Regional banks are affected by the recent Federal Reserve’s ‘no taper’ decision, according to a recent research report from Citigroup Inc. (NYSE:C).
Josh Levin of Citi Research points out Citigroup Inc. (NYSE:C)’s regional bank coverage universe is down by about 5 percent since the ‘no taper’ announcement made by the Federal Reserve, while the S&P 500 remained flat.
The following graph displaying stock performance since September 17th strengthens the analyst’s views:
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Regional banks witness maximum fall
Among the universe of regional banks tracked by Citigroup Inc. (NYSE:C), KeyCorp (NYSE:KEY) and Zions Bancorporation (NASDAQ:ZION) have posted a maximum of 6.2 percent drop in their prices since September 17th. However, First Horizon National Corporation (NYSE:FHN) has fallen by 2 percent, while New York Community Bancorp, Inc. (NYSE:NYCB)’s prices dropped by 2.8 percent during the period.
First rate hike in early 2015
Last week, the Federal Reserve announced that there will be no tapering of the bond buying program in the coming weeks.
Josh Levin of Citi Research feels despite the Fed’s ‘no taper’ announcement, the Federal Funds future curve has shifted only modestly and still suggests that the first rate hike will take place in early 2015. To substantiate his view, the analyst provides the following graph:
Fed Funds futures curve
Citi analyst observes that the Fed Funds futures curve is back to where it was in mid-July when stock prices and valuation metrics were on average about 5 percent higher than their current prices.
In the research report, Josh Levin points out that during the bank stock rally during the first half of 2013, the bank stocks were leading indicators for the Fed Funds futures curve.
Interestingly, the analyst notes Citigroup Inc. (NYSE:C)’s regional coverage universe was already up about 32 percent from its November lows when ‘taper talk’ started in late May, and the Fed Funds curve started to price in rate hikes sooner than later.
Citi assigns Buy rating on ZION
Josh Levin of Citi Research terms last week’s events as not thesis-changing and hence stocks may continue to trade sloppy for a bit longer. Though Citi feels regional banks remain a good vehicle to express a positive view on an economic recovery, the analyst notes these stocks remain very much disliked by a large swatch of dedicated financial investors who missed the rally.
Among the regional banks’ universe of stocks, Citigroup Inc. (NYSE:C) assigns a Buy rating only on ZION, projecting $35 equaling about 12.9 times of Citi’s estimated 2015 EPS of $2.70.
Corroborating a residual income model to support Citigroup Inc. (NYSE:C)’s P/E based valuation method, the analyst points out Citi’s residual income model assumes about 11 percent cost of equity and a normalized ROTE of about 18 percent.
As reported earlier, recently Deutsche Bank analysts assigned Buy ratings on five mid-cap regionals including First Niagara Financial Group Inc. (NASDAQ:FNFG).