Wells Fargo Upgrades First Horizon, With Capital Bank Integration Underway And More Interest Rate Hikes Expected

First Horizon National Corp FHN shares have underperformed after a "messy" fourth quarter, which was marred by noise related to the recently closed Capital Bank transaction as well as tax reform, according to Wells Fargo. 

The Analyst

Analyst Jared Shaw upgraded shares of First Horizon from Market Perform to Outperform with a $21 price target.

The Thesis

First Horizon is poised to hit "conservative" fiscal 2018 targets thanks to the integration of Capital Bank and expectations for additional interest rate hikes, Shaw said in a Thursday note.

The analyst sees Fed H8 data and a strong pipeline to support organic loan growth in the first quarter following Q4 performance. The Capital Bank merger is likely to be fully integrated in the first half of 2018, with 50 percent of the estimated $85 million in cost savings likely to be realized in 2018, Shaw said. Revenue synergies to the tune of $25 million to $30 million could be realized in out years, the analyst said, quoting First Horizon management. 

Wells Fargo sees asset sensitivity and discount accretion as being supportive of net interest margin expansion.

The capital markets business is forecast to rebound in Q1, helped by increased volatility that boosts average daily revenue, Shaw said. 

"We estimate the capital markets business to comprise 12 percent of 2018 revenue, down from the 16 percent pre-CBF run-rate," the analyst said. "As such, we believe that shares should be trading closer to the group, and the 1.5x PE discount should narrow as the year progresses."

The Price Action

First Horizon shares were up 1.27 percent at the time of publication midday Thursday.

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