FRC - 3 Bank Failures Bigger Than 2008 3 Bank Stocks To Sell Stand Out With Quant

2023-05-03 09:00:00 ET

Summary

• Just when you thought it was safe to get back in the water on the back of JPMorgan acquiring First Republic Bank, regional banks slump further amid fears of financial collapse.
• Where large banks may not experience the same level of risk as regional banks, the demise of 3 big regional banks brings fears of a new Great Financial Crisis.
• This financial crisis could still have legs. The Federal Deposit Insurance Corporation (FDIC) closed 465 failed banks from 2008 to 2012.
• Avoiding stocks with sell ratings may help limit your downside risk. Each of my three Sell picks lost more than 40% of its value, and they continue to get hammered.
• Many regional bank stocks may not have reached their bottom. Using Seeking Alpha’s Quant System and Factor Grades, the three stocks I’m highlighting have had Sell ratings and warning banners for months, suffer spiraling stock prices, poor growth, and downward analyst earnings revisions.

Regional Banks Fall to 52-Week Lows

In anticipation of Wednesday’s Fed announcement and the plummet of regional banking stocks, could we finally see a break in one of the most aggressive rate-hiking cycles since the days of Paul Volcker’s chairmanship?

Monday’s seizure of First Republic Bank ( FRC ) by the FDIC resulted in most of its assets being acquired by JPMorgan Chase ( JPM ). As the industry is riddled with fear after three bank failures in less than two months, FDIC Chairman Martin J. Gruenberg stated,

"The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system."

On Tuesday, PacWest Bancorp ( PACW ), a Quant Sell-rated stock, declined 27.78%, and Western Alliance Bancorporation ( WAL ), a Quant Strong Sell, fell 15.12%. Traders are grappling with concerns about the health of U.S. regional banks, and yesterday’s volatile trading resulted in every regional bank holding in t he IAT - iShares U.S. Regional Banks ETF, negative.

Every IAT - iShares U.S. Regional Banks ETF Holding is Down (as of 5/2/23)

While there are still regional bank buying opportunities , the circumstances bring about many questions. How many big banks possess the ability to acquire smaller regional banks should more fail? With JPMorgan absorbing a large portion of FRC’s burden of losses and the FDIC showing how “A poorly supervised bank was snapped up by an even bigger bank,” posted Senator Elizabeth Warren in a Tweet . And while not everyone is happy about the acquisition, the number of U.S. banks has experienced a drastic fall from the 1980s to present-day.

Decades-long consolidation has resulted in 14,469 commercial banks, down to 4,135, according to the FDIC . While fewer banks have failed following 2008’s Great Financial Crisis, given stricter regulations, lack of oversight, and lesser scrutiny for small- and midsize banks like First Republic, Silicon Valley Bank, and Signature Bank have become examples of three of the biggest bank failures since 2008.

As it stands, I believe 2008 and the financial crisis that ensued was worse than today. If not for the government stepping in, in 2008, we may have seen the largest banks and investment banks fail. Where banks received bailouts, we’re beginning to see remnants of 2008 in today’s situation, with the financials falling. The Federal Deposit Insurance Corporation (FDIC) closed 465 failed banks from 2008 to 2012; 2008 witnessed 26 bank failures; 2009 experienced 140 bank failures; 2010 ushered in a whopping 157 failures. All of these failures resulted in the banks’ acquisitions.

The industry as a whole is seeing major declines. Should another large bank like PNC Financial Services Group ( PNC ) fall, it could prompt an even worse domino effect since only the likes of Bank of America ( BAC ), Citigroup ( C ), and a few others have the ability to acquire. As a result of the regional banking crisis, I am highlighting three regional banks that have been rated sells for more than a year, continuing their distressing and horrendous downtrend.

Regional Banks to Sell

While the three featured stocks in this article are not the worst performers, they are among the worst. Showcased below are the five worst regional banks as of May 2, 2023, each has been rated a Quant Strong Sell for a long period of time.

Top 5 Worst Regional Banks (as of 5/2/23) according to SA Quant Ratings

Because they have the worst quant ratings and their market caps continue to decline well below $350M, many of their factor grades cannot take into consideration the long-term bonds that banks own and the value of bonds dropping in Q1. As a result, our quant looks to EPS revisions, and each of the stocks above and the three I’ve selected have abysmal EPS revisions and momentum, indicating that something has changed dramatically. Falling analysts’ EPS revisions have a big impact.

