Bank stocks have tumbled this year, with the KBW Nasdaq Bank stock Index sliding 25%.
But “banks in general, and midcap banks specifically, are in much better fundamental positions than you would assume from the stock prices,” Wells Fargo analysts wrote in a commentary.
“First, higher rates don't mean [historically] high rates. And the balance-sheet-management opportunity for banks, even with a 3% terminal federal funds rate, will be significantly better than when the funds rate was close to zero.”
The terminal federal funds rate is where it will end up after the Federal Reserve finishes raising it. It now stands in a target range of 1.5% to 1.75%.
“Second, credit is strong at the banks as a result of restructuring weaker credits … and even more stringent underwriting over the past two years,” the analysts said. “Additionally, banks still have excess reserves.”
And third, “loan growth continues to accelerate as a result of commercial underinvestment over the past several years,” the analysts said. “From our recent conversations with bank managements, clients are still engaging and pipelines are robust.”
So the analysts like midcap bank stocks, and name Signature Bank (SBNY), SVB Financial (SIVB) and Synovus Financial (SNV) as their top choices. They rate all three as overweight.
Signature Bank
The analysts have a price target of $408 for the stock. That's more than twice the recent quote of $177.20.
“SBNY is still seeing sustainable growth in loans as a result of expansion over the past few years, and is also benefiting from positive reinvestment trends in the securities book,” they said.
“While deposits dipped seasonally in May, management still expects the quarter to be flat-to-up. ... With roughly $29 billion of cash on the balance sheet, we are less concerned about total deposit growth right now…”
SVB Financial
The analysts have a price target of $810 for the stock. That's double the recent quote of $403.
“SVB Financial is the most asset-sensitive of all banks, and net-interest-income growth will occur to a significant degree, whether or not the balance sheet continues to grow right now,” they said.
“As management has been saying, there is still significant innovation occurring in the tech space, and there are high levels of capital already committed to funds.” SVB has a strong exposure to private equity and venture capital.
Synovus Financial
The analysts have a price target of $65 for the stock. It recently traded at $35.84.
“SNV continues to benefit from operating in some of the most vibrant economies of the U.S.,” the analysts said.
It’s “taking market share from the largest banks (who are not focused on the middle-market commercial client), as well as reaping gains from recent and proposed consolidation,” they said.
“SNV is in the process of implementing its longer-term plan focused on growing commercial market share…”
