Analysts at D.A. Davidson, Baird and Keefe, Bruyette & Woods chose their top picks among U.S. banks going into 2020, and several regional banks made the list.
Amid expectations that the economic cycle might be approaching a turn, the analysts favored banks with steady, stable growth prospects and favorable valuations. And after regional bank M&A dominated headlines in 2019, some analysts expect certain banks to benefit from forthcoming talent or client attrition.
On sectorwide expectations, D.A. Davidson forecasts median loan growth of 6.0%. In addition, they expect net interest margin headwinds to diminish and expense growth to slow. Buybacks will remain the preferred method of capital deployment, as opposed to merger activity, and asset quality is expected to remain high, according to a note by the analysts.
Meanwhile, Baird analysts predicted that the banking sector will be more volatile, so they are starting 2020 with a more cautious outlook. "With sentiment more bullish and valuations higher despite later-cycle risks, we believe investors should avoid chasing stocks as earnings growth and fundamental improvement may disappoint rising expectations," the analysts wrote in a note.
Analysts at both D.A. Davidson and Baird tabbed Columbus, Ga.-based Synovus Financial Corp. as a top pick in 2020.
With recent market disruption from two large merger-of-equals in the Southeast — Truist Financial Corp., the combined company from BB&T and SunTrust's MOE, and First Horizon National Corp. and IBERIABANK Corp.'s MOE — Synovus is well-positioned to benefit, the D.A. Davidson analysts wrote.
In addition, the bank has strengthened its balance sheet, achieved synergies from its acquisition of Weston, Fla.-based FCB Financial Holdings Inc., which closed at the beginning of 2019, and has enhanced its funding base.
Baird analysts named Synovus as their favorite mid-cap pick for the year, citing "steady organic growth ... solid credit performance, and improving industry M&A sentiment" as drivers of earnings in 2020. Like the D.A. Davidson analysts, Baird analysts believe Synovus will benefit from the merger activity in its footprint.
Baird analysts chose Providence, R.I.-based Citizens Financial Group Inc. as a "better value" bank stock among mid-cap banks based on its ability to execute and an "aggressive" efficiency initiative by the bank. "[Citizens] should not be overlooked as an M&A target in a low/no premium transaction environment," the analysts wrote.
Keefe, Bruyette & Woods analysts chose Cincinnati, Ohio-based Fifth Third Bancorp as an "opportunity." The bank's net interest margin is expected to be "less volatile" and its profitability more stable than peers, according to the analysts. A gap between where the bank is valued and the analysts' estimate has been growing, according to a note. "The valuation has remained in attractive territory over the past year," the analysts wrote.
Other top picks for mid-cap banks for D.A. Davidson included Montebello, N.Y.-based Sterling Bancorp and Phoenix, Ariz.-based Western Alliance Bancorp. Keefe, Bruyette & Woods analysts chose Waterbury, Conn.-based Webster Financial Corp. as a top pick.
Among large-cap banks, Baird chose Pittsburgh-based PNC Financial Services Group Inc. The analysts wrote that the company is a quality franchise with consistent execution and pointed to the company's "attractive" 22% stake in BlackRock Inc. The note highlighted the company's technology growth as a positive point as well.
They also chose McLean, Va.-based Capital One Financial Corp., based on its performance in 2019, its "solid" asset quality and improved "macro sentiment" in the U.S. "[Capital One] is ahead of peers with respect to technology investments," the analysts wrote, and the company should continue to improve its efficiency ratio.
At the other end of expectations, Baird analysts downgraded Wells Fargo & Co. to "underperform."
Among smaller banks, D.A. Davidson analysts chose Wilmington, Del.-based WSFS Financial Corp. and Walla Walla, Wash.-based Banner Corp. The analysts expect WSFS to be above peers in return on average assets. The analysts referred to Banner Corp. as a "conservative yet compelling investment," based on the bank's efficiency ratio, mortgages arm, special dividend announcement and attractive valuation.
KBW analysts chose New York City-based Metropolitan Bank Holding Corp., Aurora, Ill.-based Old Second Bancorp Inc. and Malvern, Pa.-based Meridian Corp. as opportunities in the small-bank sector.