Banking & Finance

5 Mid-Cap Regional Banks Undervalued by 20% or More

With the promise of higher interest rates coming and with less financial regulation already underway, much focus has been given to the higher future earnings capacity of the banking industry. Tax reform still seems to be a dream, and interest rates have not come up very much, but all in all the lower regulation will be a boon for many of the small and mid-sized banks.

Wedbush Securities has launched coverage on 15 regional mid-cap banks. While the firm has nine of these rated with Neutral ratings, there were five new Outperform ratings and one Underperform rating handed out in this call.

24/7 Wall St. has decided to focus on the Outperform banks because Neutral ratings are interpreted by new investors as “no reason to buy and no reason to sell.”

24/7 Wall St. compared Wedbush’s target prices to the Thomson Reuters consensus analyst targets, and we included what the implied upside is. On average the Outperform ratings had just above 20% in implied upside, which is about double what traditional new Buy and Outperform ratings offer for upside in competing analyst calls. We have also included a quick hit versus the last book value versus the current share price.

The Wedbush note said of the banking industry call:

We have a more positive bias on the mid-cap banks relative to the regional banks since mid-cap banks have experienced better loan growth with improved business sentiment actually translating into increased loan demand, which contrasts with the regional banks. With the exception of loan growth, we expect other fundamental trends to be very similar to the regional banks, including net interest margin expansion, decent deposit growth, and a benign credit quality outlook. Furthermore, we expect the mid-cap banks to benefit to the extent Trump’s policies get enacted, including fiscal stimulus through infrastructure spending, regulatory reform, tax reform, and healthcare reform …

As a reminder, with the Dow and S&P indexes right at all-time highs, most new analyst calls with Buy and Outperform ratings currently come with 8% to 15% upside at this stage in the bull market. Traditional new analyst calls in Dow stocks in general have implied upside that is closer to 8% for Buy and Outperform-rated stocks, sometimes less. More aggressive analyst calls in S&P stocks are generally coming with up to 15% upside.

Webster Financial Corp. (NYSE: WBS) is almost a $5 billion bank by market value, and its stock was given an Outperform rating and was held out with health care reform in particular. The $60 target price from Wedbush is almost 20% higher than the $50.13 closing price noted on the call, but the consensus analyst target is $51.67. Webster’s current value is about 1.9 times its book value. The reason for that is simple: Webster is the parent of HSA Bank, the top independent financial source for the Health Savings Accounts that have been touted under all Republican health care reform goals. Wedbush’s report said:

Our Outperform rating is based on our expectation that Webster’s HSA Bank subsidiary should spearhead extraordinary growth for the company for years to come. Webster’s HSA Bank subsidiary is the second-largest HSA administrator in the country, and we believe the shift to consumer-directed healthcare through HSAs could ultimately be as significant as the shift from pension plans to 401k plans by corporations over the past few decades – and Webster is in prime position to benefit from this transition.

East West Bancorp Inc. (NASDAQ: EWBC) was started as Outperform with a $68 price target, versus a $56.21 prior close. East West has an $8.4 billion market cap, and the consensus target price is closer to $61.50. It is valued at 2.3 times book value, a larger premium than the best money-center banks. Wedbush said:

We view East West Bancorp as the premier Asian-American bank in the US, which stands to benefit from substantial expected growth in the Asian-American population in coming decades. We expect East West Bancorp’s positioning as the go-to bank for bridging financial transactions between the East and the West to become an even bigger differentiator for the company as this trend plays out. We believe East West deserves a premium valuation given strong expected loan and deposit growth, and this should lead to an expanding multiple given it trades in-line with peers.

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