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Jefferies analysts said mid-cap banks look healthy heading into 2022, but the sector faces downward pressure on overdraft fees and the potential for increased scrutiny of mergers and acquisitions.
The group of banks, including Cadence Bank
CADE,
Commerce Bancshares Inc.
CBSH,
Customers Bancorp Inc.
CUBI,
East West Bancorp Inc.
EWBC,
Webster Financial Corp.
WBS,
and Wintrust Financial Corp.
WTFC,
offer solid fundamentals overall, said analysts Casey Haire, Tyler Marks and Ken Usdin.
“Despite emerging omicron concerns, we sensed an upbeat tone on revenue outlook, with management teams generally constructive on loan growth forecasts,” analysts wrote Wednesday in their summary of the Jefferies Mid-Cap Bank Summit earlier this week. “Deposit growth appears to be moderating, which is a welcome development given the amount of excess liquidity currently bloating balance sheets.”
On the risk side, banks highlighted a more stringent regulatory picture and inflation pressure as top risks, amid a wave of consolidation in the industry and moves by larger banks such as Capital One Financial Corp.
COF,
to roll back overdraft fees.
See Also: ‘It’s a penalty for being poor’: Capital One slashed overdraft fees. Why haven’t other banks?
“On the regulatory front, we sensed a tougher approval process for M&A (especially larger deals) and greater focus on consumer protections,” Jefferies analysts said. “Overdraft policy was topical in several meetings…with most banks adopting a wait-and-see approach for now, but acknowledging that there is likely downside pressure longer term.”
Banks noted that hiring has become “extremely challenging” with employee-related expenses seen climbing above the historical-average pace in future years.
Jefferies reiterated buy ratings on Customers Bancorp; East West Bancorp; the soon-to-be merged Webster Financial and Sterling Bancop
STL,
; Western Alliance Bancorp
WAL,
; and Wintrust Financial.
Analysts maintained hold ratings on Bank of Hawaii Corp.
BOH,
Cadence Bank and Commerce Bancshares.
The update on mid-cap banks comes in a strong year for bank stocks. The KBW Nasdaq Bank Index
BKX,
is up 36.7% so far this year, outpacing the rise of 25.2% in the S&P 500 index.
SPX,
On the regulatory front, President Joe Biden has yet to name a pick for the new vice chair for supervision at the Federal Reserve. It’s the top position in the federal banking system to oversee banking regulations such as the annual stress tests.
See Also: Bank stocks jump as Biden keeps Powell, but decision on top Fed bank cop looms
Meanwhile, Saule Omarova, Biden’s pick to oversee the nation’s largest banks, withdrew her candidacy Tuesday amid bipartisan opposition to her views on banking regulation.
Inflation remains a concern by banks as flagged by Goldman Sachs
GS,
CEO David Solomon earlier this week.
