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The Ratings Game: Bank stocks end Q3 with mixed results as Citi analyst hits buy button on ‘attractive entry point’ for sector

Citi analyst Keith Horowitz on Friday initiated coverage of four major regional banks with glowing marks for Huntington Bancshares, Zions Bancorp and KeyCorp, as a mixed third-quarter for bank stocks comes to a close on Friday.

Among the major bank stocks, only Goldman Sachs Group Inc. GS, -0.50% gained in the third quarter of 2023, with a thin rise of 0.3% during the three-month trading period, according to Dow Jones Market Data. The SPDR S&P Bank ETF KBE rose 2.4% in the third quarter, while the SPDR S&P Regional Banking ETF KRE moved up by 2.3%.

JPMorgan Chase & Co. JPM, -1.74% fell 0.3% in the third quarter, while the Financial Select Sector SPDR Fund XLF lost 1.6%, and the KBW Bank Index BKX dropped by 2.4%.

Wells Fargo & Co. WFC, -0.12% moved lower by 4.3% in the third quarter, while Morgan Stanley MS, -0.63% subtracted 4.4%, Bank of America Corp. BAC, -0.65% dropped 4.6% and Citigroup Inc. C, -0.17% moved lower by 10.7%.

Also read: Citigroup’s Jane Fraser sees soft landing with ‘mild’ recession amid cracks in some consumer pockets

Citi analyst Horowitz said regional banks offer an “attractive entry point” for investors.

“We remain constructive on the sector given our view that the best time to buy bank stocks is the transition from late-cycle to early-cycle, when we believe credit will fare better than market concerns,” Horowitz said in a research note.

Citi initiated coverage of Huntington Bancshares Inc. HBAN, +1.86% and Zions Bancorp ZION, +2.77% with buy ratings, while issuing neutral ratings on New York Community Bancorp Inc. NYCB, +0.53% and First Citizens Bancshares Inc. FCNCA, +0.69%. The Citi note penned by Horowitz said the firm’s top pick among regional banks remains KeyCorp KEY, +2.28%.

Huntington Bancshares was up 1.9%, Zion was up by 2.8%, New York Community Bancorp was up by 0.5% and First Citizens Bancshares was up by 0.7%. KeyCorp was up by 2.3% and PacWest Bancorp PACW, +1.93% was up by 1.9%.

Chris Marinac, banking analyst with Janney Montgomery Scott, said in an email to MarketWatch that bank stocks in the Nasdaq Bank Index BANK and the SPDR S&P Regional Banking ETF KRE traded with a forward price-to-earnings ratio of 8.9 times as of Thursday’s close. That compared to 18.5 times for the S&P 500 SPX.

Since 2016, bank stocks have traded at 66% of the median S&P 500 forward price-to-earnings ratio, but currently are trading at only 48%, Marinac said.

First Citizens Bancshares emerged as a much larger bank after it acquired Silicon Valley Bank earlier this year in a deal brokered by the Federal Deposit Insurance Corp. During the third quarter, First Citizens’ stock has risen 6.8%.

New York Community Bancorp’s stock has risen 0.4% in the past three months. The bank has also bulked up this year by buying Signature Bank in an FDIC auction.

Huntington Bancshares’ stock was down 3.3% in the third quarter, while Zions has rallied by 31.9% over the past three months as the stock recovered some of its steep losses earlier in the year. KeyCorp’s stock has risen 18% in the past three months as it also recovered losses from earlier in the year.

Citi analyst Horowitz said his higher ratings on Huntington Bancshares and Zions compared to New York Community Bancorp and First Citizens run contrary to prevailing ratings on Wall Street.

“While we agree that both NYCB and FCNCA are well positioned after very attractive acquisitions, we see better opportunity in ZION and HBAN which is reflective of our view that the regional banks look attractive here and that one should be playing offense, not defense,” Horowitz said.

Huntington Bancshares stands out as a “high-quality regional without a premium valuation” with potential upside for its net interest income, Horowitz said.

Meanwhile, Zion offers a discounted stock price while its net interest income has bottomed earlier than other banks, he said.

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