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Equity analysts name top US bank picks for 2023


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Equity analysts name top US bank picks for 2023

Equity analysts are bearish on U.S. bank stock performance in 2023 as the industry continues to grapple with uncertainty and volatility.

A potential recession, peaking net interest margins, funding pressures and other factors have created a challenging backdrop for U.S. banks heading into 2023. The heightened unpredictability for the industry even made it hard for equity analysts to provide outlooks for the year ahead.

"This is bar none the most uncertain period that we can recall when attempting to quantify year-ahead earnings," JPMorgan analysts wrote in their 2023 bank sector outlook note on Dec. 13, 2022. "With the odds of no recession getting slimmer by the day ..., in our view the only real question is how much downside should investors be bracing for as the industry next works through a potential NIM and/or credit storm."

A challenging backdrop

After reporting steady improvement in NIMs as the Federal Reserve raised interest rates throughout 2022, banks now face peaking NIMs in 2023 as rate hikes slow and deposit betas play catch-up. Piper Sandler analysts believe NIMs will peak in early 2023 and begin a "long drift down," they wrote in a Jan. 3 note. The analysts recommended a neutral stance on bank stocks in 2023.

An uptick in lending activity and an abundance of cash on hand were tailwinds for banks in 2022, but now, loan growth could soften as the economy deteriorates and funding is severely challenged, the analysts wrote.

"Last year's abundance of funding has flipped to a fight to keep and expand it," the Piper Sandler analysts wrote. "The bottom line is that what looked a year ago like several years' worth of excess liquidity has quickly become a brawl to keep everything that is left."

The Piper Sandler analysts also expect expenses and fee income to remain pressure points for banks in 2023.

As NIMs stop expanding, balance sheet growth slows and provisioning potentially ticks up, banks' profitability may have peaked in the fourth quarter of 2022, Hovde analysts wrote in a Dec. 5, 2022, note.

Small-cap banks

Given that outlook, the Hovde analysts said banks with strong credit quality outlooks are best positioned to maintain their NIMs as top picks.

They named Fitzgerald, Ga.-based Colony Bankcorp Inc.; Everett, Wash.-based Coastal Financial Corp.; Eau Claire, Wis.-based Citizens Community Bancorp Inc.; and Grand Rapids, Mich.-based Mercantile Bank Corp. as best ideas among small-cap bank stocks for 2023. The analysts noted that, on average, smaller-cap banks posted stronger results than mid-cap banks in 2022.

Keefe Bruyette & Woods analyst Kelly Motta named Banc of California Inc. as a top pick among small-cap banks in 2023. The analyst believes the market is not giving the Santa Ana, Calif.-based company enough credit for its ongoing balance sheet transformation. Additionally, Motta pegged the bank as a "talent magnet" gaining share in attractive markets with a differentiated payments strategy.

Mid-cap banks

JPMorgan analysts warned investors to "limit exposure to regional banks overall at this juncture given that most of the banks in our coverage universe appear vulnerable to seeing negative EPS revisions in 2023." The analysts recommended investing in banks with "more resilient earnings streams," while banks with vulnerable NIMs and credit profiles "should be avoided," they wrote.

The analysts named San Francisco-based First Republic Bank as their top pick for 2023, followed by San Antonio-based Cullen/Frost Bankers Inc. in second place. Santa Clara, Calif.-based SVB Financial Group, Dallas-based Comerica Inc. and Nashville, Tenn.-based Pinnacle Financial Partners Inc. stood in third, fourth and fifth place among their top picks, respectively.

Hovde analysts named Chicago-based Byline Bancorp Inc., Conway, Ark.-based Home BancShares Inc., Evansville, Ind.-based Old National Bancorp and Winter Haven, Fla.-based SouthState Corp. as their top picks for mid-cap banks in 2023.

Old National Bancorp also made KBW analyst Chris McGratty's list as a top pick for 2023 as a pair trade with Kansas City-based UMB Financial Corp. McGratty wrote that Old National Bancorp's high-quality deposits, low balance sheet risk, synergies from its merger with First Midwest Bancorp Inc. and current valuation, which has it trading at a 26% discount, make it more attractive than UMB Financial.

Similarly, KBW analyst Catherine Mealor recommended SouthState and Little Rock, Ark.-based Bank OZK as a pair trade, writing that SouthState has funding flexibility, NIM protection and a low-risk balance sheet with a high reserve compared to OZK which has higher deposit costs, a peaked NIM and a perception of higher credit risk.

Large-cap banks

KBW analyst David Konrad recommend U.S. Bancorp as a top pick among large-cap banks for 2023. The analyst believes the company is trading at a "deep discount" to its historical valuations, and that the Street is underestimating the earnings power to come from its recent acquisition of MUFG Union Bank NA and overestimating concerns about pro forma capital and risks associated with U.S. Bancorp becoming a larger institution.

Konrad believes U.S. Bancorp presents an "attractive entry point" for investors.