BofA/Merrill Issues Scathing Report on Regionals, Declares ‘Hope is Not a Thesis’

The math is simple for BofA: BREXIT means the Fed rate hikes are off the table, which means spreads will remain tight and banks will be under pressure. A super low rate environment is toxic for the banks. Look at the condition of the European banks, trying to deal with negative yields.

At any rate, they equate the seemingly low multiplies at many regionals to value traps and suggest avoiding them at all costs.

“Regional bank investors will remain mostly focused on higher rates, revenue growth, and M&A potential – Brexit negatively impacts all three,” writes Najarian. “As such, regional banks stocks are to us, as a group, potential value traps from here.”

For the large-cap regionals, Bank of America Merrill Lynch cut Comerica Inc. and Zion Bancorporation to ‘underperform’ from ‘neutral,’ lowering its price targets to $36 from $45 and $24 from $29, respectively. Najarian also reduced Regions Financial Corp. to ‘neutral’ from ‘buy,’ trimming her price target to $8.50 from $9.50.

“We anticipate one specific counterargument to our more cautious stance: history has suggested that the best time to buy bank stocks would be when they trade below tangible book value (TBV) – if there are no share count issues, which is our base case,” the analyst explained. “But, this post-crisis macro backdrop, marked by stubbornly low interest rates, is unprecedented. So, depressed valuation on TBV could persist near-term – as they have in Japanese bank stocks.”