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Sandler O'Neill downgrades Xenith Bankshares, Capital City Bank Group

Industry notes

* Stephens Inc. analysts raised their earnings estimates for regional banks, after the Federal Reserve's decision to raise rates. In addition, they considered the steepening of the yield curve and expectations for three more rate hikes in 2017 and 2018; and they increased their 2017 and 2018 EPS estimates by 8% and 9%, respectively. The analysts did not incorporate market expectations for reduced regulatory burden in the future, but they noted that if they come to fruition, it could raise earnings even further.

The analysts noted that the KRE has increased 28% since the elections and, in comparison, some banks have shown higher appreciation. As a result, the analysts downgraded Southwest Bancorp Inc., First Mid-Illinois Bancshares Inc., Equity Bancshares Inc. and Eagle Bancorp Inc. to "equal-weight" from "overweight" and upgraded Franklin Financial Network Inc., BancorpSouth Inc. and WSFS Financial Corp. to "overweight" from "equal-weight."

* J.J.B. Hilliard, W.L. Lyons LLC analyst Andrew Stapp also revised his outlook after the "dramatic increase" in bank stock valuations since the U.S. elections. He noted that the markets are reacting to an "expected improved operating environment" under a Republican Congress and presidency.

However, the analyst revised EPS estimates and price targets because of the considerable uncertainty about policies from the incoming Trump administration. He considered two 25-basis-point rate hikes in each of 2017 and 2018, lower corporate taxes and stronger loan growth. The analyst did not account for the expected benefits from any regulatory reform.

Based solely on valuation, Stapp downgraded BB&T Corp., Chemical Financial Corp. and Renasant Corp. to "neutral" from "buy" and lowered his investment ratings for Fifth Third Bancorp, German American Bancorp Inc. and Old National Bancorp to "underperform" from "neutral." Currently, he is only rating Huntington Bancshares Inc. at "buy."


* Sandler O'Neill & Partners analyst Stephen Scouten downgraded Capital City Bank Group Inc. to "sell" from "hold", citing valuation, as the analyst thinks the share price has risen to an unsustainable level. Scouten said while the stock is trading more reasonably at present, it does not deserve a premium. He thinks that the company's profitability will stay below peers', so a 13x multiple is appropriate, which implies a price target of $19 compared to the previous target of $15.5.

* Another Sandler O'Neill & Partners analyst, Casey Whitman, downgraded Xenith Bankshares Inc. to "hold" from "buy" due to recent stock appreciation. The analyst noted that Xenith's stock is up 6% since around last week; and it has advanced 61% year-to-date, as compared to the S&P Bank Index's 21% increase.

The analyst also maintained the price target of $31, at a discount compared to peers, based on the company's weaker profitability metrics, sub-peer deposit profile, and high credit levels. Whitman thinks it will take time for successful integration related to the Xenith/Hampton Roads Bankshares deal.


* With Old Line Bancshares Inc. valuation being attractive since the election, analyst Casey Whitman upgraded the company's stock to "buy" from "hold." The analyst said the company's stock has underperformed the market, trading 11.7x the 2018 EPS estimate -- the lowest adjusted P/E multiple among its peers. Whitman increased her price target to $30 from $21, noting the company should trade at a valuation on par with its peers.

Whitman also said that if the company ever decides to sell, it should be afforded a premium, though she is not sure whether the company will enter into M&A any time soon.

* Also at Sandler, Scouten upgraded Atlantic Capital Bancshares Inc. to "buy" from "hold" because of two points: First, he updated his assumptions to reflect the steepening yield curve and a possible lower corporate tax under the Trump administration; and second, he believes the company will enter into an M&A deal. The shares have underperformed since the election, with an increase of around 18%, compared to a 27% increase for the regional bank index.

He noted that the Tennessee expansion did not do well for the bank as initially expected. However, he thinks the company's new Charlotte loan production office and hiring for Atlanta metropolitan statistical area is likely to drive further growth. Scouten increased his price target to $20 from $16.


* Stephens Inc. analyst Erik Zwick initiated coverage of BankUnited Inc. at "overweight," with a price target of $44. The analyst noted that the company is a strong franchise, with multiple sections showing above-average growth. In addition, he does not have near-term concerns related to the company's commercial real estate and mutual funds portfolios. However, he thinks the portfolios might need to be monitored in case their concentration rises.

The company shares have appreciated 28% since the election; the analyst thinks they are attractively valued.

* Zick also initiated People's United Financial Inc. at "equal-weight" and noted that the company's stock price has increased 15.8% since the election, compared to a 24% gain in the S&P Regional Bank Index. The analyst thinks the company has potential to grow its profits, but the growth will be incremental.

* Signature Bank shares have appreciated 20% since the election. Zick thinks the company's shares are attractively valued.

He thinks the company might report some credit concerns because of its taxi medallion portfolio over the next few quarters, but does not believe there are any near-term concerns about the company's commercial real estate and mutual funds portfolios.

He initiated the company at "overweight" with a $175 price target.

* SunTrust Robinson Humphrey analyst Michael Young initiated coverage of MB Financial Inc., First Midwest Bancorp Inc., Associated Banc-Corp, F.N.B. Corp. and Wintrust Financial Corp.

The analyst initiated MB Financial at "buy" with a price target of $54. He thinks the company can generate more growth than the Chicago market currently generates, without taking additional credit risk. He also thinks that given the addition of lenders from American Chartered, and greater-than-expected asset sensitivity, the company will produce significant revenue upside at the company.

* Young initiated coverage of First Midwest with a "buy" rating and a 12-month price target of $28. The analyst thinks that given the "upward inflection in organic and inorganic growth to scale past the high cost $10 billion asset regulatory threshold" the company should be able to improve its operating leverage significantly over the next two years. He added that increasing interest rates could move the operating leverage higher. He also thinks First Midwest might now be interested in reasonably priced M&A opportunities given its stronger currency.

* Young initiated Associated Banc-Corp with a "hold" rating and a $26 price target. He thinks that over the next two years, the company will be able to grow revenues at a low-single-digit pace; and as initiatives to lower costs result in little expense inflation, the company will be able to improve its operating leverage, but slowly. Given the company's below-peer profitability and less benefit from rate hikes, the analyst does not see a catalyst for its stock to outperform over the next 12 months.

* Young thinks F.N.B. Corp. has a strong currency and is a preferred acquirer with a strong M&A history. In addition, he thinks F.N.B.'s successful integration of the Yadkin Financial Corp. deal will solidify its "preferred acquirer status," help the company grow its loans and enhance its attractiveness for future expansion. He initiated the stock at "buy" with an $18 price target.

* Lastly, Young initiated his coverage of Wintrust Financial with a "hold" rating and a 12-month price target of $77. The analyst thinks the company has done a good job maintaining its high growth rate, but keeping up the historical double-digit organic growth rate would need substantial reinvestment. Because of that, the company has often lagged its peers on profitability. But now, the company is making progress in reducing its expense base. Young thinks Wintrust will continue to reinvest in 2017 to boost earnings, but the analyst thinks it will limit the company's efficiency and improvement in profitability metrics.