BankUnited Downgraded By Morgan Stanley On Headwinds Facing Mid-Cap Banks

Mid-cap banks are plagued by multiple issues that are hurting growth, according to Morgan Stanley.

The Analyst

Analyst Ken Zerbe downgraded shares of BankUnited BKU from Overweight to Equal-weight and lowered the price target from $46 to $42.

The Thesis

The primary headwind for mid-cap banks is weaker commercial real estate growth, Zerbe said in the Tuesday downgrade note. (See his track record here.)

The shift is driven by aggressive pricing and terms from non-bank lenders such as insurance companies and debt funds that are leading CRE borrowers away from banks, the analyst said.

Some of the other headwinds for mid-cap banks include the negative impact of tariffs on material costs, weaker consumer lending and lower commercial-line utilization, in Morgan Stanley's view. 

Zerbe sees the potential for net interest margin pressure, as he said a lower average 1-month LIBOR poses incremental risk to Q3 earnings. The analyst expects a mere 1-basis point increase in NIMs in Q3 compared to a 6-point increase in Q2.

Citing the weaker loan growth and NIM pressure, Morgan Stanley said it is reducing EPS estimates for 18 of its 28 banks under coverage. 

BankUnited is facing the greatest risk from the heightened competition and its decision to de-emphasize New York City CRE, given that the CRE portfolio accounted for 43 percent of its loans compared to 27 percent for peers, Zerbe said. 

Morgan Stanley expects the bank's CRE balances to decline 2.4 percent in 2018.

The CRE declines exacerbate BankUnited's slowing overall core loan growth, the analyst said. 

Morgan Stanley is also skeptical of whether bank's deposit-gathering strategies are helping to meaningfully improve its NIM.

The Price Action

BankUnited shares have lost about 7 percent year-to-date.

Related Links:

Benzinga's Top Upgrades, Downgrades For September 18, 2018

Macquarie Downgrades Wells Fargo, Comerica, Sees Peak Bank Margins Ahead

Photo by Dustin Blitchok.