Morgan Stanley (MS) analysts Ken Zerbe, Josh Wheeler, Jonathan Katz, and Giselle Cheung published a report entitled “Mid Cap Banks” on December 9, 2011. They believe that these banks are currently “in a much better position than the market gives them credit for”. These banks have little, if any, exposure to the European crisis and have been “moving on macro events”. Overall, net interest margin for most of the banks is expected to decrease whereas net interest income is likely to remain stable. Loan growth may improve slightly and the share buybacks is going to triple.
SVB Financial Group (SIVB) has been given an equal-weight rating by Morgan Stanley (MS). SVB’s loan growth has remained strong, with average loan balances rising by 8.6% over the last quarter. The net interest margin has remained relatively stable. The company has excess cash of $1.6 billion. Tier 1 capital is valued at 13%. Shares of the company have been trading at $47 and are expecting to reach a price target of $53.
Synovus Financial Corp. (SNV) has seen a gradual improvement in its credit trends. This is likely to drive marginal profitability in the current quarter. Morgan Stanley has given Synovus an equal-weight rating. Among the midcap banks, Synovus has one of the lower Tier 1 capital ratios of 8.5%. Morgan Stanley expects the company’s margins to improve with a decrease in funding costs. Synovus is on-tract with its goal of reducing expenses by $100 million by the end of 2011. Shares of the company are currently trading at $1.3. Kevin Ulrich’s Anchorage Advisors had $40 million in SNV at the end of September.
TCF Financial Corporation (TCB) has been given an overweight rating by Morgan Stanley. With the Durbin amendment in place, revenue is going to decrease by roughly $60 million annually. Net interest margin for the company fell due to excess liquidity and lower loan yields. Morgan Stanley believes that TCF Financial is undervalued, trading at nearly a 25% discount to the group, based on expected earnings per share in 2013. Shares of the company are currently trading at $10 and are expected to go north of $16 by the end of 2012.
Valley National Bancorp (VLY) has been given an underweight rating by Morgan Stanley. The company is expected to see a lower loan growth than its peers due to weak demand and its conservative underwriting practices. Average loans increased by 0.2% over the last quarter. Residential mortgages are the company’s strong point, showing an increase of 3% over the last quarter. Valley National is acquiring STBC, expanding into densely populated Long Island. The company is seeing an increase in sales and non-interest income as it sells its residential originations. Shares of Valley National are currently trading at $12 and are expected to reach $13 by the end of next year. Billionaire Jim Simons’ Renaissance Technologies had the largest stake in VLY among the 350+ hedge funds we are tracking (see Jim Simons’ portfolio).
Washington Federal (WFSL) has a strong capital position. Morgan Stanley has given it an equal-weight rating. The company is restraining its loan growth and has seen a decline in net interest margin due to an acceleration of prepayments. Washington Federal recently repurchased 1.4% of its stock. Management is looking for organic growth in the company, with mergers and acquisitions getting second priority. Tier 1 capital stands at a high of 22.5%. Shares of the company currently stand at $13.8 and are expected to go north of $16 per share.
Webster Financial Corporation (WBS) has been given an equal-weight rating by Morgan Stanley. The company’s efficiency ratio stands at 65% and the company is looking to decrease it below 60%. It closed more than 11 branches this year and is looking to close two more by the end of this year. Webster is looking to diversify its consumer-concentrated franchise by targeting businesses with revenues of $20-60 million and hiring additional bankers. A loan growth of 0.5-0.6% is expected by the end of this quarter. Non-performing loans have been decreasing over the last seven quarters, thus improving the credit profile of Webster. Tier 1 capital stands at 11.1% while quarterly dividends are valued at $0.05. The management of Webster is not looking for any mergers and acquisitions in the short term. Its shares are currently trading at $20 per share and are expected to go north of $22 by the end of 2012.
Westamerica Bancorporation (WABC) is an underweight-rated company. Morgan Stanley expects the bank’s net interest margin to remain low. Its average loan balances have decreased to $2.7 billion in the last quarter. Net interest margin also fell due to the reinvestment of higher-yielding loans into lower-yielding securities. Westamerica’s return-on-assets is 1.8% and return-on-equity is 16%. It has bought back 1.1% of its shares over the last quarter and plans to buy back 6% of its outstanding shares by the end of 2012. Acquisitions have been the strongest part of Westamerica’s growth and it is currently looking for deals with a target asset base of more than $500 million. Westamerica’s shares are currently trading at $43.4 and are expected to reach $46 by the end of next year. Billionaire Ken Fisher’s Fisher Asset Management had $52 million in WABC at the end of September (see Ken Fisher’s stock picks).
Disclosure: I am long MS.