'Super-Regional' Banks? Piper Jaffray Is Getting Into Them

"Super-regional" banks offer investors an "inexpensive" investment opportunity, according to Kevin Barker of Piper Jaffray.

Barker initiated coverage on "super-regional" banks with a "positive bias." The analyst noted that these banks are "inexpensive" compared to long-term risk premiums and book value multiples. At the same time, many of the banks boast capital levels that are at multi-decade highs, credit losses are running "well below" long-term averages and the possibility of higher rates also provides the opportunity for "significant" upside optionality.

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Barker continued that the current low rate environment along with "heavy" competition for loans has put "downward pressure" on these banks' top-lines. Many companies have recognized that slow growth is "likely to continue." In order to generate "stable" earnings per share growth, management teams have become "more aggressive" with cost cutting and revenue initiatives.

Barker added that he also expects many banks to increase their stock buybacks and dividend payments following the Federal Reserve's 2016 CCAR (comprehensive capital analysis and review) analysis.

Finally, Barker pointed out that the current earnings yield of the group implies an equity risk premium of 3.4 percent to Moody's BBB corporate debt index. In addition, on a FY16E EPS basis, the stocks as a group are trading in-line with long-term average and "cheap" when compared to corporate debt yields.

Citizens Financial Top Pick

Barker named Citizens Financial as the top pick in the space, giving it an Overweight rating and $31 price target.

Citizens Financial operates more than 1,200 branches and 3,200 ATMs across 11 states and was a wholly owned subsidiary of The Royal Bank of Scotland (RBS) until the Scottish bank sold its final 20.9 percent stake in the company back in October 2015.

According to Barker, now that RBS is "out of the picture," Citizens Financial can "go back on the offensive" to increase its profit margins. In fact, the company has a series of initiatives already in place to increase its operating leverage; it stands to return more capital to investors than any other regional bank in the next few years.

Barker noted the company's "outsized" loan growth portfolio stems from its relationship with Apple Inc. AAPL to finance all iPhones sold in U.S. stores through the iPhone upgrade program.

Barker added that if Citizens Financial is successful and hits its long-term targets, the company can grow its earnings per share at a rate of 20 percent-plus per year over the next few years. In addition, the company could benefit from being included in the S&P 500 – an event that could "happen at any time."

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Top Idea: SunTrust Banks

Barker also named SunTrust Banks, Inc. STI as a "top idea." Shares were initiated with an Overweight rating and $50 price target.

According to Barker, SunTrust has successfully increased its operating efficiency over the past few years given its cost cutting initiatives. At the same time, the company has "selectively" grown its more profitable segments while facing "heavy pressure" from lower asset yields through 2013 and 2014.

Barker stated that SunTrust should continue generating increased operating leverage as it invests in its higher-margin business lines and loan yields bounce off from the low levels. As such, the company is expected to outperform its peers, especially when considering it operations in the Southeast United States, "one of the stronger" economic regions.

Other Companies Named In The Report

Barker also initiated coverage of U.S. Bancorp USB, PNC Financial Services Group Inc PNC and KeyCorp KEY with Outperform ratings.

Shares of BB&T Corporation BBT, Wells Fargo & Co WFC, Fifth Third Bancorp FITB, Huntington Bancshares Incorporated HBAN, Zions Bancorporation ZION and Regions Financial Corp RF were all initiated with Neutral ratings.