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First Niagara Is a Long-Term Bargain After M&A Mess

In the interim, First Niagara has said Gary M. Crosby, the bank's former operations head, will be its acting CEO as the bank looks for a permanent replacement.

A strong permanent appointment and a clear strategy going forward, could unlock value in First Niagara's shares, which Deutsche Bank and Barclays analysts call undervalued relative to small-and-mid-cap banking peers.

"While we expect investors could continue to assign a valuation discount to the shares versus peers given a relatively weaker capital position, we believe this discount will shrink over time more than we had originally anticipated given Koelmel's departure, and would expect this news to serve as a positive catalyst for the stock in the near-term," Dave Rochester, a Deutsche Bank analyst wrote in a note to clients reacting to the CEO change.

Given what is likely an end to First Niagara's merger strategy, Rochester added, "this event could ultimately meaningfully increase the pool of investors willing to take a fresh look at the stock (depending on the view of Koelmel's permanent replacement), which continues to stand out as one of the cheapest mid cap banks on a [price-to-earnings] basis."

Rochester gives First Niagara shares a $11 price target.

A new CEO with high credibility among the bank investing community may help First Niagara, however, the bank's financial picture remains hazy in the near-term. Investors betting on First Niagara's shares are likely to be focused on the bank's discounted valuation over quick results on a financial turnaround.

"Although we do not expect much in the way of EPS growth this year, we continue to believe that First Niagara's valuation discount vs. peers (11x vs. 14x 2013 EPS) will narrow over time as its demonstrates ongoing comparatively healthy organic commercial loan growth and its capital ratios rebuild," Barclays analyst Matthew J. Keating wrote in a March 20 client note.

For First Niagara investors, former CEO Koelmel's opportunism in cutting post-crisis M&A deals may have been a disappointment. Investors taking a new look at First Niagara's sub-$9 share price, however, may eventually see differently.

-- Written by Antoine Gara in New York

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