On a Monday following high-profile bank failures on Friday and Sunday, it may seem to be a strange time to recommend buying stocks of banks and other financial services companies, but Keefe, Bruyette & Woods has done just that, and even says clients should buy shares of a bank whose stock was down more than 70% in premarket trading on Monday, following a 34% decline last week.
That stock is First Republic Bank FRC, -14.84% of San Francisco. KBW’s price target for FRC is $140, which would make for a 71% gain from Friday’s close at $81.76.
Before getting to KBW’s list, this is a good point to remind readers that in his annual letter to Berkshire Hathaway Inc. shareholders for 1986, Warren Buffett, the company’s CEO, wrote that “we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.”
This is one of those times when contrarian investors will become greedy amid turmoil, following the failures of Silicon Valley Bank (the main subsidiary of SVB Financial Group SIVB, -60.41% and Signature Bank of New York.
Last week, the KBW Nasdaq Bank Index BKX, -3.91% fell 16%, while the S&P 500 SPX, -1.45% declined 4.5%. Those figures include reinvested dividends.
The liquidity problems that led to the failure of Silicon Valley Bank were driven in part by the bank’s focus on one industry: venture capital. But the fear spread to other regional banks, including two on KBW’s “buy” list that Christopher McGratty, the firm’s head of U.S. Bank research, called “unfairly punished as investors looked for SIVB read-throughs” in a report on Monday. Those two include First Republic and Western Alliance Bancorp WAL, -20.88% of Phoenix. McGratty also assigned the “unfairly punished” label to Apollo Global Management Inc. APO, -10.51%, an investment manager in New York.
The latest regulatory developments include an emergency lending facility set up by federal regulators to help banks avoid selling securities for losses if they need to raise cash to cover deposit outflows. The regulators have also said all depositors of Silicon Valley Bank and the failed Signature Bank of New York would have access to their money — even uninsured deposits balances. First Republic Bank FRC, -14.84% (listed below) announced it had secured funding from the Federal Reserve and JPMorgan Chase & Co. JPM, +2.54%.
Banks are now able to pledge securities as collateral at par (or face value) for borrowings through federal regulators’ new emergency lending facility, which means banks can avoid selling government bonds and mortgage-backed securities at a loss if they need to raise money.
Here are the 11 financial stocks KBW recommended Monday morning, in the same order they were listed in the firm’s report:
|Bank||Ticker||City||Closing price – March 10||KBW price target||Implied 12-month upside potential|
|Western Alliance Bancorp||WAL, -20.88%||Phoenix||$49.34||$85.00||72%|
|First Republic Bank||FRC, -14.84%||San Francisco||$81.76||$140.00||71%|
|U.S. Bancorp||USB, -3.97%||Minneapolis||$40.62||$58.00||43%|
|SouthState Corp.||SSB, +1.26%||Winter Haven, Fla.||$75.72||$55.00||-27%|
|Old National Bancorp||ONB, -0.37%||Evansville, Ind.||$15.96||$22.00||38%|
|Apollo Global Management Inc.||APO, -10.51%||New York||$60.29||$88.00||46%|
|AGNC Investment Corp.||AGNC, -4.59%||Bethesday, Md.||$9.97||$11.75||18%|
|Discover Financial Services||DFS, -3.31%||Riverwoods, Ill.||$102.14||$123.00||20%|
|American International Group Inc.||AIG, -4.75%||New York||$53.15||$76.00||43%|
|Reinsurance Group of America Inc.||RGA, -3.33%||Chesterfield, Mo.||$133.74||$201.00||50%|
|American Express Co.||AXP, -3.73%||New York||$165.70||$201.00||21%|
|Sources: KBW, FactSet|
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First Republic was among a small group of banks whose interest margins contracted over the past year through the fourth quarter. At the same time, the weighted net interest margin for the U.S. banking industry had expanded to 3.37% in the fourth quarter from 2.55% in the year-earlier quarter, according to the FDIC’s Quarterly Banking Profile.
Among the company’s on KBW’s recommended list, McGratty called U.S. Bancorp USB, -3.97%, SouthState Corp. SSB, +1.26% and Old National Bancorp ONB, -0.37% “safe haven bank stocks.”
He went on to write that First Republic and Western Alliance Bancorp “offer greater upside potential in the near-term given this weekend’s actions and last week’s significant sell-offs,” but also warned that these stocks “come with more downside risk until investors solidly regain confidence in the banking system’s handling of deposit/liquidity concerns.”
Don’t miss: 20 banks that are sitting on huge potential securities losses—as was SVB