First Horizon, Popular, East West Bancorp, Western Alliance get top billing as Citi flags undervalued regional banks

By Steve Gelsi

Analyst Ben Gerlinger says reduced Fed rate cut outlook has weighed on bank names

Citi analyst Ben Gerlinger on Wednesday highlighted a quartet of bank names with appealing valuations, momentum and quality despite headwinds caused by fewer rate cuts expected in 2024.

"Throughout the [first] quarter, the pivot from roughly six to three Fed cuts has weighed on overall sentiment in the space," Gerlinger said. "However, we believe the market is missing the profitability potential in this modestly higher-for-longer environment."

A surprise loss on Jan. 31 and a material weakness update on Feb. 29 from New York Community Bancorp (NYCB) have also weighed on other regional-bank stocks, although NYCB's problems appear to be isolated.

Also read: NYCB plans reverse stock split after closing $1.05B infusion

Discounted valuations among regional banks should give way to gains once concerns over commercial real estate "dissipate with rate cut realities," Gerlinger said.

The current period marks an attractive entry point for investors to buy bank stocks, given low valuations and "overblown" concerns over losses, he said.

First Horizon Corp. (FHN) and Popular Inc. (BPOP) are "well-positioned for continued upside" because neither bank is particularly dependent on any actions by the Fed, Gerlinger said.

"Leading up into and post-1Q24 earnings, we believe consensus expectations are likely to show positive earnings revisions for FHN and BPOP, especially as net interest margin trends show a pivot higher in 1Q results and future buybacks are fully incorporated into street modeling," he said.

The market is also overlooking the profit power and discounted valuations of East West Bancorp Inc. (EWBC) and Western Alliance Bancorp (WAL), he said.

Gerlinger reiterated buy ratings on Bank OZK (OZK), Webster Financial Corp (WBS), Old National Bancorp (ONB), Pinnacle Financial Partners Inc. (PNFP), Wintrust Financial Corp. (WTFC), Comerica Inc. (CMA) and Prosperity Bancshares Inc. (PB), along with buys on East West Bancorp, Western Alliance Bancorp, Popular and First Horizon.

The SPDR S&P Regional Banking ETF KRE is down 6.9% so far in 2024, while the KBW Nasdaq Bank Index BKX has risen by 3.4%. The S&P 500 SPX has risen 8.5% so far in 2024.

-Steve Gelsi

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03-13-24 0854ET

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