Macquarie Downgrades Wells Fargo, Comerica, Sees Peak Bank Margins Ahead

It’s been a slow grind higher for bank investors since 2008, but one Wall Street analyst said Friday that the margin cycle for banks is finally showing signs of peaking.

The Analyst

Macquarie Research analyst David Konrad downgraded Comerica Incorporated (NYSE: CMA) from Outperform to Neutral and lowered the price target from $106 to $104.

Konrad also downgraded Wells Fargo & Co (NYSE: WFC) from Outperform to Neutral and reiterated a $63 price target.

The Thesis

September quarter bank earnings reports will come with very cautious guidance and red flags for investors, Konrad said in the Friday downgrade note. (See his track record here.)

“Due to compressing LIBOR spreads and rising funding costs, we believe industry is in the late stages of the NIM story with margins peaking in [the second quarter of 2019],” the analyst said. 

Macquarie's estimates are below the consensus for 75 percent of the regional banks it covers, and the sell-side firm expects net interest margins to revert to their mean after the LIBOR has stagnated in recent months. LIBOR is a benchmark global interest rate that some of the world’s largest banks charge each other for short-term loans.

Konrad said the banks that will be hit hardest by the stagnant LIBOR are those with the highest yield correlation to the benchmark, including Citizens Financial Group Inc (NYSE: CFG), Fifth Third Bancorp (NASDAQ: FITB), M&T Bank Corporation (NYSE: MTB) and Comerica.

Wells Fargo stock has shifted from a 9-percent valuation discount to peers to mostly in-line with peers following positive CCAR result, Konrad said. The bank will have difficulty hitting Street earnings targets in the near-term, and Macquarie is projecting 4-percent and 3-percent EPS misses in the next two quarters, he said. Looking ahead to 2019 and 2020, Macquarie is about 1 percent above consensus EPS forecasts for Wells Fargo. 

Price Action

Comerica shares were slipping 0.48 percent at the time of publication Friday, while Wells Fargo was down 0.74 percent. 

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Photo by Dustin Blitchok.