Regional banks have represented a morass of certainty since the collapses of Silicon Valley Bank, Signature Bank and First Republic. That’s going to bring policy changes, analysts at UBS believe, but investors are more wary of them than need be.
“Large regional bank stocks continue to be discounted to money centers,” the analysts wrote. “...[W]e conclude that what's driving the valuation gap is the market's anticipation of structural pressure on regional bank profitability.”
First, the analysts note what they consider to be a valuation gap among regionals.
“Regional bank valuations suggest that these structural changes are an overhang to the share price,” analysts wrote. “While we expect cyclical concerns to persist, we think some clarity in the form of notice of proposed rulemaking could actually remove some of the overhang in these names.”
One name in particular to watch is Citizens Financial Group (NYSE:CFG) Inc, which UBS points out already has a CET1 ratio (capital to assets) of 10% and a valuation on tangible book value below 1x.
“As bank investors know, common equity tier 1 (CET1) is the binding constraint capital requirement for traditional banks, as this measure of capital is risk sensitive,” analysts wrote.
That matters because CET1 regulations could become more stringent.
“We expect two changes here: 1) as highly anticipated by the market, we expect unrealized available for sale securities gains and losses to be reflected in regional bank CET1 ratios, like with money centers; and 2) we think that under the current administration, the stressed capital buffer results from the annual stress test could be more volatile for regional banks, and that participation will be annual vs. every two years.”
UBS expects the new CET1 standard for regional banks to be 10.0-10.5%, up from the average of 9.5% as of the first quarter of 2023. Citizens Financial is already there.
Shares of Citizens Financial added 2.4% to $26.41 on Thursday afternoon.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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