Raymond James Downgrades Six Banking Stocks

• Most banking stocks have been under pressure over the last three months.
• Raymond James’ David J. Long downgraded the ratings on several banking stocks.
• A slow pace of interest rate hikes is expected to restrict the banking segment’s revenue growth going ahead, Long believes.

The recent increase in the Federal funds rate as well as expectations of further hikes in 1H16 suggest that bank stocks will perform relatively well in the near term.

“However, if the Federal Reserve freezes in the second half to let the initial hikes play out and credit trends rapidly normalize, we believe bank stock performance in 2H16 could be under pressure,” analyst David Long mentioned.

Although the fundamentals of banking stocks remain strong and their valuations remain attractive relative to other S&P sectors, a slow pace of interest rate hikes may hold back the segment’s revenue growth relative to expectations.

This, coupled with the expected normalization of credit trends, may result in downward earnings revisions for banking companies, Long added.

Hilltop Holdings

Long downgraded the rating on Hilltop Holdings Inc. HTH from Outperform to Market Perform to reflect a balanced risk/reward scenario. The company’s stock valuation is expected to be negatively impacted by the direct or indirect impact of lower oil prices on the Texas economy and the oil-exposed bank peer valuations.

Long believes that the recent softening in the insurance market and tough comps for mortgage banking next year could weigh on the Street EPS projections.

“While we acknowledge its discounted valuation versus peers and potential to exceed expectations from the ongoing integration of SWS, we see little in the way of identifiable catalysts to drive outperformance in HTH shares at this point,” the Raymond James report added.

Lakeland Financial

The analyst downgraded the rating on Lakeland Financial Corporation LKFN from Outperform to Market Perform. The company is well positioned to deliver robust shareholder returns, given its ability to produce steady organic balance sheet growth and translate the same into positive earnings momentum.

Long added, however, that the company’s positives are already reflected in its stock valuation.

Pacific Continental

Raymond James downgraded the rating on Pacific Continental Corporation PCBK from Outperform to Market Perform, following the recent strength in the company’s shares.

Pacific Continental’s shares are up 15 percent since mid-October as compared to a 5 percent rise in the BANK Index; and have surpassed the previous price target of $12,Long added.

Sierra Bancorp

The analyst downgraded the rating on Sierra Bancorp BSRR from Outperform to Market Perform, following the recent strength in the company’s shares.

Sierra Bancorp’s shares have climbed 16 percent since mid-October, as compared to a 5 percent rise in the BANK Index; and have already surpassed the previous price target of $18, Long said.

Signature Bank

Raymond James downgraded the rating on Signature Bank SBNY from Strong Buy to Outperform, while establishing a price target of $170.

The company’s stock has gained 6.5 percent since July 22, outperforming the KBW Bank Index, which has fallen 6.6 percent over the same period, as well as the S&P 500, which is down 3.6 percent.

Although Signature Bank is well positioned to continue posting revenue and EPS growth above peer rates, its shares are trading at a high premium which is unlikely to expand in the near future. Long added, “We remain bullish on SBNY’s growth prospects but believe the valuation-driven catalysts are not as appealing as they were at the time of our upgrade.”

Yadkin Financial

Long downgraded the rating on Yadkin Financial Corp YDKN from Strong Buy to Outperform, while raising the price target from $26 to $27.

The company’s recent efficiency initiatives and the acquisition of NewBridge Bancorp, expected to close in early 2Q16, are likely to result in enhanced operating leverage. The analyst noted, however, that Yadkin Financial’s current stock valuation already reflects the company’s growth prospects.

Yadkin Financial’s shares have gained 29 percent year-to-date, versus an 8 percent decline in the NASDAQ BANK Index.