In this article, we will be taking a look at the 11 best local bank stocks to buy according to hedge funds. To skip our detailed analysis of the banking industry, you can go directly to see the 5 Best Local Bank Stocks to Buy According to Hedge Funds.
The 2023 Banking Crisis
In March 2023, the US banking industry witnessed a severe crisis with the failure of three small-to-mid-sized banks. These included Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (NASDAQ:SBNY). The collapse of these three banks sent the US public into a panic. The SVB collapse, in particular, led to a significant uproar considering the fact that the bank’s clients included major technology companies and wealthy individuals who had made large deposits with the bank. Rising interest rates had led to these three banks suffering large unrealized losses on US Treasury bond holdings, and the resulting failures of these institutions set in motion the 2023 banking crisis.
The banking industry has managed to settle down somewhat since March, especially since the Federal Reserve made promises to honor the deposits of the three failing banks. Here’s a comment from the Federal Reserve’s Chair, Jerome Powell, on the situation, made this March:
“You have seen that we have the tools to protect depositors when there’s a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools. I think depositors should assume that their deposits are safe.”
Despite the above statement, it is to be noted that Chairman Powell sidestepped the question of whether the Federal Reserve is prepared to bail out the depositors of banks with less than $1 billion in assets in the event that such a bank fails. Thus while the Fed seems to have extended a guarantee for the deposits of larger banks, the situation seems unclear when it comes to smaller banks and their depositors, throwing the clientele of such banks and the institutions into a frenzy over what to expect from the Fed in the event that the banking crisis worsens.
Big Banks May Be In The Clear, But What About Small Banks?
Additionally, according to CNBC, Treasury Secretary Janet Yellen also commented this March that not all banks in the US, regardless of their size, would be fully insured. So while US bank regulators managed to fully insure the deposits of SVB and Signature Bank (NASDAQ:SBNY), this treatment has not been promised to all other US banks in the event of a collapse, leaving smaller banks and their depositors in a state of paranoia. This paranoia also led to smaller US banks facing increased amounts of withdrawals while mega-banks began gaining in deposits. According to a Wall Street Journal article from this March, after the SVB collapse, the 25 largest banks in the US gained about $120 billion in deposits, as shown by Federal Reserve data. At the same time, smaller US banks suffered from losses amounting to $108 billion over the same period.
In his interview on CNBC this March, Nelson Peltz, the founder of Trian Fund Management, commented on this situation:
“All the money as we know is leaving the small community banks and the regional banks and going to the three or four largest banks in America, and that’s a very dangerous situation, and it’s got to be resolved. What I would do is this: I would put together a plan that applies only to the US banks, and that the Fed gets an insurance premium for any money you leave in a US-accredited bank over $250,000. So you’re creating income for the Fed, and in exchange for that they insure the coverage.”
The plan put forth by Peltz envisions a guarantee from the Fed for all bank deposits regardless of the bank’s size while also charging the bank’s customers for that insurance. However, no such policy has been adopted by the Fed at present, leaving local US banks in a state of uncertainty while large banks like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Citigroup Inc. (NYSE:C) continue to gain. As of July 9, for instance, JPMorgan Chase & Co. (NYSE:JPM) is up by 6.82% year-to-date, while shares of smaller banks like Huntington Bancshares Incorporated (NASDAQ:HBAN) are down by 22.77% year-to-date.
While the situation seems dire, it should be noted that the outflow of deposits from small banks cooled down since the initial frenzy right after the collapse of SVB and the other two banks, as CNBC reported near the end of March. This means that smaller US banks may have more hope than initially expected. As such, the investing public is looking for the best regional bank stocks to buy now or the best small bank stocks to invest in as the banking crisis cools down. As such, we have compiled a list of these stocks below.
Photo by Mikel Parera on Unsplash
Our Methodology
We selected local American bank stocks that were the most popular among the hedge funds tracked by Insider Monkey during the first quarter of 2023 to compile our list below. The stocks are ranked based on the number of hedge funds holding stakes in them, from the lowest to the highest number.
Best Local Bank Stocks to Buy According to Hedge Funds
11. PacWest Bancorp (NASDAQ:PACW)
Number of Hedge Fund Holders: 22
Brandon King at Truist Securities has a Hold rating on PacWest Bancorp (NASDAQ:PACW) shares as of June 29, alongside a $10 price target.
PacWest Bancorp (NASDAQ:PACW) is a local US bank based in Los Angeles, California. It offers business banking and treasury management services.
PacWest Bancorp (NASDAQ:PACW) was spotted in the 13F holdings of 22 hedge funds during the first quarter, with a total stake value of $139 million.
Manole Capital Management mentioned PacWest Bancorp (NASDAQ:PACW) in its second-quarter 2023 investor letter:
“25 years ago, there were 13,000 financial institutions, but now there’s really only 4,000 banks left. Will we continue to see consolidation? With JP Morgan buying First Republic, the latest worry seems to PacWest Bancorp (NASDAQ:PACW). In a recent security filing, it reported that it lost 9.5% of its total deposits, with most of it happening over two days. For PacWest and other regional banks, they are fighting a two-sided battle. On one side, investors are finally demanding higher yields and the media is highlighting the risk of keeping assets at struggling banks. On the other side, short sellers are eager to identify the next possible “weak (banking) link”.”
