JPMorgan's 'Magnificent Seven' — Bank Version: These Stock Picks Have 'Strong Upside Potential'

JPMorgan analyst Steven Alexopoulos has identified seven bank stocks poised for significant growth in the current market landscape. He’s referred to these picks as “our ‘Magnificent Seven'”.

JPMorgan’s Magnificent Seven Bank Stock Picks

Alexopoulos’ picks from among mid- and small-cap banks, and his views (summarized) on them are as follows:

• First Citizens BancShares Inc (Delaware) Class A FCNCA: Despite a challenging VC environment in 1Q24, First Citizens’ acquisition of SVB has stabilized deposit balances and increased new deposits, indicating potential growth in the future. The bank’s asset-sensitive balance sheet could benefit from potential Fed rate cuts, leading to strong net interest income growth.
• Western Alliance Bancorporation WAL: Western Alliance achieved key financial targets in 1Q24, setting the stage for continued growth, particularly driven by its national businesses outperforming peers. With shares trading at an elevated implied cost of equity, there is significant upside potential for shareholders.
• Live Oak Bancshares Inc LOB: Delayed Fed rate cuts have postponed the benefit to Live Oak’s liability-sensitive balance sheet, but the bank’s long-term growth story remains intact. LOB is well-positioned for growth with strong loan originations and a favorable valuation.
• Pinnacle Financial Partners Inc PNFP: Pinnacle stands out among regional banks with strong balance sheet growth exceeding peers. The bank’s high growth footprint and focus on client relationships could lead to a favorable NIM outlook and further upside in revenue.
• Cullen/Frost Bankers, Inc. CFR: With a founder-inspired culture and strong balance sheet, Frost continues to invest for the long term. Despite modest NII guidance adjustments, Frost’s trajectory points to an increase in NIM and strong growth ahead.
• MVB Financial Corp MVBF: MVBF shares underperformed peers due to NIM compression, but this is expected to reverse in 2Q. With a strong foothold in the online gaming industry and attractive valuation, MVBF is poised for long-term growth.
• Webster Financial Corporation WBS: Despite underperforming peers in 1Q24, Webster’s sell-off is seen as an overreaction. While the company lowered its loan growth outlook, strong loan growth in 1Q24 and potential improvements in 2H24 could lead to upside. Shares trade at a discount to peers, offering an attractive buying opportunity.

The analysis comes on the heels of the U.S. mid- and small-cap banks’ 1Q24 earnings outlook, which showed a mixed bag of results.

Also Read: Market Reaction To Bank Earnings Is Mixed, JPMorgan Analysts Project Further Decline In Net Interest Income

US Mid- And Small-Cap Banks’ Outlook

For Alexopoulos, key takeaways from the quarter included: “NIMs trending flat, minimal loan and deposit growth being delivered, and credit quality trends remaining strong despite one-offs.” These should translate into improved loan growth trends in the second half of the year.

However, there are challenges on the horizon. Economic growth has been robust in recent years, but loan demand has remained limited.

Moreover, the timing for Fed rate cuts, which many banks were banking on for a significant uptick in growth, is now uncertain.

Recent inflation data has come in higher than expected, prompting the Fed to hold off on rate cuts until there is more confidence in the inflation trajectory.

“We believe the Fed may need to see several inflation readings trending more favorably before it considers lowering the funds rate,” said Alexopoulos.

Strong Upside Potential

Despite these challenges, JPMorgan remains bullish on the sector, citing “strong upside potential” and low odds of negative catalysts such as rate hikes.

Alexopoulos views the “Magnificent Seven” picks as particularly well-positioned to drive significant intrinsic value growth in the current environment.

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