WBS - Commerce Bancshares Prosperity Cullen/Frost downgraded at Morgan Stanley

2023-05-16 10:17:24 ET

Morgan Stanley analyst Manan Gosalia on Tuesday downgraded Commerce Bancshares ( NASDAQ: CBSH ), Prosperity Bancshares ( NYSE: PB ), and Cullen/Frost Bankers ( CFR ) as valuation calls as the rest of the midcap bank group has "de-rated."

The stocks are the most expensive in his coverage with CBSH trading at 15x, PB at 12x and CFR at 11x Morgan Stanley's 2024 EPS estimates, vs. 7x for their peers.

Commerce Bancshares ( CBSH ) and Prosperity Bancshares were cut to Underweight from Equalweight, while Cullen/Frost ( CFR ) was downgraded to Equalweight from Overweight. CBSH fell 2.4% in morning trading, PB slipped 1.3% , and CFR dipped 1.3% .

Midcap bank stocks dropped by a median 11% since the start of the month, driven by concerns that deposit outflows are reaccelerating, the analyst said. That brings the stocks in his coverage down a median of 31% since March 8.

For the midcap bank sector, Gosalia believes "recent declines seem ovedone as QTD deposit outflows are tracking in-line with seasonality."

Potential near-term catalysts include deposit insurance talk this week and Q2 deposit updates in June, the analyst pointed out.

Gosalia disagrees with investors' focus on uninsured deposits and outflows at midcap banks. "We see accelerating deposit costs, not accelerationg deposit outflows , as the most significant headwind for the Midcap Banks over the next several quarters," he said.

His preferences include: M&T Bank ( MTB ), Webster Financial ( WBS ), Citizens Financial Group ( CFG ), and Huntington Bancshares ( HBAN ), all rated Overweight, due to their high quality funding profiles and attractive valuations.

Earlier, this month the SA Quant system flagged Commerce Bancshares ( CBSH ) for high risk of performing poorly due to negative EPS revisions and valuation.

Prosperity Bancshares ( PB ) has a SA Quant rating of Hold, as does Cullen Frost Bankers ( CFR ).

More on Midcap Banks:

• Relief rally for regional bank shares - Will it continue?
• Blackstone in talks with regional banks about lending partnerships
• Wolfe upgrades Prosperity Bancshares as a 'source of relative safety'
• Commerce Bancshares: High Risk, Limited Upside Make Stock Unattractive

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