10. East West Bancorp, Inc. (NASDAQ:EWBC)
Number of Hedge Fund Holders: 23
East West Bancorp, Inc. (NASDAQ:EWBC) is a regional bank based in Pasadena, California. It is the bank holding company for East West Bank.
Truist Securities analyst Jennifer Demba holds a Buy rating on East West Bancorp, Inc. (NASDAQ:EWBC) shares as of June 29, alongside a $62 price target.
Our hedge fund data shows 23 funds long East West Bancorp, Inc. (NASDAQ:EWBC) in the first quarter, with a total stake value of $362 million.
Citadel Investment Group held 1.7 million shares in East West Bancorp, Inc. (NASDAQ:EWBC) at the end of the first quarter, making it the largest shareholder in the company.
Aristotle Capital Management mentioned East West Bancorp, Inc. (NASDAQ:EWBC) in its first-quarter 2022 investor letter:
“We purchased East West Bancorp in the third quarter of 2017; however, our history with the business stretches back further having twice previously invested. Companies we consider to be high-quality like East West tend to remain high quality, and we have long admired the business for its uniqueness among the otherwise homogenous U.S. banking industry. Its dominant market share built over generations in Asian communities – and difficult-to-replicate experience due to culture, geography and business practices – create distinct competitive advantages in our view. During our most recent holding period, the bank achieved sustained loan growth, a catalyst we identified, through its continued leadership position as the financial “bridge” for customers doing business in the U.S. and China. Moreover, East West also realized market share gains in its headquarters state of California. With these catalysts nearing completion, we decided to exit our investment to fund the purchase of Oshkosh. As always, we will continue to study East West and, in the future, may once again find an opportunity to be investors.”
Like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Citigroup Inc. (NYSE:C), East West Bancorp, Inc. (NASDAQ:EWBC) is a bank stock worth keeping an eye on in the second half of 2023.
9. Regions Financial Corporation (NYSE:RF)
Number of Hedge Fund Holders: 29
Betsy Graseck at Morgan Stanley reiterated an Overweight rating on Regions Financial Corporation (NYSE:RF) shares on June 26, alongside a $25 price target.
Regions Financial Corporation (NYSE:RF) is a regional bank providing financial services to individual and corporate customers. It is based in Birmingham, Alabama.
There were 29 hedge funds long Regions Financial Corporation (NYSE:RF) in the first quarter. Their total stake value in the company was $221 million.
8. Huntington Bancshares Incorporated (NASDAQ:HBAN)
Number of Hedge Fund Holders: 31
We saw 31 hedge funds long Huntington Bancshares Incorporated (NASDAQ:HBAN) at the end of the first quarter, with a total stake value of $313 million.
Huntington Bancshares Incorporated (NASDAQ:HBAN) is another regional bank on our list. It is based in Columbus, Ohio, and operates as the bank holding company for The Huntington National Bank.
As of July 7, Morgan Stanley’s Betsy Graseck holds an Overweight rating on Huntington Bancshares Incorporated (NASDAQ:HBAN) shares alongside a $12 price target.
Citadel Investment Group was the largest shareholder in Huntington Bancshares Incorporated (NASDAQ:HBAN) at the end of the first quarter, holding 14.9 million shares.
7. KeyCorp (NYSE:KEY)
Number of Hedge Fund Holders: 34
KeyCorp (NYSE:KEY) is a diversified banking company and the holding company for KeyBank National Association. It is based in Cleveland, Ohio.
Gerard Cassidy at RBC Capital maintains an Outperform rating on KeyCorp (NYSE:KEY) shares as of June 13, alongside a price target of $14.
Out of the 943 hedge funds tracked by Insider Monkey in the first quarter, 34 funds were long KeyCorp (NYSE:KEY), with a total stake value of $573 million.
6. M&T Bank Corporation (NYSE:MTB)
Number of Hedge Fund Holders: 37
M&T Bank Corporation (NYSE:MTB) had 37 hedge funds long its stock in the first quarter. Their total stake value in the company was $497 million.
M&T Bank Corporation (NYSE:MTB) is the bank holding company for Manufacturers and Traders Trust Company and Wilmington Trust, National Association. It is based in Buffalo, New York.
Morgan Stanley analyst Manan Gosalia holds an Overweight rating and a $155 price target on M&T Bank Corporation (NYSE:MTB) shares as of July 7.
Here’s what The London Company said about M&T Bank Corporation (NYSE:MTB) in its first-quarter 2023 investor letter:
“M&T Bank Corporation (NYSE:MTB)- MTB underperformed, along with other regional banks, on the failures of Silicon Valley Bank and Signature Bank and fear of broader contagion. Importantly, MTB has neither the same kind of client concentration risk nor duration risk that impacted Silicon Valley Bank. Particularly with respect to duration risk, MTB was an outlier in its conservatism with respect to buying shorter-term securities in a very low rate environment. MTB does have exposure to commercial real estate, including office real estate. While we do expect some elevated credit losses in this portion of the loan portfolio, we note MTB has historically been an effective manager of risk, and we remain confident that management has behaved with appropriate caution.”
Like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Citigroup Inc. (NYSE:C), M&T Bank Corporation (NYSE:MTB) is a bank stock that is popular among elite hedge funds today.
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Disclosure: None. 11 Best Local Bank Stocks to Buy According to Hedge Funds is originally published on Insider Monkey.