Hovde Group cuts bank earnings view across the board amid a 'competitive battle of historic proportions' over deposit funding costs

By Steve Gelsi

Hovde Group analysts on Wednesday cut their earnings projections for its coverage area of 27 regional banks to about 7% to 9% below the current Wall Street consensus figures amid competition for deposits, as Fifth Third Bancorp added its name to the list of super-regional banks to issue lower net interest income guidance.

While bank stocks have been lifted in recent sessions by tame inflation data and an expected pause in interest rate hikes, Hovde Group said the banking industry continues to face steeper costs for attracting and holding deposits.

"The banking industry is currently waging a competitive battle of historic proportions with regard to deposit funding costs," Hovde Group analysts said in a research note on Wednesday. "The recent string of mid-quarter updates from the super-regional banks has well telegraphed the idea that consensus estimates are dramatically too high."

Overall, the rapid interest rate hikes by the U.S. Federal Reserve in the past year, combined with banking turmoil around the demise of Silicon Valley Bank, First Republic and Signature Bank, "seems to have caught banks flat-footed regarding their deposit base relationships," Hovde said.

For its part, Fifth Third Bancorp (FITB) stock was down 3.3% in premarket trades on Wednesday after the lender said it expects its second-quarter net interest income to fall 4% to 5% over the year-ago quarter.

The bank's earlier forecast as of April 20 for second-quarter net interest income was a drop of only 1%. The newer projection assumed no rate hike by the U.S. Federal Reserve through the end of the quarter. For fiscal 2023, Fifth Third is projecting net interest income growth of 3% to 5%.

Meanwhile, Hovde analysts praised Home Bancshares (HOMB) as a bank "built for this environment" and said they remain positive on the stock even after it has outperformed this year.

Analysts said they also like Pinnacle Financial Partners Inc. (PNFP), and said National Bank Holdings Corp. (NBHC) "has a solid chance of having lower deposit betas, through cycle."

Meanwhile, Hovde said Puerto Rican banks Banco Popular Inc. (BPOP), First BanCorp (FBP) and OFG Bancorp (OFG) are well-positioned because of their low deposit betas and a de-coupled economy from the mainland.

Hovde said Coastal Financial Corp. (CCB) stands out as its favorite play among financial technology, or fintech, companies.

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-Steve Gelsi

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06-14-23 0808ET

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