Preferred Bank Faces Risk From Fed Rate Cuts, DA Davidson Says In Downgrade

With the Fed having paused rate hikes for now and the market increasingly expecting at least one rate cut before the year is out, Preferred Bank’s PFBC profitability seems to be near peak levels, according to D.A. Davidson. 

The bank holds a higher probability of downward revisions to estimates in the intermediate term, the sell-side firm said in a Wednesday downgrade note. 

The Analyst

Gary Tenner downgraded Preferred Bank from Buy to Neutral and reduced the price target from $60 to $52.

The Thesis

About 95 percent of Preferred Bank’s loan portfolio has variable rates, which resulted in the company’s 31-basis point net interest margin expansion in 2018, with the Fed hiking rates multiple times over the course of the year, Tenner said in the note. (See his track record here.)

Preferred Bank faces significant earnings risk in the event of Fed rate cuts due to it being overly asset-sensitive, the analyst said. 

Market expectations seem to be increasingly factoring in this potential earnings headwind, with the probability increasing to 97.5 percent for at least one rate cut by the Fed in 2019 and to 82.5 percent for two or more cuts, he said. 

Irrespective of the Fed’s decision, Preferred Bank’s NIM could contract 4 bps in 2019 and 11 bps in 2020, Tenner said. 

“With no additional Fed hikes to drive loan yields higher, we expect deposit mix shift and deposit lag from repricing CDs and other deposit sources to negatively impact the NIM on a go forward basis." 

D.A. Davidson reduced its EPS estimates for 2019 and 2020 from $5.18 to $5.11 and from $5.47 to $5.30, respectively.

Price Action

Preferred Bank shares were down 3.47 percent at $45.30 at the time of publication Wednesday. 

Related Links: 

Benzinga's Top Upgrades, Downgrades For June 5, 2019

Preferred Bank Q1 EPS $1.23 Misses $1.26 Estimate, Sales $40.91M Miss $41.44M Estimate

Photo by Dustin Blitchok.