The Ratings Game: Citi analyst hits buy button on regional-bank stocks offering ‘attractive entry point’

Daily Trade

Citi analyst Keith Horowitz on Friday initiated coverage of four major regional banks with glowing marks for Huntington Bancshares, Zions Bancorp and KeyCorp, as a mixed third-quarter for bank stocks comes to a close on Friday.

With one trading day left in the quarter, Horowitz said the sector offers an “attractive entry point” for investors.

“We remain constructive on the sector given our view that the best time to buy bank stocks is the transition from late-cycle to early-cycle, when we believe credit will fare better than market concerns,” Horowitz said in a research note.

Citi initiated coverage of Huntington Bancshares Inc.
HBAN,
+2.40%

and Zions Bancorp
ZION,
+4.36%

with buy ratings, while issuing neutral ratings on New York Community Bancorp Inc.
NYCB,
+1.11%

and First Citizens Bancshares Inc.
FCNCA,
+1.02%
.
The Citi note penned by Horowitz said the firm’s top pick among regional banks remains KeyCorp
KEY,
+3.56%
.

The stocks all rose on Friday, as Huntington Bancshares was up 1.9%, Zion was up by 4.1%, New York Community Bancorp was up by 0.8% and First Citizens Bancshares was up by 1.3%. KeyCorp was up by 3.7% and PacWest Bancorp
PACW,
+3.60%

was up by 3.2%.

Among the major benchmarks for bank stocks, the KBW Nasdaq Bank Index
BKX
is down by 1.6% in the third quarter, although it was up by 0.9% on Friday, along with a fractional rise by the Financial Select Sector SPDR ETF
XLF
and a 1.7% gain by the SPDR S&P Regional Banking ETF
KRE
was up by 1.7%.

Chris Marinac, banking analyst with Janney Montgomery Scott, said in an email to MarketWatch that bank stocks in the KBW Nasdaq Bank Index
BKX
and the SPDR S&P Regional Banking ETF
KRE
traded with a forward price-to-earnings ratio of 8.9 times as of Thursday’s close. That compared to 18.5 times for the S&P 500
SPX.

Since 2016, bank stocks have traded at 66% of the median S&P 500 forward price-to-earnings ratio, but currently are trading at only 48%, Marinac said.

First Citizens Bancshares emerged as a much larger bank after it acquired Silicon Valley Bank earlier this year in a deal brokered by the Federal Deposit Insurance Corp. During the third quarter, First Citizens stock has risen 6.8%.

New York Community Bancorp’s stock has risen 0.4% in the past three months. The bank has also bulked up this year by buying Signature Bank in an FDIC auction.

Huntington Bancshares’ stock was down 3.3% in the third quarter, while Zions has rallied by 31.9% over the past three months as the stock recovered some of its steep losses earlier in the year. KeyCorp’s stock has risen 18% in the past three months as it also recovered losses from earlier in the year.

Citi analyst Horowitz said his higher ratings on Huntington Bancshares and Zions compared to New York Community Bancorp and First Citizens run contrary to prevailing ratings on Wall Street.

“While we agree that both NYCB and FCNCA are well positioned after very attractive acquisitions, we see better opportunity in ZION and HBAN which is reflective of our view that the regional banks look attractive here and that one should be playing offense, not defense,” Horowitz said.

Huntington Bancshares stands out as a “high-quality regional without a premium valuation” with potential upside for its net interest income, Horowitz said.

Meanwhile, Zion offers a discounted stock price while its net interest income has bottomed earlier than other banks, he said.

Among the major benchmarks for bank stocks, the KBW Nasdaq Bank Index
BKX
is down by 2.5% in the third quarter. On Friday, the Financial Select Sector SPDR ETF
XLF
was up fractionally while the SPDR S&P Regional Banking ETF
KRE
was up by 1.7%.

Also read: Citigroup in talks to sell China retail-wealth unit to HSBC: Reports

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