Investing.com -- Following the Federal Reserve’s rate cut last week, Wedbush analysts added Comerica (NYSE:CMA) and Western Alliance (NYSE:WAL) Bancorporation stocks to its Best Ideas List.
The firm has also upgraded several banks, including Banc of California (NYSE:BANC), Columbia Banking System (NASDAQ:COLB), Prosperity Bancshares (NYSE:PB), and Regions Financial Corporation (NYSE:RF).
“We turned more constructive on banks coming out of July’s earnings season as the rate backdrop became more clear and the Fed is putting its best foot forward to engineer a soft landing,” Wedbush analysts said in a Tuesday note.
They had turned cautious on the banking sector in the summer of 2022 when the Fed began raising rates. Since then, the regional bank index (KRX) has only increased by 9%, compared to a 50% rise in the S&P 500.
While a recession is still possible, especially given recent concerns about consumer health from major retailers, Wedbush's base case is that the Fed could manage to steer the economy towards a soft landing.
“To the extent that our base case is correct, we anticipate that banks should be in a stronger position to pivot to a more offensive posture, as lower short-term rates and a more normalized yield curve should make for a more ideal operating environment on multiple fronts,” the note states.
Wedbush has upgraded Comerica stock to Outperform from Neutral, highlighting its position as the most liability-sensitive bank in their coverage. The firm anticipates that Comerica will benefit from the lower rate environment, which could potentially lead to share repurchases resuming in the fourth quarter of 2023 or early 2024.
Western Alliance Bancorporation, while asset-sensitive, is also expected to gain from the lower rates through decreased deposit costs and increased mortgage origination volumes.
WAL’s discounted valuation compared to its peers has also encouraged Wedbush analysts. The stock is trading at a multiple of 10.1x compared to the peer average of 11.0x based on estimated earnings for 2025.