2 Regional Banks That Have Just Caught Upgrades To Keep On Watch

David Chiaverini is a managing director covering the disruptive finance and bank sector with over 20 years of investment experience.

Transcript

00:00David, earlier you mentioned Western Alliance. Are there any other of that grouping of regional

00:07bank stocks that got crushed? I don't even know when that was, a year and a half ago,

00:11two years ago?

00:12Last April.

00:13Was it really only last April? It feels longer ago than that. Are there any other regional

00:17banks that to you stand out as either the market's undervaluing them right now, or they're

00:25doing some interesting things to kind of stand out from the rest of the group? Is Western

00:29Alliance kind of the one that sticks out to you?

00:33No, there's some others. And one of the themes when we published our preview a couple weeks

00:38ago and then put out a follow-up note this morning is the overarching theme, now that

00:43the Fed has pivoted to lower rates, is we're leaning into those that have a liability-sensitive

00:50balance sheet. And what that means is their liabilities ought to reprice faster in a downrate

00:57environment than their assets, which should lead to an expanding net interest margin.

01:03So the banks that I like, given that backdrop that we just upgraded, is Bank of California,

01:09BANC. They are liability-sensitive. I expect their net interest margin could exceed their

01:15guidance range at the end of this year. And then looking out to next year as rates are

01:20expected to come down even more, I think BANC is well-positioned to take advantage. And

01:26then they've also gone through a merger that they've been working through over the past

01:31year. And I think that they're going to get their expenses down into their range of $195

01:36to $200 million. And it should lead to nice earnings growth relative to other banks looking

01:42out to next year. So I like Bank of California. The other one I just recently upgraded that

01:47is liability-sensitive is Columbia Banking System, COLB. Similarly, I expect their net

01:53interest margin to benefit. Looking out to next year, they have a range of $345 to $360

02:00on the net interest margin. I think they're going to come in at the high end of that range.

02:04And right here, when they announce earnings this month, third quarters tend to be seasonally

02:11strong for them on the deposit side. So I think they could surprise to the upside there

02:17as well. And they're trading at a discount to the group. So I think they're well-positioned

02:22for the outlook as well. And then we recently downgraded a couple asset-sensitive banks.

02:28So First Citizens, FCNCA, they are the most asset-sensitive in our coverage, and we expect

02:35them to face headwinds in a lower-rate environment. So we downgraded that one. We also downgraded

02:42First Horizon, FHN. They also are asset-sensitive, so we think they're going to face the headwinds.

02:48So we decided to step aside on that one as well.