Regional Banks in ‘Sweet Spot’ Since Stress Tests: Analyst

All but four banks passed the latest round of Federal Reserve stress tests, but those in the “sweet spot” are the regionals, Sterne Agee financial services analyst Todd Hagerman told CNBC Thursday.

A lot of investors were left “quite confused and perplexed” about the methodology the Fedused in determining which banks would be able to maintain a capital ratio of 5 percent in case of a financial downturn. The Fed’s criteria included a 13 percent unemployment rate, a 50 percent drop in stock prices, and a 21 percent decline in housing prices.

Many of the larger regionals have shown they are generating a “tremendous amount of excess capital“ and returning “roughly midteens on tangible common equity, which is pretty healthy” in a depressed economy, Hagerman said.

His picks in the sector are Wells Fargo, Fifth Third Bancorp, and PNC Financial Services Group.

“We’re past the inflection point on a lot of the regulatory reform on the regionals, past the inflection point on some of the mortgage issues, and perhaps we’re getting closer to a more favorable rate environment than we were a few years ago,” he said. “All those stack up quite favorably among larger regionals.”

Additional News: Not All Risks Addressed in Stress Tests: Sheila Bair

Additional Views: Long Regional Banks Trade Is Over: Terranova

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Disclosures:

Todd Hagerman does not own shares in Fifth Third Bancorp, but Sterne Agee makes a market in the stock. Hagerman and his company do own shares of Wells Fargo and PNC.

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