Morgan Stanley Cuts Regional Banks Outlook; Western Alliance Dives On Financial Update

The outlook for bank stocks remains muddy with first quarter earnings around the corner. Morgan Stanley cut its outlook for midsize banks early Wednesday and suggested Wall Street do the same. Western Alliance stock swooned following its financial update. But Zion Bancorp fell early Wednesday despite getting an upgrade from Baird.

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Western Alliance Update

Phoenix-based Western Alliance Bancorp (WAL) provided a financial update ahead of its Q1 earnings report late April 18.

Western Alliance’s total insured deposits represent 68% of all deposits, which is “significantly higher” than at year-end. However, that may reflect an exodus of uninsured deposits over the past several weeks.

As of quarter-end, the bank’s coverage ratio is greater than 140% and its available liquidity exceeds uninsured deposits. Western Alliance says it has no outstanding loans from the Federal Reserve discount window after balance sheet repositioning.

Unrealized losses on Securities and Held for Investment (HFI) loans have improved since the end of the year due to lower interest rates, according to the bank.

Western Alliance estimates unrealized losses for Held to Maturity securities to be $139 million, improving from $177 million at year-end. Available-for-Sale security losses fell to $789 million from $881 million at the end of the year.

HFI loan losses improved to $2.9 billion from $4.2 billion at year-end. And Western Alliance says it maintains non-interest bearing deposits exceeding its residential loans, which are the primary driver of unrealized losses for HFI loans.

The losses are partially offset by $431 million in unrealized gains on debt and other borrowings, up from $121 million at year-end.

Western Alliance reported deposits fell 11% to $47.6 billion at the end of Q1 from $53.6 billion in Q4 during an afternoon update Wednesday.

Shares bounced off their intraday lows to trade around 30, down 10.5% Wednesday. WAL stock initially tanked 17% to 27.80 in the morning following the update.

Morgan Stanley Cuts Regional Bank Outlook

Morgan Stanley says Wall Street estimates for regional banks need to come down meaningfully ahead of the Q1 earnings season, The Street Insider reported early Wednesday. “We recommend fading any rally — the medium-term outlook is tough for every driver of midcap bank returns,” Morgan Stanley analyst Mana Gosalia wrote in a Wednesday research note, citing fund costs, loan growth, fees, expenses, provisions and capital.

Morgan Stanley cut its fiscal 2023 and 2024 estimates by 17% and 27% on average for the group, putting them well below current consensus lows. “No one is immune, but (we) favor banks with funding flexibility,” Gosalia wrote, listing M&T Bank (MTB), Webster Financial (WBS), Citizens Financial (CFG), Cullen/Frost Bankers (CFR) and Huntington Bancshares (HBAN).

Those banks showed modest losses at Wednesday’s open.

Zions Upgrade

Baird analyst David George doesn’t agree with Morgan Stanley’s outlook. He upgraded Salt Lake City-based Zions Bancorp (ZION) to outperform from neutral early Wednesday. Sentiment has been abysmal in recent weeks and group weakness is “beyond overdone,” George wrote in a research note. He says market participants appear to be pricing in “permanent profitability destruction,” which Baird sees as unlikely, leaving “significant upside” in ZION stock. George maintained his 60 price target on ZION.

ZION stock, up slightly in premarket trade, fell 2% soon after Wednesday’s open.

The SPDR S&P Regional Banking ETF (KRE), which includes WAL stock, Zions and many other regional banks, fell 1.8% Wednesday morning, not far from recent two-year lows.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

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