Raymond James downgrades ConnectOne Bancorp stock rating on valuation

Raymond James downgraded ConnectOne Bancorp to Market Perform from Strong Buy, citing limited upside after the stock’s +44.4% 12-month run and near-fair-value trading (~$33.44 vs $33.52 fair value). The note expects fixed-rate loan repricing to lift net interest margin toward 3.50% by year-end 2026 from 3.39% in 1Q26, but flags NYC deposit-pricing competition and potential upside limits from higher rates. Separately, CNOB’s 1Q26 EPS of $0.72 narrowly missed the $0.73 forecast, while revenue of $116.64M beat $115.46M, leaving the outlook cautious amid NYC rent-regulated multifamily rent-guideline risk.

Analysis

This looks more like a valuation reset than a fundamental downgrade. For an asset-sensitive regional bank, the market is already discounting a chunk of the future margin expansion, so the easy money is gone unless deposit costs roll over faster than expected. The second-order issue is that NYC deposit competition tends to be sticky exactly when banks think they have pricing power, which can cap operating leverage even if asset yields reprice upward.

The real risk is timing: fixed-rate loan repricing is a slow burn over multiple quarters, while deposit betas can reset quickly if rate volatility stays elevated. That creates a near-term earnings asymmetry where headline NIM guidance can look fine while core profitability disappoints if loan growth slows or credit costs in multifamily tick up. The NYC rent-regulated book is less about a single loss event than about creeping capital drag and management distraction.

Relative value is probably more important than outright direction. If CNOB is trading near intrinsic value, the cleaner expression is to fade the crowded winner and rotate into regional banks with either stronger growth visibility or less localized deposit competition. The contrarian miss is that investors may be overestimating how much of the 2026 margin story is already in the stock; if forward guidance merely reiterates rather than raises, multiple compression can happen before any true credit deterioration shows up.

Key Decisions for Investors

• Trim/avoid new longs in CNOB at current levels; better entry would be a 5-8% pullback or evidence that deposit costs are stabilizing over the next 1-2 quarters.
• Pair trade: short CNOB vs. long TBBK or SYBT for 1-3 months if you want regional bank exposure with less concentration in NYC funding dynamics; thesis fails if CNOB raises NIM guidance again or outgrows peers on deposits.
• Use CNOB as a hedge against a regional-bank rally: short against a basket/ETF proxy if rate volatility keeps deposit betas elevated; cover if the stock loses its recent highs and NIM commentary softens.
• Watch upcoming quarterly update for two falsifiers: deposit cost trajectory and multifamily reserve language. If either improves materially, the downgrade becomes irrelevant and the stock can re-rate higher.