Investors have demonstrated an increasingly bullish outlook toward banking stocks. This trend is primarily fueled by indications from the Federal Reserve that no further rate hikes will be instituted this cycle. However, despite the keen attention given to bank stocks, bank profits are predicted to face continued pressure.

Regional banks Wintrust Financial Corporation (WTFC) and Commerce Bancshares, Inc. (CBSH) are set to announce the results for the quarter that ended on December 31, 2023, soon.

Analysts expect WTFC’s revenue and EPS for the fiscal fourth quarter of 2023 (ended December 2023) to be $579.32 million and $2.52, up 5.2% and 13.1% year-over-year, respectively. On the contrary, CBSH’s revenue and EPS for the same quarter are expected to decline 4.1% and 14.3% year-over-year to $385.93 million and $0.85, respectively.

Given this backdrop, let’s further analyze as to why WTFC should be kept on one's watchlist for better entry opportunities, while CBSH should be best avoided. But first, let’s look at what’s shaping the banking industry before delving deeper into the fundamentals of the two stocks.

2023 presented a challenging landscape for banking institutions, with significant operational and macroeconomic hurdles arising. Despite these challenges, the sector demonstrated notable resilience, navigating the complexities effectively. Owing to escalating interest rates, banks saw an uplift in their revenue streams.

While higher interest rates can indeed be beneficial for banks, they have the potential to curtail loan growth by pushing up borrowing and deposit costs. However, the prospect of future reductions could stimulate the demand for goods and services, triggering an increase in bank lending accordingly.

Nevertheless, there has been a growing cloud of pessimism looming over the banking sector. The most formidable contributor to this negativity has been the profound decline in profitability. Approximately 75% of bank stocks in 2022 saw price-to-book ratios dipping below 1. Concurrently, price-to-earnings multiples plummeted to nearly half of what they were in 2008.

Similarly, shareholder returns on bank stocks have consistently fallen behind those of major market indexes since the global financial crisis, with this gap progressively broadening over time.

Looking ahead, Boston Consulting Group predicts that even if banks make substantial investments in productivity and undergo drastic simplifications in their operations, profitability will likely remain under strain. This pressure owes to mounting capital requirements and intensifying competition from emerging players in the sector, predominantly fintech firms.

With these trends in mind, let's delve into the fundamentals of the two Midwest Regional Banks stock picks, starting with the weakest from the investment point of view.

Stock #2: Commerce Bancshares, Inc. (CBSH)

CBSH operates as the bank holding company for Commerce Bank. It provides retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses in the U.S. It operates through Consumer; Commercial; and Wealth segments.

CBSH’s forward non-GAAP P/E of 14.36x is 39.9% higher than the industry average of 10.26x. Likewise, its forward Price/Sales of 4.38x is 67.2% higher than the industry average of 2.62x. Moreover, its forward non-GAAP PEG multiple of 34.71 is significantly higher than the industry average of 1.50.

For the fiscal third quarter that ended September 30, 2023, CBSH’s revenue stood at $391.50 million, while its net interest income came at $248.55 million. Moreover, net income attributable to CBSH and net income per common share came at $120.60 million and $0.96, down 1.8% and 1% year-over-year, respectively.

For the nine months that ended September 30, 2023, its net cash provided by operating activities declined 21.7% year-over-year to $367.75 million.

Street expects CBSH’s revenue and EPS in the fiscal first quarter ending March 2024 to be $379.07 million and $0.78, down 3% and 14% year-over-year, respectively.

The stock has declined marginally intraday to close the last trading session at $52.85. Over the past year, it has declined 20.2%.

CBSH’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Growth and Value. Within the Midwest Regional Banks industry, it is ranked #34 out of 45 stocks.

To see additional POWR Ratings for Momentum, Stability, Sentiment, and Quality for CBSH, click here.

Stock #1: Wintrust Financial Corporation (WTFC)

WTFC is a financial holding company. It operates in three segments: Community Banking; Specialty Finance; and Wealth Management.

On November 24, 2023, WTFC paid a quarterly dividend of $0.40 per share of outstanding common stock to the stockholders. The company has a record of paying dividends for 20 consecutive years, reflecting upon the company’s strong cash generation ability.

It pays a $1.60 per share dividend annually, translating to a 1.70% yield on the current share price. Its four-year average dividend yield is 1.82%. The company’s dividend payouts have grown at a CAGR of 12.6% over the past three years and 16.1% over the past five years.

WTFC’s forward non-GAAP P/E of 9.19x is 10.5% lower than the industry average of 10.26x. Likewise, its forward Price/Sales of 2.52x is 3.9% lower than the industry average of 2.62x. However, its forward Price/Book multiple of 1.21 is 4.9% higher than the industry average of $1.15.

For the fiscal third quarter that ended September 30, 2023, WTFC’s net revenue stood at $574.84 million, up 14.3% year-over-year. Its net interest income increased 15.2% from the year-ago quarter to $462.36 million. Moreover, net income and net income per common share came at $164.20 million and $2.53, up 14.9% and 14.5% year-over-year, respectively.

However, for the nine months that ended September 30, 2023, its net cash provided by operating activities declined 53% year-over-year to $496.45 million.

Street expects WTFC’s revenue in the fiscal first quarter ending March 2024 to be $573.34 million, up 1.3% year-over-year, while its EPS is expected to decline 15.1% year-over-year to $2.38.

The stock has declined 1.2% intraday to close the last trading session at $93.99. However, over the past nine months, it has gained 32.5%.

WTFC’s fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to a Neutral in our proprietary rating system.

The stock has a C grade for Growth, Value, Momentum, Stability, and Sentiment. Within the same industry, it is ranked #25.

Click here to access WTFC’s additional rating (Quality).

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

CBSH shares were unchanged in premarket trading Tuesday. Year-to-date, CBSH has declined -1.05%, versus a 0.29% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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