A new Sterne Agee report identifies banks undervalued banks with “asset sensitivity” and delivers names of a few small to mid capped regional banking concerns that might be worth investment consideration. In part the research can be used to help ascertain winners and losers in a rising rate interest rate environment.

Big banks asset sensitivity

Interests in big banks rise

The report notes a rise in interest in banking stocks just over the last five trading sessions. Bank stocks are up 1.6 percent while the broader market, measured by the S&P 500, is up just 0.7 percent over the same period.  That said, the large global banks, which rocketed higher 3.2 percent in the wake of the largest government fines for fraud the big banks have endured in their history.  Interesting to note on a relative value basis smaller banks, however, generally treated to a harsher standard, were up just 1.3 percent over the same period.

big banks peforrmance

Big banks vs small banks performance

Could this spread divergence between big banks relative outperformance to small banks underperformance ultimately revert back to the mean?  Could smaller banks outperform over the near term?

The Sterne Agee report comes as a consolidation is taking place among smaller banks. Separate analysis of the banking industry from Tim Melvin, who covers small banks in the Deep Value Investor Newsletter, notes that a consolidation even more significant than that in 1998 is currently occurring. Speaking on Benzinga’s pre-market show, Melvin notes that the acquisition prices of small banks are rising, indicating a hot market in small bank acquisitions. This is particularly significant as artificially low interest rates are squeezing profits out of the small bank business model to a greater degree than the larger banks.

Big banks smid

Big banks’ asset sensitivity

The Sterne Agee report, citing a proprietary model, identifies banks’ sensitivity to asset flow and valuation, by taking into account their stock’s price relative to the 2016 earnings per share forecast.  (To view more of the research reports methodology click here for the previous week’s report.)

big banks regional asset sensitivity

The result of their proprietary modeling?

East West Bancorp, Inc. (NASDAQ:EWBC), which currently has a buy rating, PNC Financial Services Group Inc (NYSE:PNC), also a buy, KeyCorp (NYSE:KEY), which garners a neutral ranking at the firm, Fifth Third Bancorp (NASDAQ:FITB), which has a buy rating, SunTrust Banks, Inc. (NYSE:STI), a buy rating and PrivateBancorp Inc (NASDAQ:PVTB), rated with a buy.

big banks net interest income

The five banks with the largest interest rate sensitivity, however, were also considered.  Those banks are Cathay General Bancorp (NASDAQ:CATY), PacWest Bancorp (NASDAQ:PACW), Texas Capital Bancshares Inc (NASDAQ:TCBI), Hilltop Holdings Inc. (NYSE:HTH) and SunTrust Banks, Inc. (NYSE:STI), the only firm to make both lists.