The repercussions from the ongoing banking crisis will take some time to play out, but Piper Sandler has names for investors to start sorting through among the wreckage. The latest comments from Treasury Secretary Janet Yellen assuring further government support if needed added to investor optimism in spite of the turmoil that followed the Silicon Valley Bank collapse. Stocks were higher on Tuesday. Even so, banks are dealing with tightening lending standards and rising costs that will continue to weigh on the sector. “While it is difficult to predict the eventual regulatory cost burden (e.g. we estimate the potential cost of FDIC insurance coverage on all deposits to be 3%-4% per year in our recent note here), we believe a likely prevailing earnings impact this year will be an acceleration in upward funding cost pressures,” read a note from a team of Piper Sandler analysts led by Nathan Race. Still, some banks with strong deposit and liquidity characteristics can help investors find safe harbor, according to Piper Sandler. The firm, which expects two more 25 basis point rate hikes in the first half of 2023, found banks that were in the top quartile of outperformers heading into the last two rate hikes in 2015 and 2019. “Assuming two more 25 bps Fed rate hikes as a base case in 1H23, we found that banks in the top quartile of lowest IBL and IBD betas leading into the final two hikes last cycle (4Q15 to 1Q19) outperformed the median bank by > 400 bps up until the first Fed rate cut in July 2019,” read the note. Here are three overweight-rated, mid-cap bank stocks that Piper Sandler highlighted: The firm named SouthState Corporation to its focus list, saying it has confidence in the bank’s ability to outperform peers because of its “strong low-cost, core deposit base.” The stock is 1% lower in 2023, and has dropped 6% this month. “The bank has managed its balance sheet conservatively, maintaining higher liquidity than peers, being a bit more deliberate in regard to incremental securities investments, and growing loans at a solid high-single digit pace over time,” the note read. “Near-term loan growth may slow, but we continue to see shares of SSB as a safer play, even as its P/E multiple has risen relative to peers given its ~20% YTD outperformance,” it continued. Old National Bancorp , covered by analyst Scott Siefers, was also named to the list. According to the note, the bank historically outperform peers during times of pressure, as it has a solid low-cost deposit base as well as an excellent risk profile. It’s also attractively valued. Shares are 15% lower in 2023, and fell 13% this month. “While we acknowledge the uncertainty in forecasting EPS these days, we would have to haircut our 2024E EPS by over 30% for ONB to trade at its historic multiple,” read the note. First Interstate BancSystem was named to the list because of its lower cost deposit base, its relatively insulated location, as well as its strong dividend yield. The stock is about 18% lower in 2023, falling 10% this month. First Interstate has a 6% dividend yield, according to FactSet. “Among Western banks, we favor FIBK’s more granular and lower cost deposit base (18% uninsured deposits and $31k in average deposits per client), as well as its predominately Mountain West- and Midwest-based footprint that should be very well insulated from recent industry turmoil,” the note read. — CNBC’s Michael Bloom contributed reporting.