My three stocks with sell ratings and falling market and share prices, run the risk of slashing dividends on the heels of the crisis. Although their dividend safety ratings appear solid, we are in the midst of a unique challenge that includes having to raise rates paid on deposits after banking turmoil. Additionally, higher interest rates and deposit costs moving closer to market rates have resulted in a drop in Net Interest Margins ((NIM)) for some stocks. As experienced first-hand by one of my sell-rated stocks, as reported by SA News , Live Oak Bancshares ( LOB ) experienced more NIM headwinds in two quarters than anticipated over the course of two years. "With LOB’s deposit costs moving closer to market rates at a faster than expected pace, however, what is also now moving at a faster pace is the eventual peak in deposit costs and, tied to this, eventual inflection point in NIM." While the stocks may survive, it’s crucial to consider a review of a stock’s fundamentals before diving into a position. Consider strong factor grades over poor factors when considering Strong Buys versus Strong Sell stocks.

Which Regional Banks Are In Trouble?

Regional banks got crushed the last few days, and where stocks with questionable performance tend to experience declines, Seeking Alpha’s Sell Recommendations illustrate just how drastically our stocks have underperformed the S&P 500 using quantitative data.

Avoid our Sell-Rated stocks with poor fundamentals.

We strive to select stocks that will perform well and highlight poor performers. SA Quant Sell and Strong Sell rated stocks offer the ability to look at and instantly compare a stock’s factor grades, all while warning investors of picks at high risk of performing poorly. Here are three regional banks at risk of continuing their downtrend.

1. Live Oak Bancshares, Inc.

• Market Capitalization: $1B

• Quant Sector Ranking (as of 5/1): 693 out of 707

• Quant Sector Ranking (as of 5/1): 260 out of 266

• Analysts' Downward Earnings Estimate Revisions: 4

• Quant Rating: Strong Sell

Operating in banking and Fintech, Live Oak Bancshares, Inc. is the bank holding company for Live Oak Banking Co. Headquartered in Wilmington, North Carolina . LOB is focused on being America’s small business bank. Unfortunately, where growing its own business has fallen short amid its goal of fueling the growth for small businesses, with a banking crisis and higher interest rates proving to be headwinds, the stock has been on a downtrend since 2022.

Live Oak Bancshares has had a sell rating for more than a year.

Seeking Alpha Factor Grades, which rate investment characteristics on a sector-relative basis, showcased LOB’s poor fundamentals and quant ratings for more than a year. As of February 10, 2022, Live Oak’s bearish momentum resulted in investors selling shares to drive its quarterly price lower. Year-to-date, the stock is -28%, and over the last year, -50%. With a trailing dividend yield of 0.53% compared to the Financials sector median of 3.87%, and a premium forward P/E ratio of 81.61%, LOB is highly overvalued and receives an ‘F’ overall valuation grade .

When exploring stocks, a review of LOB on SA’s website is met with a warning banner , highlighting that Live Oak’s characteristics are historically associated with poor future stock performance. Negative EPS revisions, which include four analyst downward revisions over the last 90 days, come on the heels of LOB’s missed Q1 2023 top-and-bottom-line earnings. Although LOB ended the quarter with more than $4B cash and available liquidity, with the fall of much larger Signature Bank, Silicon Valley Bank, and First Republic Bank, whose underlying metrics also appeared “safe,” the small-cap Live Oak could be dead in the water, based upon the quant ratings, should more banks need saving.

2. Eagle Bancorp, Inc.

• Market Capitalization: $744.63M

• Quant Sector Ranking (as of 5/1): 685 out of 707

• Quant Industry Ranking (as of 5/1): 253 out of 266

• Analysts' Downward Earnings Estimates Revisions: 2

• Quant Rating: Strong Sell

Eagle Bancorp, Inc. ( EGBN ), the holding company for EagleBank, offers small and medium-sized businesses commercial and consumer banking services and insurance products through a referral program. Down more than 50% YTD and over the last year, EGBN’s Momentum Grade is an ‘F.’

Despite a strong valuation grade supported by a dividend yield ((TTM)) of 7.48% versus the sector median of 3.87% and a trailing P/E ratio that’s -29% difference to the sector, be wary of decelerating momentum and declining growth. Eagle Bancorp’s year-over-year revenue growth is -12.19% compared to the Financial sector’s 5.84%, and quarter-over-quarter, EGBN’s net interest margins declined. With lagging interest income from loans and a 70% reduction in deposits amounting to $1.2B, shares of Eagle Bancorp began to plummet following the March 9th banking crisis, despite most of the deposit reductions taking place prior to the industry turmoil.

