Proactive Investors - US regional banks’ first quarter earnings should demonstrate resilience in earnings per share (EPS) despite a tough revenue growth environment, analysts at the Bank of America (NYSE:BAC) believe.
They wrote in a note to clients that investors will be looking for potential areas of vulnerability in a higher for longer interest rate backdrop, specifically in commercial real estate, overall credit, and deposit costs.
“Unfortunately, the outlook for higher rates have weighed on investor sentiment given potential downside EPS risks in a hard landing/stagflation scenario,” they wrote.
However, they highlighted that regional banks with strong deposit franchises should be well-suited to compete in a structurally higher rate backdrop, which could turn investor sentiment positive.
“Confidence that net interest income (NII) could rebound this year and that credit losses should stay manageable (normalizing not spiking) could change investor attitudes as far as perceived risk in a higher for longer backdrop underpinned by a strong economy,” they wrote.
They identified five key themes to watch during earnings season, which included deposit mix-shift away from non-interest bearing given limited visibility and loan growth outlook given the weak start to the year and uncertainty posed by the upcoming US Presidential elections, which both pose a risk to NII.
They also pointed to credit quality outlook and if management teams have enough visibility to stop building reserves which should drive positive EPS; an investment banking rebound; and capital deployment priorities, such as buybacks and bond book restructurings.
In terms of stock valuations, the analysts see US regional banks trading somewhere between a discounting a soft landing and credit/margin pressures for a higher for longer scenario.
Ahead of earnings, they upgraded Huntington Bancshares Incorporated (NASDAQ:HBAN) to a ‘Buy’ rating on their belief the bank’s accelerating growth momentum is not fully appreciated by investors.
They also have ‘Buy’ ratings on Truist Financial Corp (NYSE:TFC), First Horizon National Corporation (NYSE:FHN), East West Bancorp, Cullen/Frost Bankers, Synovus Financial, Western Alliance (NYSE:WAL) Bancorporation, and F. N. B. Corporation, which they believe present an attractive risk/reward portfolio.