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FBR upgrades Huntington Bancshares, KeyCorp; Baird downgrades BB&T

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery


FBR upgrades Huntington Bancshares, KeyCorp; Baird downgrades BB&T

Initiations

Piper Jaffray analyst Peyton Green initiated coverage of KansasCity, Mo.-based Commerce BancsharesInc.; Evansville, Ind.-based OldNational Bancorp; Muncie, Ind.-based First Merchants Corp.; and Clayton, Mo.-based .

Green initiated Commerce Bancshares at "neutral" witha 12-month price target of $43.50.

His 2016, 2017 and 2018 EPS estimates are $2.75, $2.90 and $3.10,respectively.

The analyst noted that the company is currently trading at thehigh end of the range, so based on the analyst's projected annual EPS growth ofapproximately 6% through 2018, there is little upside. However, he noted that thecompany displayed a 4.5% EPS compound annual growth rate over the past 15 years.Which, along with current return on assets of 1.0% and return on tangible commonequity of 11.9%, is not "eye-catching," but is significant as the companyachieved these metrics against a backdrop of 180 basis points of net interest marginpressure over the time frame.


Green initiated Old National at "neutral" with a 12-monthprice target of $13.50.

His 2016, 2017 and 2018 EPS estimates are 94 cents, $1.03 and$1.15, respectively.

The analyst believes that the company needs to show approximately9% EPS accretion in 2017, resulting from the AnchorBanCorp Wisconsin Inc. acquisition,to expand its stock price. In addition, he noted that the company needs to generatea higher run rate of EPS than $1, which has been in place since the third quarterof 2011. However, he added that "[e]ven though we believe ONB's valuation willremain below the [five-year] average until sustainable EPS growth surfaces (i.e.,[thesecond half of 2017], the current valuation, a projected [return on tangible commonequity] of 11.5%, and a yield of 4.3% should limit downside."


First Merchants was initiated at "neutral" with a pricetarget of $27.

The analyst's 2016 and 2017 EPS estimates are $1.84 and $2.00,respectively.

Green thinks that the company has limited upside to EPS in thenear term, which might stop it from exploring further M&A. He added that thecompany has purchased four banks and thrifts with $2 billion of assets since 2013.He believes that the company might focus its capital deployment on M&A, internalgrowth, dividends and buybacks. However, "given a mid-single-digit organicgrowth rate, an active M&A strategy has been, and will likely be, necessaryto achieve better-than-expected growth," he added.


Enterprise Financial was initiated at "overweight"with a price target of $31.25.

The analyst's 2016, 2017 and 2018 EPS estimates are $2.20, $2.31and $2.55, respectively.

The analyst believes that the company will be able to generatea higher price to earnings multiple in 2017, because of its better-than-peers growthand return on tangible common equity, along with increasing scarcity value of metro-and commercially-focused franchises. He also believes that the company's metro-and commercially-focused business model should gain interest from growth investorsand a host of potential acquirers.

Industry reports

In their recent research note, FBR & Co. analysts noted thatthe financial sector, and banks in particular, were significantly affected as interestrates dropped and the yield curve continued to flatten. The analysts highlightedthat the main reason was "underwhelming macroeconomic data and a flight toU.S. Treasury securities following the Brexit vote in June."

As a result, analysts are favoring banks that are currently tradingat or below tangible book value per share, while maintaining strong fundamentals.The list includes Comerica Inc.,Huntington Bancshares Inc.,KeyCorp, and , and oversold banks likeConnectOne Bancorp Inc.and Signature Bank. Inaddition, they highlighted FlagstarBancorp Inc., U.S. Bancorpand Wells Fargo & Co.,as they think that mortgage originators will benefit from lower interest rates asrefinancing activity picks up.

The analysts upgraded Huntington Bancshares and KeyCorp, to "outperform"from "market perform," but maintained the companies' 12-month price targetsat $11 and $12.50, respectively.

"Shares of both companies trade near multiyear lows, reflectingin part poor sentiment on both companies' pending acquisitions and disappointingCCAR capital plans, but we think these issues are now priced into the stocks, andwe like the shares' risk/reward," the analysts noted in their research report.


Marty Mosby, director of bank and equity strategies at ViningSparks, expects second-quarter earnings to show 8% sequential improvement due to"rebound in fee income, continued modest growth in net interest income, lessloan loss provisioning, and incremental deployment of capital." He thinks thatthis rebound will help the large-cap U.S. banks exceed current market expectationsby 2% in 2016.

The analyst also lowered his median EPS estimates for 2016 and2017 by 2% and 4%, respectively, primarily because he does not expect the Fed toraise rates any time soon because of the results of the Brexit vote.

Mosby upgraded KeyCorp to "strong buy" from "marketoutperform" and lowered the company's 12-month target price to $13.50 from$14.

The analyst also lowered his 2016 and 2017 EPS estimates forKeyCorp to $1.05 and $1.30, from $1.10 to $1.35, respectively.

Downgrade

Baird Equity Research analyst David George downgraded to "neutral"from "outperform" and also lowered the company's 12-month price targetto $37 from $40.

The analyst maintained his 2016 EPS estimate at $2.71, but loweredhis 2017 EPS estimate to $2.95 from $3.00.

Because of its diversified business mix, strategy that focuseson steady organic growth and opportunistic M&A, along with a high-quality managementteam, the analyst believes that the company is better positioned than most banksfor a lower-for-longer environment. The analyst noted that the company's' earningsare a bit visible in light of the synergies from the recent Susquehanna Bancshares and National Penn Bancshares acquisitions. However,he thinks that its net interest margin will probably compress from 3.40%, the company'scurrent approximate level, which will prove challenging as the company tries toreach its goal of an efficiency ratio of approximately 56% to 57%.