Equities

High-Yield Bank Stocks Set to Rally, Says Piper Sandler

Regional bank stocks with yields over 5% poised to thrive despite underperformance, says Piper Sandler.

By Bill Bullington

7/11, 14:39 EDT
Brookline Bancorp, Inc.
First Horizon Corporation
Heritage Commerce Corp
SPDR S&P Regional Banking ETF
Pacific Premier Bancorp Inc
U.S. Bancorp
Western Alliance Bancorporation
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Key Takeaway

  • Regional bank stocks like Brookline Bancorp (5.8% yield), Heritage Commerce (5.7%), and Pacific Premier Bancorp (5.4%) offer high dividends despite 2024 declines.
  • U.S. Bancorp, First Horizon, and Western Alliance are expected to rally with potential gains of 19%, 17%, and 23% respectively.
  • Piper Sandler highlights these banks for their strong capital positions, conservative credit approaches, and attractive valuations amidst broader sector underperformance.

Regional Bank Stocks Underperform

Regional bank stocks have had a challenging year, with the SPDR S&P Regional Banking ETF (KRE) down about 1% in 2024. This performance is notably weaker compared to the tech-driven 17% surge for the S&P 500. Despite this underperformance, some regional banks offer attractive dividend yields that could appeal to investors. Mark Fitzgibbon, managing director at Piper Sandler, noted, "Given the recent pullback in bank stock prices, we are finding lots of regional and community bank stocks that have eye-catching dividend yields." Piper Sandler's report focused on banks with dividend yields over 5% that are poised to thrive.

Fitzgibbon's team screened for banks offering current dividend yields above 5%, eliminating those with a dividend payout ratio greater than 85% and tangible common equity ratios less than 7%. The list was further narrowed by excluding banks that had cut their dividends in the past decade and only included banks rated as overweight by Piper Sandler. Among the banks that made the cut are Brookline Bancorp, Heritage Commerce, and Pacific Premier Bancorp.

Dividend-Paying Banks Highlighted

Brookline Bancorp, based in Boston, offers a dividend yield of 5.8% but is down 15% in 2024. Fitzgibbon highlighted the bank's high-quality commercial operations and steadily improving profitability metrics. "We believe that Brookline is a high-quality commercial bank with steadily improving profitability metrics," he wrote. He also noted that the bank operates in desirable markets and is well-positioned to take market share from larger banks. Fitzgibbon added that Brookline "manages risk well" and should navigate the current environment better than most banks.

Heritage Commerce, based in San Jose, California, offers a dividend yield of 5.7% and is down nearly 9% in 2024. Analyst Andrew Liesch described it as a "solidly profitable institution with an attractive deposit base and strong capital position." He noted that while no bank is immune to credit deterioration in a softening economy, Heritage's problem loans are expected to be fewer and more manageable compared to peers. Liesch added, "Plus with its robust capital position and a dividend payout near 60% (we also think earnings are set to rise in the quarters ahead), it has plenty of cushion supporting the dividend."

Pacific Premier Bancorp, based in Irvine, California, offers a dividend yield of 5.4% and is down 15% in 2024. Analyst Matthew Clark highlighted the stock's attractive valuation and potential catalysts that could boost earnings in the second half of the year. "We continue to view PPBI as a solid holding due to its more conservative credit approach, higher quality funding profile, and strong capital levels," Clark wrote.

Banks Expected to Rally

Despite the overall underperformance of regional banks, some are expected to rally. U.S. Bancorp, which has underperformed this year with a decline of more than 7%, is expected to surge 19% to its consensus price target. The stock has a forward price-to-earnings (P/E) ratio of 10.6 and recently crossed above its 200-day moving average, indicating an upward trend.

First Horizon has risen 8% this year and is expected to gain 17% from its current level. The stock has a forward P/E of 10.1. Stephens initiated coverage of the bank with an overweight rating, stating it is "well positioned for the current higher for longer interest rate environment" and has been "unduly discounted."

Western Alliance shares have underperformed this year, down 6%, but the stock is a consensus buy among analysts and is expected to rise 23% from its current level. It has a forward P/E of just 8.4. East West Bancorp and State Street also made the list of banks expected to rally.

Street Views

  • Mark Fitzgibbon, Piper Sandler (Bullish on regional and community banks):

    "Given the recent pullback in bank stock prices, we are finding lots of regional and community bank stocks that have eye-catching dividend yields."

  • Mark Fitzgibbon, Piper Sandler (Bullish on Brookline Bancorp):

    "We believe that Brookline is a high-quality commercial bank with steadily improving profitability metrics. We think BRKL operates in desirable markets and is situated well to take share from larger banks."

  • Andrew Liesch, Piper Sandler (Bullish on Heritage Commerce):

    "It’s a solidly profitable institution with an attractive deposit base and strong capital position, and the stock is trading at a discount to peers... Plus with its robust capital position and a dividend payout near 60% (we also think earnings are set to rise in the quarters ahead), it has plenty of cushion supporting the dividend."

  • Matthew Clark, Piper Sandler (Bullish on Pacific Premier Bancorp):

    "We continue to view PPBI as a solid holding due to its more conservative credit approach, higher quality funding profile, and strong capital levels."