include Payment Services, Consumer and Business Banking, Corporate & Commercial Banking, and Wealth Management and Investment Services.

According to the Wedbush report, while the minimum CET-1 ratio as part of the DFAST is 4.5% under a severely adverse scenario, USB came in at the top with a ratio of 9.3%. This ratio is important as it tests the bank’s liquidity and whether it can survive a challenging financial environment.

It was precisely this concern regarding the bank’s liquidity that prompted Wolfe Research analyst Bill Carcache to lower the price target to $54 from $62 on USB while reiterating a Buy on the stock last month. The analyst’s price target is just above the lowest price target of $52 on the Street and implies an upside potential of 14.3% at current levels.

Elaborating on it further, the analyst viewed recession as a likely scenario and expects that banks, specifically mid-cap banks with low liquidity, could face relatively higher costs of funding and deposit betas as competition is likely to intensify from higher rate-paying banks.

Deposit beta is a measure of how quickly a bank reprices its deposit rates in response to a change in interest rates.

Other analysts on Wall Street are cautiously optimistic with a Moderate Buy consensus rating based on four Buys and ten Holds. The average USB stock prediction is $59.15, implying 25.2% upside potential to current trading levels.

Fifth Third Bancorp. (NASDAQ: FITB)

Fifth Third Bancorp is a financial services company with its headquarters in Cincinnati, Ohio. As of March 31, FITB had $211 billion worth of assets and operates four main businesses, including branch banking, commercial banking, consumer lending, and wealth and asset management.

Shares of Fifth Third Bancorp have not fared well in the past month and have dropped 11.6%, with the stock currently trading just above its 52-week low of $33 with a closing price of $34.87 as of June 27. This drop in the stock price has been driven by volatile macroeconomic conditions.

However, the Fed’s DFAST stress test indicated FITB’s balance sheet strength as its stress capital buffer remains at the minimum level of 2.5% effective from October 1, while its CET-1 ratio also exceeds the regulatory minimum of 4.5% at 7.6%.

Following these results, FITB stated in its press release that it intends to “recommend to its Board of Directors an increase to the quarterly cash dividend on its common dividend in September, which may be up to 3 cents per share.”

Earlier this month, Baird analyst David George upgraded the stock from a Hold to a Buy with a price target of $44, implying an upside potential of 26.2% at current levels. The analyst is confident that there are “no meaningful lending excesses as we sit here today, which will likely mitigate significant bank credit losses.”

Rest of the analysts on Wall Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on eight Buys and five Holds. The average FITB stock prediction is $47.08, implying 35% upside potential to current trading levels.

Regions Financial Corp. (NYSE: RF)

Regions Financial Corp serves customers in the region of Midwest, Southern U.S., and Texas through its subsidiary Regions Bank and has around $164 billion worth of assets.

The uncertain economic environment has resulted in investors’ being pessimistic about the stock as it has dropped 12.4% in the past month. Shares closed at $19.35 on June 27, hovering near a 52-week low of $18.02.

Regions also fared well in DFAST test and stated in a press release that it “remains committed to managing its Common Equity Tier 1 capital ratio within the company’s current operating range, which is 9.25-9.75%.”

Truist analyst Jennifer Demba had an inkling of this earlier this month when she reiterated a Buy rating but lowered the price target to $25 from $27 on the stock, implying an upside potential of 29.2% at current levels.

While the analyst updated her financial model considering the macro volatility, Demba was positive about RF’s growth in Net Interest Margins (NIM).

Other analysts on Wall Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on nine Buys and four Holds. The average RF stock prediction is $25.15, implying approximately 30% upside potential to current trading levels.

Bottom Line

Considering the results of the DFAST test, the group of analysts from Wedbush like Peter Winter expects that as regional banks like the ones above are well capitalized, “buyback activity will be modest to on-hold over the next 4-quarters for our group of banks.”

However, given the optimistic outlook when it comes to NII, the Wedbush group of analysts are of the view that “a number of banks [including RF and FITB] are in a position to announce meaningful dividend hikes as payout ratios are below the low-end of ranges.”

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