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Morgan Stanley Research thinks it’s time to lean into midcap banks, upgrading Prosperity Bancshares (NYSE:PB) to Overweight from Equal-Weight and Valley National Bancorp (NASDAQ:VLY) to Equal-Weight from Underweight, on the view that imminent interest-rate cuts lower funding costs, increase loan demand and relieve credit pressures.
Q2 earnings reports gave analyst Manan Gosalia increased conviction that lenders’ net interest income is at an inflection point., with runway for steady growth through next year.
“This will initially be driven by improving net interest margins as banks can quickly cut deposit costs,” the analyst wrote in a note, adding “an acceleration in industry-wide loan growth in 2025 should be an incremental tailwind.”
On the valuation front, midcap banks are still changing hands at a 4x discount to historical valuations, the note said. The aforementioned factors “should support multiples closer to historical levels.”
There are some exceptions, though. Gosalia downgraded Webster Financial (NYSE:WBS) to Equal-Weight, “as our thesis has played out with the bank reducing CRE exposure, increasing reserves and potentially benefitting from rate cuts.”
Cullen/Frost Bankers (CFR) shares were also cut to Underweight, “given fuller valuation and higher asset-sensitivity than peers.”
Seeking Alpha’s Quant system, meanwhile, gives East West Bancorp (EWBC) the highest rating among regional banks, followed by Fulton Financial (FULT) and Popular (BPOP).
In Monday morning trading, (CFR) dipped 3.3%, (VLY) was little changed, (WBS) slid 4.9%, and (PB) slipped 1.1%.
