DA Davidson lifts Flagstar Bank stock rating to buy, PT to $14.50

On Friday, DA Davidson upgraded Flagstar Bank (NYSE:FLG) stock rating from Neutral to Buy, setting a new price target of $14.50, up from the previous $12.00. The adjustment comes after a thorough review of the bank’s financials, which showed significant improvements in capital and credit concerns that had previously troubled the institution. According to InvestingPro data, the stock has shown remarkable momentum with a 16.3% return over the past week, though it remains significantly below its 52-week high of $19.68.

The bank’s management has taken decisive steps to address capital issues, notably by divesting parts of its mortgage business. This strategic move has resulted in a considerable increase in Flagstar’s Common Equity Tier 1 (CET1) ratio, which climbed 281 basis points year-over-year to 11.9%, surpassing the peer median of 10.8%. This strengthening of the bank’s capital position was a key factor in the analyst’s decision to upgrade the stock rating. With a current market capitalization of $4.59 billion and trading at just 0.57 times book value, InvestingPro analysis reveals several additional insights about the bank’s financial health and future prospects available to subscribers.

Flagstar’s current trade at just 0.64 times tangible book value (TBV) also contributed to the analyst’s positive outlook. The bank has demonstrated a more robust control over credit issues, as evidenced by the management of nonperforming loans (NPLs). After incurring $892 million in net charge-offs (NCOs) in 2024, the bank has successfully increased its allowance for credit losses (ACL) ratio to 1.78%, up from 1.23% in the fourth quarter of 2023. However, InvestingPro data indicates that analysts anticipate a significant revenue decline this year, with the company not expected to be profitable in the current fiscal year.

Management’s comprehensive review of Flagstar’s commercial real estate (CRE) portfolio has further instilled confidence, with expectations for NPLs to decrease by 30% by year-end and substandard loans to reduce by 10%. This proactive approach to managing and mitigating credit risks has been a critical component in the analyst’s reassessment of the bank’s stock.

DA Davidson’s revised outlook on Flagstar Bank reflects a belief in the bank’s improved financial stability and its potential for growth in the market, as indicated by the raised price target and stock rating upgrade. The bank’s efforts to fortify its capital structure and address credit issues head-on have been recognized as significant steps towards a more secure and profitable future.

In other recent news, Flagstar Bank, a subsidiary of Flagstar Financial, has finalized the sale of its mortgage servicing and third-party origination business to Mr. Cooper Group Inc. The deal, worth $1.3 billion in cash, is expected to strengthen the bank’s Common Equity Tier 1 (CET1) capital ratio by approximately 60 basis points. This move is part of Flagstar’s ongoing strategy to streamline its business model and concentrate on its core areas of Retail Banking, Commercial and Private Banking, and Commercial Real Estate lending.

The sale is a significant step in Flagstar’s evolution towards becoming a focused regional bank, following its merger with Flagstar Bancorp (NYSE:FBC), Inc. and the acquisition of substantial parts of the former Signature Bank (OTC:SBNY). Despite these changes, Flagstar Bank will continue to offer residential mortgage products through its retail origination channels and the Private Bank.

In other recent developments, Flagstar Bank has announced the appointment of Christopher Higgins as Chief Information Officer and Rich Martin as the Head of Credit Review. These changes are part of the bank’s ongoing efforts to enhance technology innovation and risk management oversight.

In its third quarter 2024 earnings call, the bank revealed a strategic shift towards becoming a diversified regional bank, with a substantial increase in retail and private banking deposits. Despite a net loss for the quarter, the bank’s management remains confident in their strategy to rebalance the portfolio and achieve growth in future years. Flagstar is also implementing a significant expense reduction initiative expected to save $200 million annually.

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