The Citigroup Says Two Bank Stocks Are Bullish After The Panic

Monday is a favorable day overall for shares of regional banks.

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Stocks in the sector increased when First Citizens Bancshares (ticker: FCNCA) acquired some of Silicon Valley Bank's assets from SVB Financial. Investors may be encouraged by that deal to believe that the government will buy the bankrupt bank's deposits and debts and, more generally, that the financial crisis is over for the organization. 

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Citigroup claims that's unquestionably the case for M&T Bank MTB +3.02% and KeyCorp KEY +5.86% (KEY) (MTB).

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KeyCorp and M&T Bank were both upgraded by analyst Keith Horowitz from Neutral to Buy; he preserved the former's price objective of $20 while lowering the latter's to $155 from $178.

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Although Silicon Valley Bank's demise was mostly due to issues that were specific to that company, he concedes that since the crisis began, broader worries have surfaced over the losses banks incur from increased rates and clients withdrawing uninsured deposits. Yet, based on his calculations, there are several banks that could be bought right now.

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He contends that the conventional wisdom on banks is false, particularly in light of how investors view bank liabilities. Unrealized fixed-income losses are no more dangerous than opportunity costs incurred by reduced net-interest margins, which have been increasing in recent quarters, as long as funding is consistent.

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If we were considering a factory that produces widgets, Horowitz writes, "this works because there is no real offset from their liabilities and the unrealized losses would probably not be equity risk where securities reach adulthood at par, but instead say investment losses that ought to be marked-to-market." As the value of a deposit base rises in a higher-rate environment, banks create value from their liabilities.

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Furthermore, it would be foolish to disregard any uninsured deposits as a warning sign because many valued commercial accounts frequently surpass the $250,000 cap set by the Federal Deposit Insurance Corporation.

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The average account size for uninsured deposits is, in our opinion, the most important indicator to consider, and we believe

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As a result, he conducted stress tests on the banks covered by his insurance, replacing around 50% of the uninsured deposits with wholesale financial alternatives, such as public and federal money among others (he considers this to be an implausibly high percentage). Even while it's hardly any investor's first option, that demonstrates how much cash businesses might still access in the face of emigrating depositors.

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In addition to supporting his bullishness on many larger banks, such as Bank of New York Mellon (BK), Goldman Sachs Group (GS), and JPMorgan Chase (JPM), this study also prompted him to elevate KeyCorp and M&T Bank.

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According to Horowitz, "M&T Bank has the strongest financial standing of the regionals and was the most disciplined with its extra cash throughout the era of low rates." We discovered that KeyCorp has benefited the most from the repricing of fixed-rate assets, which will increase earnings in 2024 and 2025. Yet, these mistakes reflect near-term difficulties.

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At the time of this check, KeyCorp stock is up 7.7% to $12.78, while M&T Bank stock is up 4.5% to $120. Both the SPDR S&P Regional BankingKRE +1.38% ETF and the SPDR S&P BankKBE +2.51% exchange-traded fund are up over 3% this mornings.