EGBN Stock Misses Earnings, Met With 2 Downward Revisions

With industry headwinds likely to persist, Eagle’s Q1 EPS of $0.78 missing by $0.35 and revenue of $75.02M missing by $8M does not help its cause and resulted in two FY1 Down Revisions in the last 90 days. During the Q1 2023 Earnings Call, CEO Susan Riel stated :

"While we are disappointed with our first quarter operating results, our capital ratios are well in excess of regulatory minimums, and our asset quality metrics remained strong, even against the backdrop of a challenging market, including continued disintermediation of deposits amid a rising interest rate environment…We met the liquidity needs of our depositors and the credit needs of our borrowers while holding firm to our commitment to strong underwriting and risk management practices."

With the Fed continuing to increase interest rates and EGBN’s attempts to navigate rates paid on deposits and the top-and-bottom-line misses, Eagle brought on higher-cost, short-term borrowings to their balance sheet as their “fix,” which crushed their net interest income ((NII)). And where the company’s market cap continues to decline, there’s still a chance it could see the bottom should steep losses persist.

3. Bank of Hawaii Corporation

• Market Capitalization: $1.9B

• Quant Sector Ranking (as of 5/1): 672 out of 707

• Quant Industry Ranking (as of 5/1): 244 out of 266

• Analysts' Downward Earnings Estimates Revisions: 4

• Quant Rating: Sell

Where aloha means hello and goodbye, Seeking Alpha’s quant ratings say goodbye – or sell – to Bank of Hawaii Corporation ( BOH ). Like my two regional bank stock picks before, the banking crisis effect has taken hold, and BOH is getting pummeled. Down 43% YTD and -41% over the last year, BOH’s consistent Sell Rating since February 16, 2022, comes as a result of declining growth, poor valuation, high-interest rates, and lack of margin expansion.

Bank of Hawaii’s Poor Price Performance is highlighted by a Warning Banner.

Exasperated by headwinds from the banking collapses, the Bank of Hawaii has been one of the biggest losers , among other financials. Although the stock’s ‘B’ valuation grade appears to be an attractive entry point given its fall, its D- momentum showcases how the stock may be like catching a falling knife. Underperforming its sector peers quarterly, the stock’s gradual price performance continues to be poor.

First-quarter earnings resulted in top-and-bottom-line misses. EPS of $4 missed by $0.09, and revenue of $176.69 missed by $2.31M. While modest losses, the company’s diversification in bank deposits helped cushion the blow felt by other banks. Consumers made up less than 50% of overall deposits, commercial deposits comprised 41.9%, and public and municipalities the remainder.

BOH Stock Deposits Remain Flat

“In terms of tenure, Bank of Hawaii has some of the longest-tenured deposits in the industry. 51% of our deposits are with relationships over 20 years old, 23% 10 to 20 years old, and only 26% under 10 years. So here on Slide 12 , what you can see is the deposit performance for really the past year, and certainly the month of March has been pretty darn flat,” said Peter Ho , BOH President & CEO.

Although deposits remained relatively flat and BOH has maintained healthy liquidity, including backup liquidity funding totaling $8.2B, Bank of Hawaii remains at a high risk of performing poorly as its forward EPS Diluted Growth is -10.76% versus the Financial sector median of 1.06%, supported by four FY1 Downward revisions and earnings miss. The worst for regional banks and financial institutions does not seem to be over. With substantial drops in share prices across the nation, banks resumed declines despite hopes that the government-brokered deal with JPMorgan Chase and First Republic Bank would prompt a turnaround for the industry. Only time will tell if the industry will see a bigger financial crisis than 2008. In the meantime, heed the ratings and warnings.

Conclusion

Ask yourself if regional banks are worth buying in the midst of a banking crisis. The banking crisis that started in 2008 did not slow down until 2013. It was not a one-and-done year. LOB, EGBN, and BOH have been rated sell or strong sells according to my quant ratings for over a year. Experiencing substantial declines in stock price, which fell off a cliff after 3 of the biggest bank failures in a decade, each of my stocks possesses less than attractive growth, earnings revisions, abysmal momentum, and poor fundamentals. This is in no way a statement that these regional banks will fail. The Quant factor grades simply highlight that these stocks have weaker metrics than the sector means on the factors that are measured. Rather than purchasing sell-rated stocks with poor fundamentals, consider Top Regional Banks or stocks with strong financials that share the strong collective attributes of valuation, growth, profitability, momentum, and EPS revisions, for potential upside.

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