The banking industry has been in the spotlight recently following the Fed’s rate hike. Being the Fed’s first interest raise since 2018, Wall Street analysts expect that this increase could drive up net interest income (NII) for banks. Moreover, Federal Reserve Chairman Jerome Powell has signaled that the Fed was not averse to a further rate hike by 50 bps to continue controlling inflation.
While this is good news for investors of bank stocks, Wedbush analyst Peter Winter thinks that the banking sector’s Q1 outlook has been hampered by uncertainty due to the repercussions of Russia’s war on Ukraine. This has led to “higher inflation pressures and a higher risk of a recession as the Fed combats inflation; the flattening yield curve may be a reflection of this heightened risk,” argued the four-star analyst.
Winter believes that while the interest rate hikes could benefit NII of banks, the fee income of banks could be weaker due to pressures in “mortgage banking, investment banking, wealth management due to the decline in the stock market and lower deposit service charges.”
In this scenario, Winter expects regional and mid-cap banks to benefit. The analyst has shortlisted three regional bank stocks that could benefit from the macroeconomic changes. Regional banks are commercial banks that have assets under management (AUM) between $50 billion and $500 billion.
Regional banks stand to benefit more as compared to other big names in banking due to the rising interest rates, as a larger share of their revenues comes from traditional loans.
Let us look at these three stocks.
Citizens Financial Group (NYSE: CFG)
Citizens Financial Group, headquartered in Providence, Rhode Island offers a wide array of retail and commercial banking products and services.
As of December 31,2021, the bank had $188 billion worth of assets while deposits were $154 billion.
This regional bank is a part of Wedbush’s Best Ideas List and analyst Winter expects that the bank’s recent three acquisitions (JMP Securities, HSBC, and ISBC) could be accretive to the bank’s earnings in FY22 by approximately 5%.
The analyst is also positive about the bank’s management which has transformed CFG “from an underperforming regional bank with bottom tier profitability metrics to a more competitive regional bank in just over 5-years.”
Winter noted that the bank has a “much stronger deposit franchise,” rising fee income, and expanding product offerings 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 the Street high price target of $63. Winter’s price target implies an upside potential of 32.5% to Thursday pre-market levels for the stock.
The rest of Wall Street, however, is cautiously optimistic, resulting in a Moderate Buy consensus rating on the stock based on nine Buys, three Holds, and one Sell. Meanwhile, the average CFG stock prediction is $58.50, implying an upside potential of 25% levels seen before markets opened on Thursday.
Fifth Third Bancorp (NASDAQ: FITB)
Fifth Third Bancorp is a financial services company headquartered in Cincinnati, Ohio that operates four main businesses. These include branch banking, commercial banking, consumer lending, and wealth and asset management. FITB is the “indirect parent company 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’s management stated that it expects loans to increase at the higher end of its range between 1% and 2% driven by its “large corporate book, and improving line utilization rate” and higher commercial and industrial (C&I) loans.
The analyst also approves of 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 as it indicates that the bank is growing its revenues faster than its expenses.
Winter has a price target of $51 on the stock, implying an upside potential of 15.2% to levels seen before market open on Thursday.
However, other analysts on the Street do not share Winter’s optimism, resulting in a Moderate Buy consensus rating on the stock based on six Buys and five Holds. Meanwhile, the average FITB stock prediction is $51.65, implying an upside potential of 16.6% to levels seen before market open on Thursday.
Huntington Bancshares (NASDAQ: HBAN)
Huntington Bancshares, founded in 1866, headquartered in Columbus, Ohio is a regional bank that provides a comprehensive suite 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 closed its acquisition of TCF Financial Corp. in an all-stock deal worth $22 billion. Since the closing of the acquisition, the bank’s management stated at a recent conference, that TFC’s “systems conversion is done,” according to analyst Winter.
The bank’s management reiterated that it was bullish about 2022 and was poised for rising revenues. Winter noted that “new customer acquisition and cross-selling into TCF’s client base and loan growth is poised to accelerate led by strong new client demand and robust loan pipelines, all while being well positioned to benefit from higher rates.”
Winter has set a 12-month price target of $18 on the stock, nearer to its Street-high price target of $20, and implying an upside potential of 20.9% to levels seen before market open on Thursday.
Other analysts, however, are cautiously optimistic with a Moderate Buy consensus rating on the stock based on six Buys, four Holds, and one Sell. Meanwhile, the average HBAN stock prediction is $17.73, implying an upside potential of 19.1%.
From Wedbush analyst Winter’s list, it appears that these regional banks are geared up to benefit from the rising interest rates and better growth rate for loans this year.
However, the analyst has cautioned that he remained concerned that “ongoing global unrest could unnerve consumers and businesses, prompting them to cut back on investments and lending needs.”
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