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Wolfe Research upgrades Bank of New York Mellon

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Wolfe Research upgrades Bank of New York Mellon

Upgrade

Wolfe Research analyst Steven Chubak upgraded Bank of New York Mellon Corp. to "peer perform" from "underperform" and raised its price target to $50 per share from $45.

The upgrade was largely centered on efforts by the Federal Reserve to maintain economic expansion, according to a note. The analyst said he expects trust banks to expand their balance sheets after a period of declines, and Bank of New York Mellon "is arguably the best positioned here."

Chubak added that accelerating deposit growth should offset pressure from lower rates, as the Fed is poised to grow its balance sheet.

Aside from Fed moves, the analyst added that Bank of New York Mellon would be one of the least-impacted banks in the case of a recession, is currently running well above his capital target of 10% with a CET1 ratio of approximately 11.1%, and is trading near all-time lows compared to the S&P index.

The analyst set the bank's estimated EPS at $1.01 for the third quarter, $4.09 for 2020 and $4.40 for 2021.

Downgrade

Wells Fargo analysts Jared Shaw and Timur Braziler downgraded First Republic Bank to "market perform" and lowered its price target to $100 per share from $112.

"We still have confidence in the longer-term outlook for [First Republic]," the team wrote in a note, "but in an environment with few positive catalysts, combined with the richest valuation in the group, the bar is set pretty high."

The bank has a liability-sensitive balance sheet, which has resulted in its net interest margin declining 45 basis points because of rising rates since the second quarter of 2015, the analysts said. "Deposit costs are going to remain near current levels longer than the rest of the group," the analysts said.

The team added that the bank's wealth management and student lending programs carry high expenses.

Finally, the bank's asset quality is "so good that it's bad," the analysts said. "As the industry continues to move closer to what we would call a normalization of credit, [First Republic] has the most to lose from a valuation standpoint if credit results ever fall short of expectations."

The analyst team set the bank's 2019 EPS estimate at $4.95 and lowered its 2020 estimate to $5.00 from $5.41.

Initiation

Sandler O'Neill analyst Nicholas Cucharale initiated coverage of Archbold, Ohio-based Farmers & Merchants Bancorp Inc. with a "hold" rating and a 12-month price target of $27 per share.

"Farmers & Merchants has produced solid profitability metrics with impressive consistency over time," Cucharale wrote in the initiation, predicting a return on average assets of around 1.3% for the next six quarters and noting that the company's core ROAA has only dropped below 1.0% in four years dating back to 1992. "The foundation for [Farmers & Merchants'] lofty returns is a resilient [net interest margin], steady revenue diversification and low credit costs," Cucharale said.

Farmers & Merchants has a high concentration in agriculture lending, given its presence in Ohio, Indiana and Michigan, with about 28% of its total loans in agriculture, the analyst noted. With recent woes in the ag-lending space, the sector is now at the "forefront of the Farmers & Merchants storyline," Cucharale said.

Farmers & Merchants may also be on the hunt for M&A opportunities after closing its deal with Geneva, Ind.-based Limberlost Bancshares Inc. on Jan. 1.

The analyst believes that the bank's valuation is "fair at this juncture" and gave it a 2019 EPS estimate of $1.82 and a 2020 EPS estimate of $1.85.