Stephens takes deep dive on US banks' interest rate sensitivity

Analyst notes

In a report assessing banks' positioning in the rate-hike cycle, Stephens analysts expect the bank group to benefit from higher short-term rates.

With the market expecting five rate hikes by the end of 2023, Stephens analysts conservatively modeled two rate hikes in 2022 and a third in the second quarter of 2023.

"Broadly, the bank group stands to benefit from higher short-term rates, but we do find that loan floors could mute asset repricing benefits for the first couple of rate hikes, similar to prior cycles," the analysts wrote.

The analysts conducted four sets of analysis to examine rate sensitivity: loan maturity and repricing schedules, deposit and funding, prior-cycle performance, and net interest income sensitivity disclosures.

On loan maturities, the analysts highlighted banks including Bank7 Corp., Comerica Inc., SVB Financial Group, Texas Capital Bancshares Inc. and Wintrust Financial Corp. to witness quicker loan repricing benefits due to short-duration portfolios. Bank7 stood out among community banks, with 84% of its loans repricing within three months.

On the other hand, banks with longer-duration portfolios could see "slower" loan repricing benefits, including Community Bank System Inc., First Republic Bank, New York Community Bancorp Inc., Pacific Premier Bancorp Inc. and TriCo Bancshares.

However, the analysts noted that floors on variable rate loans could mute some of the benefits from rising rates. Using company disclosures, the analysts reported that several banks had more than 90% of their loans acting as fixed, led by Bank OZK, with 97% of its variable rate loans currently at floor pricing.

Upgrade

Hovde Group analyst Bryce Rowe upgraded Muncie, Ind.-based First Merchants Corp. to "outperform" primarily because its stock underperformed a regional banking index year-to-date by 27% despite delivering "solid" year-to-date fundamental performance.

A broader 2022 outlook piece highlighted First Merchants as a "Show-me M&A Story." The bank's pending acquisition of Level One Bancorp Inc. is projected to generate roughly 10% EPS accretion.

The price target was kept unchanged at $47.00. The EPS estimates for 2021, 2022 and 2023 were also unchanged at $3.79, $3.48 and $4.00, respectively.

Initiation

Piper Sandler analyst Andrew Liesch initiated coverage of FinWise Bancorp. to "overweight."

"FinWise is well positioned to benefit from the increased digitization of the banking industry by partnering with technology-oriented loan origination platforms (Strategic Programs) and deploying its own in-house technology to deliver loan and deposit solutions to customers directly and through third parties," the analyst wrote.

The analyst expects the bank to deliver a return on assets of over 7% and a return on equity over 25%.

The price target was set at $15.50. The analyst established EPS estimates for 2021, 2022 and 2023 at $2.94, $2.65 and $3.10, respectively.

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Stephens Inc. analyst Brody Preston also initiated coverage of FinWise Bancorp with an "overweight" rating.

Preston wrote that the company should experience outsized revenue growth relative to peers due to its strategic programs business in which the lender partners with nonbank fintechs. As FinWise retains more of the fintech-originated loans moving forward, the bank should report stronger profitability than peers due to the higher-yielding nature of the programs that are geared to subprime and subprime-like customers.

The analyst set a price target of $22.50 and EPS estimates for 2021, 2022 and 2023 at $3.06, $2.68 and $3.22, respectively.