On Thursday, Raymond (NS:RYMD) James made a significant adjustment to its outlook on Hilltop Holdings (NYSE:NYSE:HTH), downgrading the company's stock from Market Perform to Underperform.
The firm's analysis indicates a challenging road ahead for Hilltop Holdings, whose year-to-date performance has lagged behind its peers and broader market indices, with a 16.4% decline compared to a 16.5% and 23.1% gain for the BANK index and S&P 500 respectively through December 18, 2024.
The downgrade stems from concerns about the company's fee-heavy business structure, which is approximately 65% based on its third-quarter 2024 earnings. Hilltop's significant involvement in mortgage and securities operations is expected to suffer due to a higher-for-longer rate backdrop.
Raymond James anticipates that the profitability of Hilltop Holdings will not see substantial improvement through 2026, projecting a return on assets (ROA) and return on tangible common equity (ROTCE) of 0.66% and 5.5% respectively, which is below the consensus forecasts of 0.77% and 6.3%.
The analyst pointed out that Hilltop's mortgage division, PrimeLending, remains unprofitable, and its securities division, HilltopSecurities, is not expected to see significant improvement in its pretax margin.
Despite ongoing investments by management in these areas as well as the core bank, the current financial landscape does not favor the company's business model. Lower interest rates and a steeper yield curve are deemed necessary to elevate Hilltop's profitability to a level more aligned with its peers.
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