Title: Moody’s Credit Rating Cuts Send Shockwaves Through Regional Banks, Analysts Identify Bargains
Date: [Insert Date]
Author: Jessica Nix, Forbes Staff
Last week, Moody’s Investor Services dealt another blow to the already struggling regional banking sector by cutting the credit ratings of 10 small and mid-sized banks. The move was prompted by higher costs and lower profits in the industry, sending shockwaves through the market. In response, the Dow Jones dropped by 400 points on Tuesday morning.
The downgrade by Moody’s adds to the challenges faced by regional banks, which have seen a year-to-date decline of 19% as compared to a 16% gain for the S&P 500, according to the iShares U.S. Regional Bank (IAT) ETF. However, some analysts believe this presents a buying opportunity for investors looking for bargains in the sector.
Michael Mayo, a Wells Fargo banking analyst, argues that the Moody’s report is mainly backward-looking, reflecting the past 15 months of performance. He highlights that equity analysts have already lowered the average earnings estimate for banks by 20%. Mayo believes that while rising interest rates and the potential of a recession may have resulted in a discounted price for regional bank stocks, investors should be cautious about increased regulation.
Alexander Yokum, a senior equity analyst at independent research firm CFRA, agrees with Mayo’s perspective. Yokum notes that banks have taken measures to strengthen themselves against potential risks since the spring, such as increasing capital ratios. He highlights that the major concern for banks now is the possibility of an unexpected economic downturn.
While larger national banks may provide a sense of stability, Yokum identifies select regional banks offering good investment opportunities. He suggests looking for banks with consistent strategies and management, strong credit quality, cost control, and sound capital levels. Yokum’s top pick among the largest regional banks is PNC Financial Services (PNC), citing its higher capital buffer and lower exposure to unrealized losses.
Mayo also recommends investing in regional banks with consistent growth potential. He suggests considering U.S. Bancorp (USB) and Fifth Third Bancorp (FITB), despite Moody’s recent downgrades. However, Yokum expresses caution about U.S. Bancorp due to its lower capital levels and exposure to unrealized security losses. Fifth Third, on the other hand, stands out due to its increasing deposits and low exposure to changes in commercial office space.
Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods (KBW), advises a wait-and-watch approach. He suggests monitoring expected earnings and reserve growth as indicators of regional bank strength. McGratty highlights East West Bancorp (EWBC) as a growth stock, touting its conservative management approach and focus on the Asian American demographic. He also recommends New York Community Bank (NYCB) and Columbia Banking System (COLB) for their strong balance sheets and dividend yields.
Despite the challenges faced by regional banks, analysts believe that selectively chosen stocks within the sector offer attractive investment opportunities. However, investors are urged to exercise caution and stay alert to changing market conditions and regulatory developments.