Yahoo Finance

The earnings to watch this week are the banks, and our next guest has a few regional bank names that he likes heading in to some of these prints. We've got David Cheverini, who is the managing director of Equity Research at Wedbush Securities. David, great to have you back on the program with us. So which banks would you be most focused in on right now, your your top picks, if you would?

Yes, so we're really interested in the liability sensitive banks here, and those are banks that should benefit from a lower interest rate environment. So we did recently upgrade Comerica Bank CMA. We like them. Here they should benefit from lower rates. Western Alliance, we like Western Alliance as well. They have what's called earnings credit rates or ECR deposit costs. They should lower at a pretty fast clip with lower interest rates, and they also have a mortgage banking business that should benefit with with lower rates. And then another name we like is M&T Bank. So they're neutral to rates, but when we look at their credit quality, their criticized and classified assets, which includes some commercial real estate loans, those borrowers should benefit with lower rates. So we're expecting their credit quality to benefit really nicely in a lower rate environment. So we like MTB as well.

David, when it comes to some of the movement that we're seeing this morning, we've got PNC touching the highest intraday level that we've seen since 2022 on the heels of their earnings prints. I'm curious, when it comes to earnings growth overall for the regional banking sector, do you see it catching up to some of its larger cap or larger bank peers?

Yeah, we do expect this rerating to continue, and while lower interest rates, when you kind of zoom out, is normally not good for financials, but given the impact on credit quality, I think that's giving investors as well as analysts like myself become more constructive on the banks because they've been trading at discounts to historical multiples. They're still at a discount to historical multiples, but they're narrowing that gap. So there's hope for a steepening of the yield curve, so that should help banks as well. And then lower interest rates could also be a catalyst for improved loan growth. So there's a few things to get more excited about the banks looking out over the next six to 12 months.

Okay. And so, with all the excitement and the things that investors could hang their hat on, there's also some banks that might underperform. Where are those kind of areas of weakness that you'd be tracking up against?

Yeah, so sticking with the theme of rate impacts on banks, the asset sensitive banks are the ones that should be impacted. So we recently downgraded First Citizens, FCNCA. We recently downgraded First Horizon, FHN. They are asset sensitive. We expect their net interest income to come under pressure. Some of the fees on for Citizens side, they have client investment fees from off balance sheet money market funds. They'll earn less fees from those balances. There's a partial offset for First Horizon in that their fixed income trading business and their mortgage banking business should benefit, but we think the headwinds on NII should be, you know, bigger than the offset on the countercyclical businesses. So it's really the asset sensitive names that we'll probably see some headwinds.

David, what do you think the deal making activity is going to look like for regionals?

I think it's going to improve with with this theme of lower rates. You know, one of the big items that's been a headwind to M&A activity are these fair value marks, both on loans as well as securities portfolios. They call it the AOCI marks. Those are going to come down meaningfully in a lower rate environment. So that's one headwind that should go away. Also, a potential change in the administration could pave the way for increased M&A activity because some of the deals that have occurred over the past couple years have really been hung up and the approval time has been extended much longer than a typical approval time. So if we do end up with change in administration, combined with lower interest rates, we could see an uptick in M&A activity.