Three bank stocks to avoid — and 18 to buy — from analysts at Jefferies

Jefferies analysts initiated coverage on 32 regional banks, issuing 18 "buy" ratings and 3 "underperform" ratings ahead of annual regulatory stress tests. The analysts anticipate a rebound in loan growth, widening net interest margins, and strong credit quality, leading to attractive valuations and potential for dividend increases and stock buybacks. Banks in the S&P 500 have outperformed the broader index over the past year, and despite recent Federal Reserve rate cuts, net interest margins remain significantly improved compared to 2021, however, Cullen/Frost Bankers Inc., Comerica Inc., and Zions Bancorp NA were assigned "underperform" ratings due to valuation concerns, loss of a key client, and below-average earnings growth outlook, respectively.

Analysis

Jefferies analysts have initiated coverage on 32 regional banks, presenting a generally positive outlook underscored by anticipated rebounds in loan growth, widening net interest margins (NIMs), robust credit quality, and substantial capital levels supporting dividends and buybacks. This optimism is contextualized by the strong performance of S&P 500 bank stocks, which returned 27.2% over the past year compared to the S&P 500's 13.4%, buoyed by improved NIMs; U.S. banks' combined NIM stood at 3.28% in Q4, a significant recovery from 2.55% in Q4 2021, with potential further benefits from future Federal Reserve rate cuts. Valuations appear attractive, with the Invesco KBW Bank ETF (KBWB) and Invesco KBW Regional Banking ETF (KBWR) trading at forward P/E ratios of 11.5 and 11.2 respectively, representing 53% and 52% of the S&P 500 ETF Trust's (SPY) P/E of 21.5, and below their 10-year average P/E relative to SPY. Despite this positive backdrop, Jefferies assigned "underperform" ratings to three specific regional banks: Cullen/Frost Bankers Inc. (CFR), due to its premium P/E of 14 and below-average earnings growth outlook despite a strong deposit base, implying a 20% downside to a $105 price target. Comerica Inc. (CMA) received an underperform rating, with a 19% implied downside to a $47 target, primarily due to the anticipated loss of approximately 15% of its non-interest-bearing deposits following the U.S. Treasury's Direct Express program transition and management's apparent lack of urgency for M&A. Zions Bancorp NA (ZION) was also rated underperform, with an 18% implied downside to a $40 target, owing to a below-average earnings growth forecast (6% EPS growth for '26/'27 vs. peers at 12%), lower capital ratios, and vulnerability from above-average commercial real estate exposure, despite its low forward P/E of 9.1. Conversely, 18 banks received "buy" ratings, indicating selective opportunities within the sector.

Key Decisions for Investors

• Investors should consider the generally positive outlook for U.S. regional banks, focusing on Jefferies' 18 buy-rated names which exhibit potential for loan growth rebound, net interest margin expansion, and attractive valuations, such as First Foundation Inc. (FFWM) with an implied 32% upside.
• Exercise caution with Cullen/Frost Bankers Inc. (CFR), Comerica Inc. (CMA), and Zions Bancorp NA (ZION), which received 'underperform' ratings due to concerns about premium valuation and lower growth (CFR), significant client loss and deposit impact (CMA), and weaker earnings outlook and higher CRE exposure (ZION), respectively.
• Note the significant valuation discount of bank ETFs (KBWB, KBWR) relative to the S&P 500 (SPY) and their historical averages, suggesting potential value, but remain selective given idiosyncratic risks highlighted in the 'underperform' ratings.
• Monitor the upcoming annual regulatory stress test results and banks' subsequent capital deployment plans, as these events could serve as significant catalysts for individual bank stocks and the sector.
• Evaluate banks with strong deposit franchises and robust capital positions, as these attributes are highlighted as favorable, particularly in the context of potential economic shifts and regulatory scrutiny.