Discover 3 Regional Bank Stocks To Sell According To SA’s Quant System

A new round of regional banking woes erupted in late January when New York Community Bancorp (NYCB) reported a Q423 loss of over $250 million and cut its dividend, partly attributed to writing off bad commercial real estate (CRE) loans. Banks with high CRE/Tier 1 capital ratios (over 300%) are in regulator cross-hairs. This article reviews three stocks with high CRE ratios and “Sell” ratings generated by Seeking Alpha’s systematic quantitative model.

Regional Banks: Commercial Real Estate Overload

The SA Quant Team recently warned that New York City Bank is at risk of future dividend cuts after the bank sliced its dividend and Q4 results surprised to the downside. NYCB’s exposure to commercial real estate has triggered more scrutiny of regional banks and the slumping value of commercial properties worldwide. The U.S. banking industry CRE concentration ratio has soared in the past ten years, according to quarterly regulatory filings compiled by BankRegData.

In a speech on February 16, Fed Vice Chair for Supervision, Michael Barr, said regulators are “closely focused” on bank CRE lending in light of pressure on commercial real estate valuations driven by reduced office space demand. Barr noted that in the current environment of “heightened risk,” the Fed has stepped up the pace of firm downgrades.

According to the Mortgage Bankers Association, nearly 20% ($929 billion) of $4.7 trillion in outstanding commercial mortgages will mature this year, up 28% from 2023. Fitch Ratings last month said CRE loan performance would further weaken and maintained a “deteriorating” outlook on the U.S. office sector for 2024. Fitch cited sustained higher interest rates, expected economic slowdown, secular hybrid working shift, and tighter access to capital. Fitch projected office delinquencies to increase from 3.3% in 2023 to 8.1% in 2024 and 9.9% in 2025. During an interview last week, former U.S. Treasury Chief Larry Summers succinctly captured the essence of the dilemma.

Regulators are right to be concerned about commercial real estate… The chronic problem in banking is a failure to pay attention to the market value of assets,” Summers told Bloomberg, adding that the problem is particularly pronounced with CRE, where there is not always a liquid market for properties.

It is impossible to predict what this exactly means for stocks on the high-CRE watch list. However, according to SA’s Quant rating system, some high-CRE ratio stocks also have characteristics historically associated with poor future performance.

3 Sell-Rated Regional Banks With High CRE Ratios

Three banks with CRE ratios of more than 300%, according to filings compiled by BankRegData, and Sell quant ratings include WaFd, Columbia Banking System, Inc., and Independent Bank Corp.. WAFD’s CRE ratio has climbed nearly 250% in the past ten years and now sits at 366%. COLB is the holding company of Umpqua Bank (319% CRE ratio), and INDB operates as the holding company for Rockland Trust Company (318% CRE ratio).

Quant Ratings are objective, data-driven, unemotional evaluations of each stock based on company financial statements, price performance, and analyst estimates. SA gathers over 100 metrics for each stock and grades them versus the sector median across five factors: Value, Growth, Profitability, Momentum, and EPS Revisions. The first three Factor Grades aim to identify mispriced securities and the other two address timeliness.

Hence, a stock’s Quant Rating aims to provide a single snapshot that’s potentially actionable for both short-term and long-term investors. Stocks rated Sell or worse by SA’s Quant rating system have massively underperformed the S&P 500.

Although they have not performed as poorly as NYCB, the three high-CRE regional bank stocks rated Sell are all down double-digits year-to-date. In the past 12 months, COLB is -40%, INDB -33%, and WAFD -20%.

All three stock Sell Ratings are largely driven by poor or below-average Momentum, Growth, and EPS Revision Quant Factor Grades. All three stocks have average profitability scores, although they fared better in Valuation.

