JPMorgan Downgrades Signature Bank: 'We Would Lock In Losses And Trim Exposure'

Signature Bank SBNY reported a sharp increase in earnings Thursday in its second-quarter report, helped by a decrease in the provision for loan losses, with most of it tied to the New York City taxi medallion portfolio.

The Analyst

JPMorgan analyst Steven Alexopoulos downgraded shares of Signature Bank from Overweight to Neutral and lowered the price target from $150 to $130.

The Thesis

The credit challenge arising out of the taxi medallion portfolio is now behind Signature Bank, but net interest margin pressure is likely to keep a lid on the shares, Alexopoulos said in a Friday note. (See the analyst's track record here.) 

The analyst projects another re-rating in shares as the commercial real estate lending environment turns irrational. The company is likely to see intensified volatility in its return from deposits, as over 50 percent of deposits are parked in money market accounts, Alexopoulos said. 

The spread between two-year and 10-year notes is in the tightest range in over a decade and is likely to become even flatter over the next few months, the analyst said.

Net interest margin pressure at Signature Bank is likely to get worse before it gets better, Alexopoulos said. Another noteworthy risk is the intensifying competition for CRE lending, he said. 

"Although SBNY shares might appear 'cheap' on the surface, given the prospects that this former 'beat-and-raise' story now becomes more of a 'miss-and-lower' name, we would lock in losses and trim exposure." 

JPMorgan no longer sees the roadmap for company outperforming its peers, Alexopoulos said. The firm lowered its EPS estimates for 2018-2020. 

The Price Action

Signature Bank shares have shed about 14 percent year-to-date.

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