Bank Sentiment Turning? What We Learned from Second Quarter Earnings

Expert Insights: Raymond James Analyst David Feaster on Bank Earnings, Market Sentiment, and Future Outlook

Michael Perito, Head of Bank Strategy at Travillian, sat down with David Feaster, Senior Analyst at Raymond James. With 16 years of experience at Raymond James, Feaster offers a wealth of knowledge and insights into the banking sector’s current landscape and prospects.

The conversation is also available on Spotify and Apple Podcasts.

Investor Sentiment Leading into Q2

Perito begins by exploring the mindset of bank investors as they approached 2Q2023. Feaster notes that the optimism around potential Fed rate cuts had improved sentiment significantly. “It’s almost as if there have been two rallies,” he explains.

The first rally was driven by the prospects of a Trump victory and its potential benefits for the M&A market. The second rally centered around the possibility of Fed rate cuts, which boosted investor confidence.

Despite the positive sentiment, Feaster highlights ongoing concerns about the sector’s investability, particularly from a credit perspective. Many investors remain underweight due to uncertainties around a possible credit cycle and whether rate cuts can effectively address these issues.

The increased interest from generalist long-only investors and a shift toward more structural sector allocations, however, suggest a more optimistic outlook.

Key Takeaways from Q2 Earnings

As the conversation shifts to Q2 earnings, Feaster describes the period as “relatively in line with expectations for the first time in a while.” He characterizes the quarter as one of stabilization, with margins, funding costs, and loan growth showing signs of steadying. This stabilization has fostered a sense of optimism among management teams and investors alike.

One major theme emerging from Q2 earnings is the focus on core deposits and funding costs. Feaster emphasizes the importance of core deposit growth in the trajectory toward normalized profitability levels, which many see as a 2026 story. With the 10-year Treasury yield down, there’s relief on the accumulated other comprehensive income (AOCI) side, further aiding the positive outlook.

The Role of Asset Dynamics

Perito and Feaster delve into asset dynamics, discussing how banks have finally caught up on asset pricing. Initially, banks underpriced fixed-rate assets to generate loans and maintain relationships, but they’ve now adjusted to higher pricing levels necessary for maintaining healthy net interest margins.

Feaster notes that while investors are looking past credit concerns due to the prospect of rate cuts, deposit performance remains critical. The franchise value of a bank hinges on its core deposit base, and confidence in the stability of these deposits is key to future growth.

Addressing CRE Credit Concerns

The conversation then turns to commercial real estate (CRE) credit, an area of significant concern for many investors. Feaster opines that CRE may have become a “dirty word” in the banking sector, with management teams focusing on reducing CRE concentration largely due to regulatory pressures.

Despite these concerns, CRE credits have held up surprisingly well. Reserve allocations are increasing, and credit migration is occurring, but Feaster believes losses will be manageable. He highlights the active secondary market for loan pool purchases as a positive sign for the sector.

Navigating M&A and Future Outlook

Looking ahead, Perito asks Feaster about the outlook for M&A in the banking sector. Feaster acknowledges the challenges in deal math due to high seller expectations and low valuations. However, he remains optimistic about the future, noting that conversations and the pipeline for M&A activity are strong.

Feaster also shares his top investment ideas for the back half of the year, highlighting Glacier and Colombia:

  • Glacier: Offers downside protection in unique markets with attractive pricing.
  • Colombia: A pure play on Washington State, experiencing strong growth and potential for outperformance if Fed cuts materialize. Both banks are well-capitalized with clean balance sheets and strong fundamentals.

Optimism Despite Challenges

The interview concludes with Feaster expressing his optimism for the banking sector despite the challenges. He believes that improved market sentiment, potential rate cuts, and a favorable M&A environment will drive future growth.

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