Four Regional Banks Oversold on Brexit
Citizens Financial, Zions, SVB and Regions Financial endured steep sell-offs, making their valuations more attractive.Evercore ISI
Not surprisingly, U.S. regional banks are broadly lower on the Brexit news.
That said, select names appear oversold, many of which include banks with higher interest-rate sensitivity. While such concerns are valid, the magnitude of the respective sell-offs appear steep and valuations more attractive. Such names include Citizens Financial Group, Zions Bancorp (down 8%), SVB Financial Group and Regions Financial.
The Brexit vote pressures long-term yields, reaffirming net interest margin (NIM) pressure concerns for regional banks. Average long-term yields have steadily trended lower this quarter implying greater reinvestment risk and greater NIM pressure for banks. For the month of June the average 10-year yield is 1.68%, versus 1.81% in April and May. Quarter-to-date, the average 10-year Treasury yield is 1.77%, below the first-quarter average rate of 1.92%.
While trading has been volatile, we note that the current yield on the 10-year Treasury is 1.57% post-Brexit, significantly below the aforementioned 1.77% average second-quarter yield. Last night, the 10-year Treasury yield hit 1.42%, versus the 1.74% close prior to the Brexit news.
Rate-hike expectations have been pushed out by one year and odds of a cut tick higher. Fed-fund futures currently fully price in a rate hike by January 2018. Just prior to the Brexit vote, futures fully priced in a hike by January 2017. Additionally, our Portfolio Strategist Dennis DeBusschere noted that the odds of a rate cut increased from virtually zero (1.2%) to a still-low but interesting 8.5%. We currently model a 25 basis-points hike in September and another 25 basis-points hike in June 2017.
We note that for our most-asset-sensitive names (SVB Financial, Comerica, Zions, Texas Capital BancShares, Cullen/Frost Bankers, PNC Financial Services Group, KeyCorp, Regions Financial), the elimination of our modeled September hike (but maintaining our June 2017 hike) would reduce our fiscal 2017 earnings-per-share estimates by about 5%.
European exposure is limited for regional banks. We note that select banks have limited direct exposure to Great Britain and/or Europe. Such include Wells Fargo with $27 billion of U.K. exposure (1.4% of assets), including $3 billion of sovereign-debt exposure; Capital One Financial with $3.2 billion in U.K. credit-card receivables (1.4% of loans, about 2% revenue); U.S. Bancorpwith select European exposure, including trust and card businesses (European amount not quantified, but these businesses overall account for about 23% of U.S. Bancorp revenue); U.S. Bancorp also has $1.5 billion in deposits at European banks (0.5% of total deposits), $254 million in German sovereign debt, and $22 million in preferred stock in a European bank; SVB Financial with U.K. loans of $800 million (4.5% of SVB Financial loans); and Discover Financial Services with limited, but unquantified exposure via the Pulse Network and Diners Club. Additionally, we note many banks have some level of loan exposure to companies that export products.
-- John Pancari
-- Stephen Moss
-- Rahul Patil
-- Stephen Moss
-- Rahul Patil