KBW Bullish On Flagstar, Sees Multiple's Expansion

Flagstar Bancorp Inc FBC has seen a decline of 7.2 percent in its share price over the past two days. On June 27, the company announced that it has received approval to redeem its TARP preferred stock.

Bose George of Keefe, Bruyette & Woods upgraded the rating on the company from Market Perform to Outperform, with a price target of $26.

Regulatory Approval To Drive Growth

“We think the regulatory approval opens the door for a lifting of the company's OCC consent order and further growth. As the company grows the mix of its earnings attributable to banking operations, we think the valuation multiple will improve,” George mentioned.

In the near term, the analyst expects Flagstar Bancorp to benefit from the strength in the mortgage market.

Given that the company has now seen several quarters of stable earnings, George believes management has been successful in turning operations around and that Flagstar Bancorp should continue to deliver consistent profitability.

Related Link: Benzinga's Top Upgrades

Mortgage Growth

George also believes that “the recent decline in rates is likely to boost mortgage banking profitability if rates remain low,” and that “the mortgage industry is operating close to capacity so an increase in demand should boost gain-on-sale margins.”

Any increase in gain-on-sale margins is likely to flow through to the company’s bottom line, which in turn would bring down the efficiency ratio.

Management is targeting an efficiency ratio in the 60s percent, from the 75 percent in 2016 and expects to achieve this mostly through revenue growth.