Wells Fargo downgrades four regional banks and highlights four top names in analyst shift

By Steve Gelsi

Rates and credit threaten earnings, while delayed consolidation benefits dampen the view of four stocks.

Wells Fargo analyst Timur Braziler downgraded four U.S. regional banks Wednesday, sharing his four top picks as he assumed coverage of the sector.

While he flagged some bright spots in the business, Baziler trimmed price targets across the board as bank stocks have been pushed down more than the broad market on jitters related to higher interest rates and other headwinds.

"The group remains historically inexpensive but lacking major catalysts as a sector notwithstanding alpha opportunities among select names," Braziler said. "The result is that we remain nimble in what has been above-average volatility."

Braziler listed four top picks: Western Alliance Bancorp (WAL), F.N.B. Corp. (FNB), Pinnacle Financial Partners Inc. (PNFP) and East West Bancorp (EWBC). The four stocks were rated overweight.

Western Alliance Bancorp and F.N.B. Corp. drew high marks for healthy deposits which "should create a 'beat and raise story'" for earnings, he said.

East West Bancorp is poised to benefit from higher interest rates as well as its healthy credit, Braziler said. Pinnacle Financial offers less exposure to commercial real estate, which has been weakened by slack demand for office space as workers stay at home.

Braziler downgraded Associated Banc-Corp (ASB), First Horizon Corp. (FHN), Banc of California Inc. (BANC) and First Interstate Bancsystem Inc. (FIBK) to equal-weight from overweight.

Banc of California faces a delay in the benefits of its pending acquisition with PacWest Bancorp (PACW), while First Horizon continues to deal with expenses related to its unsuccessful merger attempt with Toronto-Dominion Bank(TD), he said.

Associated Banc-Corp remains more challenged by higher interest rates, while First Interstate offers a weaker profit profile and some "cracks" in its credit profile while commanding a premium valuation, he said.

Overall, banks continue to face competition for deposits which leaves institutions with high loan-to-deposit ratios and outsized asset growth more vulnerable.

Normalization of credit trends is another theme, along with a longer-term trend of potential merger deals, although "near-term activity is likely to remain subdued given the impact of rates, credit and accumulated other comprehensive income (AOCI)." AOCI is a measure of unrealized value of bank portfolios, which have been under pressure as interest rates rise.

Jared Shaw, who formerly covered regional banks for Wells Fargo, has left the firm, according to a spokesperson.

Also read: Bank stocks end Q3 with mixed results as Citi analyst hits buy button on 'attractive entry point' for sector

-Steve Gelsi

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10-04-23 1120ET

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