Square Inc. (SQ) - Get Report shares were higher after a BTIG analyst upgraded them to neutral from sell while the digital-payment processor received conditional regulatory clearance to open a bank in Utah.
The company said in a statement that the Federal Deposit Insurance Corp. cleared its application for deposit insurance related to its Industrial Loan Co. bank charter. And Square said the Utah Department of Financial Institutions approved its charter.
Analyst Mark Palmer, who removed his $37-a-share price target, said in a note to clients that Square had been particularly hard hit during the selloff driven by the advent of the coronavirus.
Square lost more than half its market capitalization since Feb. 20, he said, "as the company's focus on processing payments and offering ancillary services to small businesses that are in the pandemic’s path has caused investors to flee from the stock."
"While we could not have predicted the kind of shock that sparked SQ’s steep decline," he wrote, "we have for some time pointed to the company’s vulnerabilities – exposure to the small firms most exposed during an economic downturn and the extension of credit as a means of spurring growth and reducing churn – that had been dismissed as the stock’s valuation became increasingly lofty."
"With that said," he added, "we believe Square's shares now appear much more fairly valued."
At last check Square shares were up 8.2% at $42.73.
The bank, Square Financial Services, is expected to launch in 2021 as an independent direct subsidiary of the company.
Palmer noted the addition of the charter was not expected to affect the company’s operating performance or its balance sheet in 2020.
Stephens analyst Brett Huff, who affirms an overweight rating and $59 price target, said Square wanted a bank to innovate faster than it otherwise could with its partner banks.
He sees the regulatory clearance as a positive, even though the "timing is tough, given bank-stock reactions lately."
Wedbush analyst Moshe Katri, who has a neutral rating and a $75 price target, views the FDIC's conditional clearance as an important tool for the company's monetization effort. The move benefits its two-sided platform, with expanding ecosystems targeting both merchants and consumers, he said.
While in theory, this charter provides the company with the ability to expand its lending business, Katri said, management will likely continue to be vigilant in controlling credit-risk exposure, while focusing more on selling financial products.