First Horizon wins upgrade as standalone company as analyst looks past scuttled TD Bank merger

By Steve Gelsi

KBW sees First Horizon remaining independent after its merger with TD Bank was called off last year

First Horizon Corp. has drawn an upgrade, to outperform from market perform, from analysts at KBW, who said the bank offers value as a standalone company that's not likely to pursue another buyer for the time being.

KBW also hiked its price target for First Horizon (FHN) to $18 a share from $16 a share and said it's positioned to benefit more than its peers from a higher-for-longer interest-rate environment.

"An asset-sensitive balance sheet and promotional deposit rates that are now repricing lower make FHN a stock to own," KBW analyst Christopher McGratty said in the upgrade note on Thursday.

He noted that the bank's employees went on a roller-coaster ride as the $13.4 billion acquisition of First Horizon by Toronto-Dominion Bank (TD) was called off last year after delays in winning regulatory approval.

"As such, we don't believe management would go down this road again unless they are nearly certain that a potential buyer could in factclose the deal," McGratty said. "We fully appreciate this, but also recognize that the first large bank deal will naturally lead to investors asking 'who may be next?,' whereby FHN would likely benefit from a sympathy trade with subsequent multiple expansion and valuation support."

Even without the merger, First Horizon has shown "that it will do right by its shareholders, even if the company wasn't officially for sale," McGratty said.

While sentiment towards bank mergers and acquisitions today is at a multi-year low due to regulatory uncertainty, "our experience is that this can change on a dime" with a shift to a Republican administration, the analyst said.

Just one notable bank deal announcement could also be a catalyst for more M&A activity, McGratty added.

Other benefits of First Horizon include its relatively low exposure to commercial real estate, which has been impacted by weakness in office-property valuations.

First Horizon also appears to be better positioned than peers such as Comerica Inc. (CMA) and Zions Bancorp (ZION) to handle a proposed increase in capital requirements under the Basel III endgame proposal for banks with $100 billion or more in assets. All three banks are currently close to that threshold.

"We favor FHN given notable capital differences that exist today," McGratty said.

With about $81.3 billion in assets, First Horizon ranked as the 33rd largest bank in the U.S. in the fourth quarter of 2023, according to the U.S. Federal Reserve.

First Horizon is scheduled to report its first-quarter earnings on April 17. The FactSet consensus estimate is for the bank to earn 33 cents a share on revenue of $809.1 million.

Analyst currently expect the bank to earn $1.46 a share in 2024, according to FactSet data. That's a penny above KBW's 2024 earnings estimate for the bank of $1.45 a share.

Including Monday's trading, First Horizon's stock is up by 6.7% in 2024, compared to a 7.4% gain by the KBW Nasdaq Bank Index BKX and a loss of 6.7% by the SPDR S&P Regional Banking ETF KRE.

Also read: Huntington Bancshares upgraded to buy with analyst seeing 'multiple pockets of potential loan growth'

-Steve Gelsi

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04-08-24 1249ET

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