Magazine article American Banker

Commerce, Seven Other Regionals Are Downgraded

Magazine article American Banker

Commerce, Seven Other Regionals Are Downgraded

Article excerpt

Oppenheimer & Co. Inc. downgraded shares of eight regional banking companies Thursday, saying it expects them to report lower earnings and narrower net interest margins this year and next.

The possibility of an inverted yield curve also threatens the eight, Oppenheimer analysts wrote.

Commerce Bancorp Inc. of Cherry Hill, N.J., and North Fork Bancorp Inc. of Melville, N.Y., were among five they downgraded to "neutral" from "buy." The others were SunTrust Banks Inc. of Atlanta; Compass Bancshares Inc. of Birmingham, Ala.; and Republic Bancorp Inc. of Ann Arbor, Mich.

Downgraded from "neutral" to "sell" were Huntington Bancshares Inc. of Columbus, Ohio; Associated Banc-Corp of Green Bay, Wis.; and Sky Financial Group of Bowling Green, Ohio. Analysts Terry J. McEvoy and Jennifer A. Thompson downgraded the eight companies in separate research notes.

Ms. Thompson wrote that Commerce is more exposed to a flattening yield curve than some of its peers, given its funding and asset mix. However, its deposit growth, typically above 20% a year for the $33.4 billion-asset company, should "mitigate" exposure to margin compression, as should its low-cost deposit base, she wrote.

"When the interest rate environment improves, Commerce should significantly outperform its peers," Ms. Thompson wrote. "However, the next few months will prove to be a difficult operating environment for a company whose net interest margin is so sensitive to rising short rates and whose earning-asset portfolio is dominated by securities."

Kevin St. Pierre, an analyst at Sanford C. Bernstein & Co., agreed. "Commerce, for the longest time, claimed that the reason their margins were stable was because it reinvested half of the balance sheet each year," he said Thursday. "It's true they reinvested half the balance sheet; what we're seeing now is how that can cause significant harm to the net interest margin if you're reinvesting those cash flows when the curve is flat. …

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