‘The small, regional bank business model is unalterably broken,’ analyst says

Also read: Bank stocks rise from lows after New York Community Bancorp triggers worst swoon since Silicon Valley Bank collapse

“The small, regional bank business model is unalterably broken,” Kotowski said. “The sooner the small banks get consolidated the better for us all. The big banks actually have a pretty darn good and resilient business model.”

Kotowski said he continues to favor seven bigger banks that he highlighted in a research note from earlier this week: Bank of America Corp.
BAC,
-1.35%,
Citigroup Inc.
C,
-0.20%,
Goldman Sachs Group Inc.
GS,
-0.04%,
Jefferies Financial Group Inc.
JEF,
-0.39%,
JPMorgan Chase & Co.
JPM,
-0.36%,
Morgan Stanley
MS,
-0.48%
and U.S. Bancorp.
USB,
-1.56%.

Also read: Goldman Sachs, Jefferies stand out among undervalued big banks, Oppenheimer says

Regional banks have a larger exposure to commercial real estate, which has left them vulnerable in the current office space downturn, Kotowski said.

In the case of New York Community Bancorp Inc.
NYCB,
-11.13%
has about 73% of its loan portfolio with some or all ties to real estate, after it acquired distressed Signature Bank last year.

Its loan portfolio in the New York area also includes exposure to multi-family homes with rent regulations as a reality of the local market.

“It just illustrates why small, regional narrow banks are inherently undiversified and in our view a generally flawed business model,” Kotowski said.

To be sure, big banks will face some losses on their office portfolios, he said.

“The nature of having a diversified portfolio is that there will always be losses somewhere on something,” Kotowski said. “This year it will likely be
office, in other years it has been energy, in others farmland. There will always be something.”

But he argued that having a larger footprint will avoid the possibility of having one thing kill a business.

Kotowski said the sell-off in larger banks this week on the heels of New York Community Bancorp was overblown, and said the sector remains undervalued.

Also read: Morgan Stanley upgrades Bank of America, Goldman Sachs and Citi on ‘lightened up’ Basel III capital requirements