* Following the Federal Reserve's decision to raise rates, Raymond James analysts updated their expectations for large U.S.-based banks in their coverage universe, those with more than $10 billion in assets.
The Fed announced that it raised the target range of the U.S. central bank's key interest rate by 25 basis points after their final monetary policy meeting of 2016. The Federal Open Market Committee voted unanimously to lift the target range for the federal funds rate to between 50 basis points and 75 basis points — up from the previous range of 25 basis points to 50 basis points.
Given the steeper yield curve, better economic outlook and company disclosures from recent investor conferences, along with the Fed rate hike, the analysts believe that the larger U.S. banks will be able to report better earnings in 2016, 2017 and 2018. They increased 2016 EPS estimates by an average of 0.1% for 14 out of the 48 larger banks under coverage. And they raised 2017 EPS estimates by an average of 3.0% and 2018 EPS estimates by an average of 4.6% for 45 banks.
In addition, the Raymond James analysts upgraded Bank of America Corp. to "outperform" from "market perform" and set a price target of $26. They described BofA as "a general proxy for the health of the economy." Given the recent expectations regarding the economy and higher interest rates in 2017, among other factors, the analysts think that the company will be able to achieve its profitability targets.
The analysts also upgraded Tupelo, Miss.-based BancorpSouth Inc. to "market perform" from "underperform," but lowered their investment ratings for Kansas City, Mo.-based UMB Financial Corp. to "underperform" from "market perform" and Blairsville, Ga.-based United Community Banks Inc. to "outperform" from "strong buy." The analysts downgraded United Community — based on the company's strong outperformance compared to peers and the S&P 500 since the U.S. elections, as well as year-to-date — but increased the target price to $32 from $27.
* Raymond James analysts also updated their projections and recommendations for smaller U.S.-based banks under their coverage universe, having less than $10 billion in assets. Similar to larger U.S. banks, the analysts expect smaller banks to report improved earnings in future periods, as well, considering the rate hike and better economic outlook.
They raised their 2016 EPS estimates by an average of 0.2% for 22 of the 75 smaller banks. And for 72 of the 75 banks covered in the report, they increased their 2017 EPS estimates by an average of 2.7% and their 2018 EPS estimates by an average of 3.9%.
In addition, they lowered their investment ratings for Rancho Cordova, Calif.-based American River Bankshares, Porterville, Calif.-based Sierra Bancorp, Honolulu-based Central Pacific Financial Corp., Nashville, Tenn.-based CapStar Financial Holdings Inc., Los Angeles-based CU Bancorp, Canfield, Ohio-based Farmers National Banc Corp., Conway, Ark.-based Home BancShares Inc., Birmingham, Ala.-based National Commerce Corp., and Marietta, Ohio-based Peoples Bancorp Inc. to "market perform" from "outperform." The analysts also downgraded Lafayette, La.-based MidSouth Bancorp Inc. to "outperform" from "strong buy."
* Sandler O'Neill & Partners LP analyst Brad Milsaps upgraded Houston-based Green Bancorp Inc. to "buy" from "hold", citing valuation, and increased his 12-month price target to $17 from $11.
Milsaps thinks the company is trading at a discount compared to its peers. He highlighted Stillwater, Okla.-based Southwest Bancorp Inc. and noted that the company is being acquired at 2.1x tangible book value and 25x 2017 earnings by Pine Bluff, Ark.-based Simmons First National Corp. The analyst noted that Southwest Bancorp was his "top acquisition target," but following the deal announcement, he thinks that investors might give Green Bancorp a fresh look.
Milsaps argued that he does not think that Green Bancorp is a near-term seller, or that the company might fetch the same multiple as Southwest Bancorp, but he thinks that the risk/reward equation of owning Green Bancorp stock is "clearly positive" considering the recent outperformance in bank stocks. He also thinks that the company will benefit from higher short-term interest rates and completion of its MARS program.
In April, the company announced a strategic initiative designed to substantially reduce the uncertainty in the financial results caused by its energy loan portfolio. The initiative dubbed Managed Asset Reduction Strategy, or MARS, aimed to remove what the company called "temporary roadblock" to the execution of Green Bancorp's growth plan due largely to the energy market. In May, the company said it was hoping to be more active in terms of M&A as it worked to eliminate energy loan exposure.
* Following Simmons First's announcement to acquire Southwest Bancorp, Hovde Group analyst Joseph Fenech downgraded Southwest Bancorp to "market perform" from "outperform." The analyst added that he was not surprised by the deal as he always considered Southwest Bancorp as a possible "acquisition candidate."
He increased his target price for the company to $30 from $21 to reflect the deal price of $30.30 per share. He stressed that his updated recommendation for the company is not a reflection on the deal, rather it factors in the expected pop in the share price.
* Piper Jaffray analyst Brett Rabatin initiated his coverage for Dallas-based Triumph Bancorp Inc. with an "overweight" rating and a price target of $28, which reflects a discount compared to the company's peers.
The analyst thinks that the company's "unique, highly differentiated business model" will help Triumph Bancorp to report stronger returns compared to the industry. He also thinks that the company will be able to increase its profits compared to its peers over the next several years.