WaFd, Inc. (NASDAQ: WAFD)

• Market Capitalization: $1.86B
• Quant Rating: Sell
• Quant Sector Ranking (as of 2/20/24): 630 out of 691
• Quant Industry Ranking (as of 2/20/24): 223 out of 264

WaFd, Inc. is the holding company of Washington Federal Bank, which operates in eight Western states, serving consumers, mid-sized and large businesses, and owners and developers of commercial real estate. WAFD is within the bottom 15% of Regional Bank Stocks and the bottom 10% in the Financial sector, with a Sell Quant Rating of 2.15. Nearly a year ago, WAFD’s Quant Rating was in Buy or Strong Buy territory for two months, gradually falling due to missed earnings and declines in Growth, Momentum, and EPS Revision grades. WAFD has had a Sell Quant Rating since October 2023, and the rating has dropped over 20% in the past 30 days.

WAFD, like the other two stocks, has a warning banner indicating that the stock is at high risk of performing badly. WAFD has characteristics historically associated with poor future stock performance, including negative EPS revisions and decelerating momentum compared to other financial stocks. WAFD has missed its EPS target in three of the past four quarters and has had two earnings down revisions in the past 90 days. In the past three months, WAFD’s FY24 consensus EPS target has been lowered by 26% and 40% in six months. According to consensus estimates, WAFD EPS is projected to drop 28% YoY to $2.75 for FY24.

Columbia Banking System, Inc. (NASDAQ:COLB)

• Market Capitalization: $3.86B
• Quant Rating: Sell
• Quant Sector Ranking (as of 2/20/24): 628 out of 691
• Quant Industry Ranking (as of 2/20/24): 175 out of 264

COLB operates as the holding company of Umpqua Bank, which provides commercial and retail banking services. The Tacoma-based bank operates in eight Western states. COLB’s stock closed down 21% on 1/25 after a Q4 earnings miss and downgrades from three analysts. D.A. Davidson said the results “dashed” hopes of net income stability, iron-clad credit quality, and attractive return on capital. COLB EPS of $0.44 missed by -$0.35, and revenue of $519 million missed by -$6.57 million. COLB missed the EPS target in six of the previous eight quarters. COLB has a startling 10 EPS down revisions in the past 90 days, more than double the sector median. The EPS target was lowered by 25% in the last three months, and according to consensus estimates, EPS is projected to fall 7% in FY24.

Independent Bank Corp. (NASDAQ: INDB)

• Market Capitalization: $2.30B
• Quant Rating: Sell
• Quant Sector Ranking (as of 2/20/24): 664 out of 691
• Quant Industry Ranking (as of 2/20/24): 249 out of 264

Independent Bank Corp. operates as the holding company for Rockland Trust Company, which provides commercial banking products and services to individuals and small-to-medium sized businesses primarily in Massachusetts. In addition to D’s in Momentum and EPS Revisions, INDB has a D in Growth, highlighted by forward EBIT growth of -8%, forward EPS growth of -4%, and ROE growth (FWD) of -8%.

INDB has had four down revisions in the past 90 days, and according to the consensus estimate, EPS is projected to fall by 14% YoY in FY24 and revenue by 6%.

The high interest-rate environment, vacancies, and increased scrutiny by the Fed and investors surrounding regional banks may have stirred consternation in holding these types of securities. Investors need not make decisions on fear alone. Data-driven and actionable intelligence can help in determining which stocks to avoid. The objective, unemotional methodology used by the SA Quant Team in this article showcases three stocks worth selling. Investors can also screen for stocks with Sell and Strong Sell ratings on their own amid the uncertainty of a renewed banking crisis.

Concluding Summary

U.S. federal regulators are targeting banks with high CRE ratios in the wake of NYCB’s troubles. Investors concerned about regional bank stocks can look to SA Quant Ratings for guidance. SA’s Quant team identified three regional banks from the high-CRE ratio list that have characteristics associated with poor future stock performance according to the Quant rating system. All three stocks are rated Sells based on subpar quantitative metrics. Screening for stocks with strong fundamentals is vital, given the delinquency rates on commercial mortgage-backed securities expected to rise in 2024. In addition to many top stocks, if you’re seeking a limited number of monthly ideas from the hundreds of top quant stocks, consider exploring Alpha Picks.