- We would argue that our regional banks in particular screen well from a total payout ratio perspective with most in our coverage screening north of 75% total payout when considering buybacks and dividends.
- Even more interesting has been the Team’s highlighting of the cash return factor as a driver of performance. The Cash Return factor constructed using yield, payout ratio and growth has been the best performer within the S&P this year, gaining 13.8% YTD.
- From a macro perspective, a reacceleration of the easier financial conditions/steeper curve we think could help the near term performance of the banks after this recent pullback. From a short term momentum perspective, the KRE registered a short term oversold reading on 9/1 as measured by the 14-day RSI (see below). Given that the short term consolidation occurred above an upwardly sloping 200 day moving average, we believe it reinforces the KRE’s constructive trend.
Source: Bloomberg
- Within the banks, we also noticed a discernible trend from pre and post 8/18 with the capital markets names having lagged the regionals pre-8/18 only to outperform post given more concern for the spread lenders due to a flattening curve relative to the capex buildout beneficiaries which have predominantly been the capital markets related names.
- From our coverage, we would reiterate the Sector Outperform on Fifth Third (FITB) which has been down an above average 4% as being poised for a catch-up trade here. While investors had to digest a bit of the vagaries of the 3Q/4Q compares due to the Labor Day conversion expense saves being more loaded into 4Q (which is logical), FITB’s 2H’26 estimates in their totality were essentially unchanged. We continue to like the name here and while in line with consensus for 2H’26, we remain ~1.3% ahead for FY’27 on PTPP/share. Importantly, our estimates still do not include any rate hikes for this year or next. With FITB tilted slightly asset sensitive (NII +0.42% in an up 100bps scenario), we believe that if the Fed were to raise short term rates, FITB’s NII would benefit at least as much as advertised as their assumptions on betas have tended to be conservative in the past.
- On the flip side, within the capital markets exposed names, Sector Underperform rated Wells Fargo (WFC) is up 2% since 8/18 as money rotated away from the regionals. We believe that if the curve re-steepens due to easier financial conditions, core regionals like Fifth Third could close the recent gap that has opened up at the expense of Wells Fargo and the broader capital markets sensitive names.
Model Updates
- As part of a some model housekeeping, we’re also updating estimates for Citizens Financial (CFG), Fifth Third (FITB) & Regions Financial (RF).
- CFG – We raise our FY’26 & FY’27 estimates from $5.24/$6.44 to $5.32/$6.51. On a PTPP basis, we’re ~1% ahead for 2H’26 and essentially in line w/consensus for FY’27. While our revenue estimates are largely similar to consensus in FY’27, we assume 4% expense growth (vs. 5% in FY’26) while consensus assumes 3.7%. Our target comes up $1 to $75 which is ~11.5x our new FY’27 estimate.
- FITB – Our FY’26 estimate of $4.13 remains intact while our FY’27 estimate rises to $5.09 from $5.04. On a PTPP basis, we’re 1.3% ahead for FY’27. Our FITB target also rises $1 to $61 or 12x our new FY’27 estimate.
- RF – We raise our FY’26 & FY’27 estimates from $2.58/$2.83 to $2.66/$2.86. The majority of the delta in our ’26 estimate comes from a lower provision. On a PTPP basis, we’re essentially in line for 2H’26 along with FY’27. Our target remains $31.
