A trio of midcap banks have emerged as “bargain” buys, according to Wells Fargo. They also offer a combination of potential share growth and income. The SPDR S & P Regional Banking ETF (KRE) enjoyed a surge of nearly 15% in November, lifted by hopes for deregulation and a smoother path to mergers and acquisitions under the incoming Trump administration. That enthusiasm fizzled into year-end, however, as the ETF slid more than 10% in December and the 10-year Treasury yield climbed. However, the best is yet to come for midcap banks, according to Wells Fargo analyst Timur Braziler. Last week, he upgraded three midcap names – members of the KRE – to overweight from equal weight: Webster Financial , Banc of California and Columbia Banking System . The analyst recommended that investors “buy the bargains.” “The group re-rated quickly post election on the expected benefits in 2025, and now it’s time for [earnings per share] revisions to do their part,” Braziler wrote. “We look for broader and more meaningful [net investment income]/EPS inflection coming in 1Q25, and we would be buyers on any weakness from either 4Q results or from the long-end of the curve backing up.” Webster Financial Webster Financial in Stamford, Connecticut, has several developments in its favor. “A combination of top-quartile profitability and the potential for better loan growth should result in WBS narrowing the current 3x EPS discount to the group,” Braziler wrote. “Adding to potential tailwinds is the improvement in the NYC [commercial real estate] outlook and increased scarcity value for WBS, now being the largest remaining independent Northeast regional bank,” he added. The “crown jewel” of Webster’s deposit base is its $9 billion health-care vertical, which accounts for 13% of deposits, Braziler said. Most of these assets come from health savings account deposits, and HSA deposit costs at the company have remained below 20 basis points through the rate-hiking cycle, the analyst said. WBS 1Y mountain Webster Financial over the past 12 months “The competition from large institutions, like Fidelity, have disintermediated some of the potential growth of the HSA vertical, but the cost profile has remained as advertised,” he said. Braziler’s price target of $75 calls for nearly 40% upside from Friday’s close. Webster Financial’s shares are up about 9% in the past 12 months, and the stock offers a dividend yield of around 3%. Banc of California Banc of California, based in Los Angeles, should see share gains in 2025, according to Braziler. “A self-help story that should see more EPS upside vs. the group as management continues to work on improving profitability on both sides of the balance sheet,” he wrote. Shares are up more than 15% over the past 12 months. The stock has a dividend yield of 2.7%. Going forward, growth in demand deposit accounts, or DDA, will help lift earnings per share, the analyst said. These so-called DDAs are essentially checking accounts “Management’s ability to grow DDA balances pre-Covid, and even more impressive, the ability to maintain those balances during rising rates, when the rest of the group was seeing large outflows, has been the most compelling part of the BANC story,” Braziler said. The analyst’s $20 price target assumes about 35% upside from Friday’s close. Columbia Banking System The Tacoma, Washington-based Columbia happens to be “a leading dividend yield trading at a steep discount to the group and historical valuation,” Braziler said. “We believe the current 3x discount on the FY25 EPS presents an attractive opportunity for what should be a core holding for regional bank investors,” he said. There is an opportunity to grow net interest margins – that is, the difference between the interest income banks generate and the amount of interest paid out to depositors. That’s because $8 billion of certificates of deposit and wholesale funding will come due through the first quarter of 2025, Braziler said. Shares are up 6% over the past 12 months. The stock has a dividend yield of 5.4%. Braziler’s $35 price target suggests 33% upside from Friday.
