Baird Sees 'Deteriorating' Risk/Reward Balance For Regional Banks

In a new report, analysts at Baird Equity Research took a look at U.S. regional banks and presented their near-term outlook for bank stocks. According to analysts, shareholders should keep their expectations low when it comes to a Federal Reserve interest rate hike serving as a positive catalysts for regional banks.
Rate hike priced in?
Analysts believe that a 1.0 percent interest rate hike is already priced into consensus 2016 earnings estimates and the valuations of regional bank stocks. When assuming a 1.0 percent rate hike, Baird projects 2016 valuation multiples of about 12x for regional banks, in-line with historical averages.
“With continued healthy loan growth, NIM improvement, and benign provisions already in 2016 EPS expectations, we believe the earnings risk for banks is biased to the downside, especially with GDP growth tracking <1% in 1H15,” analysts explain.
Unfavorable risk/reward
Analysts concede that higher short-term interest rates are good for banks. However, a Fed rate hike at some point in the next three quarters would likely catch very few traders by surprise at this point. Positive sentiment on bank stocks and high earnings expectations have Baird analysts thinking that the risk/reward balance in regional bank stocks is tilted more toward the risk side at the moment.
Downgrades
Based on their updated outlook for the regional bank sector, Baird analysts have downgraded Fifth Third Bancorp FITB from Outperform to Neutral and Comerica Inc CMA and SunTrust Banks Inc STI from Neutral to Underperfrom. Baird has a $44 price target for Comerica, a $41 price target for SunTrust and a $21 price target for Fifth Third.