The extreme skepticism over regional bank stocks has gone so far that it prompted one of the few holdouts on Wall Street to turn bullish on a trio of the hardest-hit lenders.
(Bloomberg) — The extreme skepticism over regional bank stocks has gone so far that it prompted one of the few holdouts on Wall Street to turn bullish on a trio of the hardest-hit lenders.
JPMorgan analyst Steven Alexopoulos said the last time he saw this many bearish investors was toward the end of the Global Financial Crisis, right before legislators intervened in the form of the Troubled Asset Relief Program, or TARP, which quickly flipped sentiment around.
Today, “the mood on regional banks only needs to get slightly less negative in order to see a potential significant re-rating,” he said, raising his rating on Western Alliance Bancorp, Zions Bancorp and Comerica Inc. to the buy-equivalent recommendation of overweight.
The trio surged on Friday, joining in a broader rally as the beaten-down regional bank sector bounced back from a bruising rout. Short-covering may have driven some of the move even as the White House downplayed the need to curb short-selling of bank stocks.
“Many investors might look at these names and see banks with outsized exposure to risk,” Alexopoulos wrote in a research note. “At these valuations, however, what we see are high quality banks that offer significant upside potential from current levels.”
The pressure on regional banks seemed to be contained to only a handful of names — SVB Financial Group, Signature Bank, and First Republic Bank, the analyst said — and emerging from earnings season seemed like a chance to breathe fresh air. Yet the intense selling pressure on the lenders actually accelerated despite decent quarterly results, he said.
“We have covered the bank sector for more than two decades and we’ve never seen a situation before where a seemingly perfectly healthy bank one day can end up in the hands of the FDIC the next,” he wrote. Once First Republic went into receivership, “this was the tipping point that empowered short-sellers to go on a hunt for ‘who’s next’ as well as for long-only funds to head for the hills.”
Alexopoulos kept First Republic as a top pick in mid-March, saying it was a “higher risk but potentially very high reward name.” The trio he upgraded on Friday have been among the stocks falling the most amid the tumult, with Western Alliance and Zions both down more than 50% this year and Comerica lower by roughly 45%.
To Alexopoulos, that’s left the stocks “substantially mispriced.”
He’s not alone among Wall Street in his bullishness. Hovde Group’s Ben Gerlinger has been adamant that Western Alliance’s rout offers an attractive entry point. All but one of the 15 analysts covering the stock have buy ratings, according to data compiled by Bloomberg, while analysts are more divided on Zions and Comerica.
“The catalyst that is driving this sell-off is bank-sell offs themselves,” Alexopoulos wrote.
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