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Morgan Stanley Research believes it is time to bet on mid-cap banks and has upgraded Prosperity Bancshares (New York Stock Exchange:PB) to Overweight from Equal Weight and Valley National Bancorp (NASDAQ: VLY) from Underweight to Weight Similarly, in the view that impending interest rate cuts reduce financing costs, increase demand for loans and relieve credit pressures.
Second-quarter earnings reports gave analyst Manan Gosalia further conviction that lenders' net interest income is at an inflection point, with a runway for steady growth through next year.
“This will initially be driven by improving net interest margins as banks are able to rapidly reduce deposit costs,” the analyst wrote in a note, adding that “an acceleration in industry-wide loan growth in 2025 should be an incremental tailwind.”
In terms of valuation, midcap banks continue to trade at a four-times discount to their historical valuations, the note said. The aforementioned factors “should support multiples closer to historical levels.”
However, there are some exceptions. Gosalia downgraded Webster Financial's rating (New York Stock Exchange: WBS) to Equal-Weight, “as shown in our thesis, with the bank reducing exposure to commercial real estate, increasing reserves and potentially benefiting from rate cuts.”
Cullen/Frost Bankers (CFR) shares were also downgraded to Underweight, “given the more comprehensive valuation and higher asset sensitivity than peers.”
Meanwhile, Seeking Alpha's Quant system gives East West Bancorp (EWBC) the highest rating among regional banks, followed by Fulton Financial (FULT) and Popular (BPOP).
In Monday morning trading, (CFR) fell by 3.3%(VLY) little changed, (WBS) fell by 4.9%and (PB) fell by 1.1%.
