Wedbush Upgrades Key Regional Banks as Rate Environment Shifts Favorably
In a post-Federal Reserve landscape, banks are gearing up for a potential soft landing, a scenario in which the U.S. economy avoids a harsh recession. Following the Fed’s recent rate cut, there’s been a notable shift in the banking sector, particularly for liability-sensitive banks. Wedbush analysts have issued several key upgrades for banks that are well-positioned to thrive under the current economic outlook.
Turning Point for Banks Amid Easing Rates
Wedbush has upgraded several banks, including Banc of California (BANC), Comerica (CMA), Columbia Banking System (COLB), Prosperity Bancshares (PB), and Regions Financial (RF). Meanwhile, it has downgraded others like Customers Bancorp (CUBI), First Citizens BancShares (FCNCA), and First Horizon (FHN). The firm has also added Comerica and Western Alliance Bancorporation (WAL) to its Best Ideas List.
The timing of these upgrades follows a period of concern for the banking sector, which faced headwinds as the Federal Reserve embarked on its rate-tightening cycle in mid-2022. Since then, the regional bank index (KRX) has risen only 9%, while the S&P 500 surged 50% in the same period. However, the easing of interest rates presents an opportunity for banks to improve their financial performance, especially as the Fed signals a more accommodative stance.
Potential for a Soft Landing
While recession fears still linger, Wedbush’s outlook is cautiously optimistic. The firm notes that, based on recent data and the Fed’s actions, there’s a growing possibility that the central bank may be able to guide the economy into a soft landing. This outcome would likely benefit banks, as it would create a more favorable operating environment with lower short-term rates and a more normalized yield curve.
The lower rate environment could serve as a tailwind for banks, particularly those that are liability-sensitive. These banks typically perform better when interest rates are low because their liabilities, such as deposits, are more responsive to rate changes than their assets, like loans.
Mixed Results Expected for 3Q
Despite the optimism, Wedbush expects third-quarter results to be mixed across the banking sector. While liability-sensitive banks are likely to see some positive momentum, banks that rely more on asset sensitivity could face challenges due to the lower short-term rates.
Deposit costs, a key area of concern for many banks, appear to have peaked and are now expected to decline. This is good news for liability-sensitive banks, which should see improved margins as a result. On the other hand, asset-sensitive banks, which tend to benefit from rising rates, may experience a decline in income from their variable-rate assets.
Fee income is also expected to be mixed, though Wedbush sees positive momentum forming, particularly in capital markets. Additionally, credit normalization—a process where credit trends revert to more typical patterns after periods of volatility—may continue, but the pace of normalization is expected to improve compared to recent quarters.
Stronger Capital Positions Ahead
Wedbush also highlights that lower interest rates could help reduce negative Accumulated Other Comprehensive Income (AOCI) marks, a metric that reflects unrealized losses in a bank’s balance sheet. This improvement, coupled with increasing regulatory clarity, should help banks strengthen their capital positions, allowing them to take a more aggressive stance in future quarters.
Loan growth, however, is expected to remain weak for now. Management commentary and H.8 data indicate that loan demand will likely be soft in the third quarter, though deposits are expected to remain stable or rise modestly. Lower rates could be the catalyst that drives loan and deposit growth in future quarters, according to Wedbush.
Valuation Opportunities
For investors, Wedbush’s top picks in the banking sector include M&T Bank (MTB), Comerica (CMA), Western Alliance Bancorporation (WAL), Prosperity Bancshares (PB), Fifth Third Bancorp (FITB), and Wintrust Financial (WTFC). These regional banks are currently trading at a valuation of 11.0 times the firm’s 2025 earnings per share (EPS) estimates, compared to a historical median of 12.7 times. On a price-to-tangible book value (P/TBV) basis, regional banks are trading at 1.7 times versus a historical median of 1.5 times.
Mid-cap banks, another attractive segment, are trading at 11.1 times Wedbush’s 2025 EPS estimates, below their 10-year historical median of 13.7 times. On a P/TBV basis, mid-caps are trading at 1.3 times compared to their historical average of 1.7 times.
As the Federal Reserve continues to navigate the complex economic environment, banks are adjusting their strategies to align with the evolving rate landscape. Liability-sensitive banks, in particular, are poised to benefit from lower interest rates, improved deposit conditions, and stronger capital positions. While third-quarter results may still show some mixed performance, the longer-term outlook appears more favorable for banks as they prepare to shift to a more offensive posture.
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