KBW spotlights East West Bancorp, Webster Bank and Western Alliance as offering growth and value in tough year for bank stocks

By Steve Gelsi

KBW's Chris McGratty sees bank stocks breaking out on any further prospects of interest rate cuts

KBW analyst Chris McGratty said the bank sees potential upside for at least three regional bank stocks in a tough year for the sector.

McGratty, who is head of U.S. bank research for KBW, told MarketWatch that East West Bancorp Inc. (EWBC) offers above-average returns compared to its rivals, plus it's buying back stock at an attractive valuation.

He also highlighted Webster Financial Corp (WBS) as an inexpensive stock with a high return on investment partly because the market is currently mispricing its long-term potential.

Western Alliance Bancorp (WAL) also ranks as another top pick for KBW with strong earnings despite a big sell-off in the wake of the collapse of Silicon Valley Bank, Signature Bank and First Republic this past Spring.

Jitters around uninsured deposits that fueled a drop in bank stocks this year have mostly eased, he said.

Interest rates remain key to the performance of bank stocks, with the sector getting a big boost on tame Consumer Price Index data on Nov. 14, as 10-year Treasurys BX:TMUBMUSD10Y rallied and yields came down.

"Bank stocks will react even on the whiff of a rate cut," McGratty said.

In terms of net interest income, which is the profit banks make on loans compared to what they have to pay out in interest for deposits, trends point to a trough in the next quarter or two before rising again.

Uncertainty over interest rates and a potential U.S. recession on the horizon have been weighing on the sector, in addition to the bank blowups earlier this year.

The KBW Nasdaq Bank Index BKX is still down about 18% so far in 2023, despite the rally on Nov. 14, compared to a 36.6% increase by the Nasdaq Composite Index COMP and an upward move of 18.8% by the S&P 500 Index SPX.

KBW highlighted East West Bancorp, Webster Financial and Western Alliance Bancorp in a note on the sector published Sunday under the title, "Chutes and Ladders."

With the market rewarding scale, KBW is advising investors to avoid banks with less than $10 billion of assets and instead focus on banks with assets of $50 billion to $80 billion.

Among smaller banks, KBW reiterated outperform ratings on Popular Inc. (BPOP), Columbia Banking System Inc. (COLB), East West Bancorp, Synovus Financial Corp. (SNV), Valley National Bancorp (VLY), and Wintrust Financial Corp. (WTFC).

In terms of capital on their balance sheets, KBW favors East West Bancorp and Webster Financial over Comerica (CMA) and Zions Bancorp (ZION).

In terms of profitability, KBW gave higher marks to East West Bancorp, Western Alliance Bancorp and Webster Financial than it did for Comerica, First Horizon Corp. (FHN) and Zions.

Looking ahead, KBW is expecting more pressure for mergers to allow banks to bulk up and offer more scale to clients and investors.

For now, deal-makers are awaiting more certainty around bank regulations, as the Federal Reserve readies new capital requirements, an update to the Community Reinvestment Act and other moves.

Also read: Fed community-bank advocate Michelle Bowman says proposed bank reforms go beyond what the law intends

"Although the markets believes mergers and acquisitions (M&A) can't resume until the regulatory environment thaws, KBW believe M&A must occur given regulatory burden and scale demands," KBW said.

Potential builders of scale with strong structure return on tangible common equity include Huntington Bancshares, (HBAN), Fifth Third Bancorp (FITB), M&T Bancorp (MTB). Regions Financial Corp. (RF) and East West Bancorp, KBW said.

Potential "sources of scale" with less bulkiness and less margin to their cost of capital including Comerica, First Horizon and Western Alliance Bancorp, KBW said.

Also read: Zions Bancorp draws downgrade as Citi sees 'more favorable risk/reward elsewhere'

-Steve Gelsi

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11-22-23 1138ET

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