KBW recommends buying these 11 financial stocks, including First Republic, following federal backstop for banks

MW KBW recommends buying these 11 financial stocks, including First Republic, following federal backstop for banks

By Philip van Doorn

Other favored bank stocks for a rebound include American express and Western Alliance.

On a Monday following high-profile bank failures on Friday and Sunday, it may seem to be a strange time to recommend buying stocks of banks and other financial services companies, but Keefe, Bruyette & Woods has done just that, and even says clients should buy shares of a bank whose stock was down more than 70% in premarket trading on Monday, following a 34% decline last week.

That stock is $First Republic Bank(FRC-N)$ $(FRC)$ of San Francisco. KBW's price target for FRC is $140, which would make for a 71% gain from Friday's close at $81.76.

Before getting to KBW's list, this is a good point to remind readers that in his annual letter to Berkshire Hathaway Inc. shareholders for 1986, Warren Buffett, the company's CEO, wrote that "we simply attempt to be fearful when others are greedy and to be greedy when others are fearful."

This is one of those times when contrarian investors will become greedy amid turmoil, following the failures of Silicon Valley Bank (the main subsidiary of SVB Financial Group $(SIVB)$ and Signature Bank of New York.

Last week, the KBW Nasdaq Bank Index fell 16%, while the S&P 500 declined 4.5%. Those figures include reinvested dividends.

The liquidity problems that led to the failure of Silicon Valley Bank were driven in part by the bank's focus on one industry: venture capital. But the fear spread to other regional banks, including two on KBW's "buy" list that Christopher McGratty, the firm's head of U.S. Bank research, called "unfairly punished as investors looked for SIVB read-throughs" in a report on Monday. Those two include First Republic and Western Alliance Bancorp $(WAL)$ of Phoenix. McGratty also assigned the "unfairly punished" label to Apollo Global Management Inc. $(APO)$ , an investment manager in New York.

The latest regulatory developments include an emergency lending facility set up by federal regulators to help banks avoid selling securities for losses if they need to raise cash to cover deposit outflows. The regulators have also said all depositors of Silicon Valley Bank and the failed Signature Bank of New York would have access to their money -- even uninsured deposits balances. First Republic Bank FRC, -14.84% (listed below) announced it had secured funding from the Federal Reserve and JPMorgan Chase & Co. JPM, +2.54%.

Here are the 11 financial stocks KBW recommended Monday morning, in the same order they were listed in the firm's report:

Bank                               Ticker  City                Closing price -- March 10  KBW price target  Implied 12-month upside potential 
Western Alliance Bancorp            WAL    Phoenix                               $49.34            $85.00                                72% 
First Republic Bank                 FRC    San Francisco                         $81.76           $140.00                                71% 
U.S. Bancorp                        USB    Minneapolis                           $40.62            $58.00                                43% 
SouthState Corp.                    SSB    Winter Haven, Fla.                    $75.72            $55.00                               -27% 
Old National Bancorp                ONB    Evansville, Ind.                      $15.96            $22.00                                38% 
Apollo Global Management Inc.       APO    New York                              $60.29            $88.00                                46% 
AGNC Investment Corp.               AGNC   Bethesday, Md.                         $9.97            $11.75                                18% 
Discover Financial Services         DFS    Riverwoods, Ill.                     $102.14           $123.00                                20% 
American International Group Inc.   AIG    New York                              $53.15            $76.00                                43% 
Reinsurance Group of America Inc.   RGA    Chesterfield, Mo.                    $133.74           $201.00                                50% 
American Express Co.                AXP    New York                             $165.70           $201.00                                21% 
                                                                                                                       Sources: KBW, FactSet 

Click on the tickers for more about each company, including the latest news.

Read Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

First Republic was among a small group of banks whose interest margins contracted over the past year through the fourth quarter. At the same time, the weighted net interest margin for the U.S. banking industry had expanded to 3.37% in the fourth quarter from 2.55% in the year-earlier quarter, according to the FDIC's Quarterly Banking Profile.

Among the company's on KBW's recommended list, McGratty called U.S. Bancorp $(USB)$, SouthState Corp. $(SSB)$ and Old National Bancorp (ONB) "safe haven bank stocks."

He went on to write that First Republic and Western Alliance Bancorp "offer greater upside potential in the near-term given this weekend's actions and last week's significant sell-offs," but also warned that these stocks "come with more downside risk until investors solidly regain confidence in the banking system's handling of deposit/liquidity concerns."

Don't miss:20 banks that are sitting on huge potential securities losses--as was SVB

-Philip van Doorn

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March 13, 2023 07:58 ET (11:58 GMT)

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