Big Analyst Downgrades Weigh on Bank Stock Valuations

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Many investors have heard the term “merger Monday” before, but what about “bank stock downgrade Monday” as a new term? In the daily upgrades and downgrades from 24/7 Wall St., several bank stocks took analyst downgrades, and many other financials saw their respective price targets being lowered as well.

Investors hear that they should be buying stocks all the time from Wall Street. What is heard far less is when to sell a stock. It turns out that some of these new ratings are effectively telling clients to look for downside ahead.

Some brief color was provided on each call, and consensus analyst data is the mean target from Thomson Reuters. These were some of the key analyst downgrades in the banking sector.

Citizens Financial Group Inc. (NYSE: CFG) was downgraded to Underperform from Buy in a two-notch downgrade at Merrill Lynch. Its price objective was cut to $40 after having closed at $37.87 on Friday. The firm expects the recent return on the tangible common equity improvement to decelerate, while its higher deposit costs will put spread revenue growth at risk and could lead to downside earnings surprises. The shares were down 2.2% at $37.04 on Monday morning. The stock has a 52-week trading range of $24.22 to $39.75 and a consensus price target of $39.59.

Fifth Third Bancorp (NASDAQ: FITB) was downgraded to Underperform from Neutral at Robert W. Baird. Its $24 price target implied downside of more than 14% from the prior $27.98 close. Fifth Third traded down 1.1% at $27.66 after the call. Its shares have a 52-week range of $19.57 to $28.97 and a consensus price target of $28.01.

Regions Financial Corp. (NYSE: RF) was downgraded to Underperform from Neutral with a $13 price target at Robert W. Baird. As Regions closed most recently at $15.23, the downgrade implies that this stock could face almost 15% downside ahead. The shares were down 1.1% at $15.06 after the downgrade, and the 52-week range is $9.78 to $16.03. The consensus analyst target is $15.33.

U.S. Bancorp (NYSE: USB) was downgraded to Underperform from Neutral with a $54 price objective, versus a $53.59 prior close, at Merrill Lynch. The firm’s prior price objective was $56, and the firm noted that investors may prefer value over quality despite this being a high-quality franchise. The analyst noted that the bank’s peer-leading returns appear to be more than reflected in its valuation. Shares of U.S. Bancorp were last seen down 1% at $53.03 on Monday after the call. The 52-week range is $42.37 to $56.61, and the consensus price target is $54.78.

Zions Bancorp (NASDAQ: ZION) was downgraded to Underperform from Neutral with a $43 price target at Robert W. Baird. It closed at $47.18 a share on Friday, so the call really implies that shares are overvalued by almost 10%. Zions was last seen down 0.8% at $46.81 after this call. It has a 52-week range of $30.07 to $48.33 and a consensus price target of $49.83.

While some of these downgrades may seem harsh, it turns out the performance here has been far greater versus a year ago than how each of these banks have performed so far in 2017:

  • Citizens up 57% over a year ago, but up just 6.3% so far in 2017.
  • Fifth Third 38% higher than a year ago, but up just 3.7% so far in 2017.
  • Regions Financial up 57% year over year, but up just 6.1% year to date.
  • U.S. Bancorp up 26% from a year ago, but just 4.3% higher so far in 2017.
  • Zions Bancorp up 54% over a year ago, but up 9.6% so far in 2017.