Morgan Stanley Thinks Banks With Low Loan-To-Deposit Ratios & Less Reliance On Customer Deposits Have Chance Of Winning: Here's Why

Morgan Stanley analyst Manan Gosalia revised the rating for the midcap banks Valley National Bancorp VLY, Zions Bancorporation N.A. ZION, Commerce Bancshares Inc CBSH.  

The analyst lowered the rating for VLY and ZION to Underweight from Equal-Weight with a raised price target of $8.5 (from $8) and $32 (from $27), respectively.

On the other hand, Gosalia upped the rating for CBSH to Equal-Weight from Underweight at an increased price target to $49 from $48.

The analyst is bearish on the expected higher for longer rate environment, weakening loan growth pressure NII, rising loan losses, and elevated pressurized expense in the market in 2024.

In a higher for longer rate environment, the analyst prefers banks with low loan-to-deposit ratios, granular deposit bases with less reliance on customer deposits, and higher excess capital and liquidity. 

VLY: Gosalia thinks the consensus is underestimating the pressure on NII in a higher for longer rate environment, which has a 101% loan-to-deposit ratio (vs. ~84% for peers) that offers lower deposit pricing flexibility.

Gosalia revised FY23 and FY24 EPS estimates to $1.07 (from $1.05) and $0.92 (from $0.97).

ZION: The analyst sees risk-reward towards the downside in a higher for longer rate environment, given the banks' increased risk of non interest bearing (NIB) outflow that needs to be replaced with higher cost client deposits currently off-balance sheet.

The analyst notes that ZION's 2024 estimates are the most susceptible to changes in betas and NIB mix-shift.

Gosalia raised FY23 and FY24 EPS estimates to $4.55 (from $4.47) and $3.72 (from $3.63).

CBSH: Gosalia cites that the bank has underperformed the median bank in the coverage by 700bps on deposit trends, driving a recovery.

The analyst has confidence in CBSH's NII outlook in a higher-for-longer rate environment, given its more granular deposit base (99% of deposit accounts under $250k).

Gosalia boosted FY23 and FY24 EPS estimates to $3.81 (from $3.77) and $3.39 (from $3.30).

Price Action: VLY shares are trading lower by 2.06% at $8.31 and ZION by 2.06% at $33.29, while CBSH shares are trading higher by 0.66% at $47.29 on the last check Wednesday.