The American financial industry has slipped into a crisis not seen since the global financial crisis of 2008. The Silicon Valley Bank (SVB) collapsed spectacularly earlier this month. The failure of the Signature Bank followed the collapse of SVB.
Both banks are now under the Federal Deposit Insurance Corporation (FDIC) control. With the banking system battered by bank failures, avoiding the First Interstate BancSystem, Inc. (FIBK) could be wise. Throughout this article, I have discussed the reasons I am bearish on this regional bank stock.
The bank failures have rattled the financial industry. SVB was the 16th largest bank in the United States at the end of 2022. Its collapse could be attributed to a large percentage of uninsured deposits and a substantial proportion of deposits invested in hold-to-maturity deposits.
EY-Parthenon’s chief economist Greg Daco said, “The risk in terms of the spark from SVB is real. Once there is stress in a particular set of institutions, then those institutions and those that have similarities will tend to be more cautious in their lending.” “We’re likely to be in this state for a prolonged period,” he added.
Regional bank FIBK failed to surpass the consensus EPS and revenue estimates in the fourth quarter. Its EPS missed analyst estimates by 17.4%, while its revenue came 3.2% below the consensus estimate.
FIBK President and CEO Kevin P. Riley said, “Our fourth quarter performance wrapped up a strong year for the company as we executed well on the integration of our merger with Great Western, realizing the cost synergies projected for the transaction while generating solid organic loan growth throughout our footprint.”
“We continued to see a significant volume of high-quality lending opportunities in the fourth quarter, with our newer markets helping us generate our strongest organic loan growth of the year. We also saw positive trends in our adjusted net interest margin and asset quality, as non-performing assets declined by 23.5%,” he added.
BlackRock Inc. (BLK), the world’s largest asset manager, reduced the number of FIBK shares it was holding by 23.3%, while its ownership in the company decreased by 1.5%.
The banking crisis is expected to drive regional banks to tighten lending standards and hold back on lending. Apollo Global Management Inc.’s chief economist Torsten Slok said, “If it’s suddenly much harder to get an auto loan, a consumer loan, a mortgage for commercial real estate simply because smaller regional banks have to reorganize balance sheets.”
The bank failures fueled fear among investors that other banks might have similar issues, leading to a sell-off in bank stocks. FIBK’s stock has declined 17.5% in price over the past month and 29.2% over the past six months to close the last trading session at $30.65.
Here’s what could influence FIBK ’s shares in the upcoming months:
Mixed Financials
For the fiscal year ended December 31, 2022, FIBK’s net interest income increased 92.7% year-over-year to $942.60 million. Its total non-interest income rose 9.2% year-over-year to $163.20 million. The company’s net income increased 5.3% over the prior-year period to $202.20 million. Its EPS declined 37% year-over-year to $1.96.
Its cash and cash equivalents for the fourth quarter ended December 31, 2022, declined 62.9% year-over-year to $870.50 million. Its total non-performing assets increased 163.6% year-over-year to $78.30 million. Its total non-interest income rose 12.1% year-over-year to $41.60 million.
Stretched Valuation
In terms of forward P/S, FIBK’s 2.70x is 25.8% higher than the 2.15x industry average. Its 8.82x forward non-GAAP P/E is 5.8% higher than the 8.34x industry average. Likewise, its 1.47x forward non-GAAP PEG is 45.4% higher than the 1.01x industry average.
Poor Profitability
FIBK’s 7.99% trailing-12-month Return on Common Equity is 28.6% lower than the 11.19% industry average. Likewise, its 19.83% trailing-12-month net income margin is 25.7% lower than the 26.69% industry average. Furthermore, the stock’s 1.03% trailing-12-month Capex/Sales is 43.7% lower than the industry average of 1.83%.
POWR Ratings Reflect Bleak Prospects
FIBK has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. FIBK has a D grade for Value, consistent with its stretched valuation.
It has a D grade for Quality, in sync with its weak profitability.
FIBK is ranked #41 out of 43 stocks in the D-rated Pacific Regional Banks industry. Click here to access FIBK’s Growth, Momentum, and Stability ratings.
Bottom Line
FIBK’s stock is trading below its 50-day and 200-day moving averages of $35.88 and $39.50, respectively, indicating a downtrend. Although the bank was confident of successfully navigating through the tense macroeconomic environment this year, the recent bank failures are expected to put FIBK under pressure.
The bank might be forced to pull back on lending, hampering its net interest income. Given its stretched valuation and poor profitability, it could be wise to avoid the stock now.
Stocks to Consider Instead of First Interstate BancSystem, Inc. (FIBK)
The odds of FIBK outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three B-rated (Buy) stocks from the Pacific Regional Banks industry instead:
BayCom Corp (BCML)
First Northwest Bancorp (FNWB)
RBB Bancorp (RBB).
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FIBK shares were trading at $31.75 per share on Tuesday morning, up $1.10 (+3.59%). Year-to-date, FIBK has declined -16.81%, versus a 3.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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