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Bank analysts release expectations for 2018 CCAR, DFAST

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Bank analysts release expectations for 2018 CCAR, DFAST

Industry reports

* Kevin Barker of Piper Jaffray & Co. commented on his expectations of the 2018 Comprehensive Capital Analysis and Review to be released by the Federal Reserve on June 28. He views the 2018 CCAR as a transitional cycle, given that a tougher stress test may set back more aggressive capital return. However, new rules proposed for the next year, coupled with the recently passed regulatory relief bill, should lead the market to look forward to 2019 to fully realize the value of excess capital, the analyst wrote.

* Sandler O'Neill & Partners analyst Jeffery Harte previewed his 2018 CCAR expectations, saying that "while we sense the typical level of interest from investors, the wildcard is more a function of what will happen both to [the Dodd-Frank Act stress test] and CCAR in subsequent years in light of recently passed regulatory reform."

The analyst further wrote that he doubts whether regulatory reform will have much of an effect on this year's results. "Rather, we look for another year of iterative increases in overall capital return," Harte wrote.

One change worth noting in the 2018 CCAR and DFAST process, according to Harte, is that "rather than just being allowed to use the 'mulligan' as a chance to reduce planned distributions, firms can now also increase planned common stock issuances in making this adjustment."

* Keefe Bruyette & Woods analyst Brian Kleinhanzl also commented on CCAR 2018 expectations, saying that the stress test is anticipated to be more challenging this year, as compared to the last year. However, most banks have enough capital to absorb that stress, while still returning capital at a higher level compared to last year's CCAR, Kleinhanzl wrote.

The analyst, in another research report, wrote: "We are expecting 16 out of the 26 banks to breach the 100% gross payout level in the 2018 CCAR cycle," including in the analysis the publicly traded U.S. bank holding companies that fall under Keefe Bruyette & Woods' coverage.

* Vining Sparks analyst Marty Mosby, while commenting on the upcoming CCAR and DFAST, wrote that large-cap U.S. banks should be able to generate double-digit dividend growth for the 6th consecutive year, raise share buyback authorization by approximately 35%, and move the median total payout ratio up to 100% for the first time since the financial crisis.

Mosby further wrote that SunTrust Banks Inc., Citizens Financial Group Inc., Comerica Inc. and Zions Bancorp., among other superregional banks, are expected to announce, on average, "the largest positive surprises."

Upgrades

* Casey Whitman of Sandler raised Shippensburg, Pa.-based Orrstown Financial Services Inc.'s stock rating to "buy" from "hold" and increased the price target to $30 from $27.

The analyst wrote that "[Orrstown Financial] is a late-stage recovery story and for a long time, the company's below peer profitability metrics have justified a meaningful valuation discount." The analyst expects that this valuation discount is poised to close as the company's profitability metrics approach peer levels due to strong loan-growth momentum, along with accretion from its proposed acquisition of Mercersburg Financial Corp.

* Royal Bank of Canada's stock rating was upgraded to "neutral" from "underperform" by Macquarie Research analyst Mike Rizvanovic.

The analyst raised Royal Bank of Canada's stock price target to C$102 from C$99.

The analyst attributed the upgrade to Royal Bank of Canada's "more attractive valuation and our expectation of continued outperformance on margin." In addition, Royal Bank of Canada's earnings for the first time did not "feature outsized results versus expectations, while earnings quality was generally weaker," wrote Rizvanovic.

Downgrades

* Stephens Inc.'s Terry McEvoy downgraded Chicago-based First Midwest Bancorp Inc.'s stock rating to "equal-weight" from "overweight," based on First Midwest's outperformance following the announcement of Cincinnati-based Fifth Third Bancorp acquiring Chicago-based MB Financial Inc.

The analyst wrote that First Midwest has benefited from speculation around the possibility of a future sale given MB Financial's deal news. But First Midwest's announced acquisition of Northern States Financial Corp. is a "clear indication that First Midwest isn't selling anytime soon," wrote McEvoy.

The analyst kept First Midwest's stock price target unchanged at $28.

* Matthew Breese of Piper Jaffray downgraded his rating on Boston-based Berkshire Hills Bancorp Inc.'s stock to "neutral" from "overweight."

The analyst attributed the downgrade to Berkshire Hills' stock being fairly valued at about 14x earnings, or about $43.50, which is the price target set by the analyst. Breese wrote: "Overall, we continue to like the fundamentals of [Berkshire Hills] given its diversified revenue stream, a sub-300% [commercial real estate] concentration, sub-100% [loan-to-deposit] ratio, and improving profitability profile."

* Whitman of Sandler downgraded Bryn Mawr, Pa.-based Bryn Mawr Bank Corp.'s stock rating to "hold" from "buy" as the stock approached the $51 price target set by the analyst.

The analyst wrote: "While we were encouraged by the beat in the [first quarter], this was largely due to accretion income that was likely out-sized." Whitman further wrote that he is still encouraged by Bryn Mawr Bank's positive net interest margin and wealth management trends during the quarter.

Initiations

* Breese also started covering New Canaan, Conn.-based Bankwell Financial Group Inc.'s stock. He gave it a "neutral" rating and set the price target at $33.50.

The analyst introduced Bankwell Financial's initial EPS estimates at $2.30 for 2018 and $2.38 for 2019.

Breese wrote that besides serving its core markets of New Canaan and Fairfield, Conn., Bankwell Financial is a "triple-threat with a management team that has a history of acquisitions, but is also open to a potential sale."

* Kevin Reevey of DA Davidson is now covering Evansville, Ind.-based Old National Bancorp's stock. He gave it a "neutral" rating and a 12-month price target of $20.

The analyst introduced Old National Bancorp EPS estimates at $1.22 for 2018 and $1.42 for 2019.

Reevey wrote that Old National Bancorp has been very active in terms of M&A in the past 10 years and "tends to take an opportunistic approach to M&A, focusing on expanding into attractive metropolitan geographies with solid growth prospects."