The surge of institutional money into banking stocks is likely to continue for at least another quarter, according to Keefe, Bruyette & Woods.

Institutional investors favored large and small-to-mid-cap banks in the second quarter; those categories outperformed the S&P and overall financial stocks, a research team at KBW wrote in a Monday note to clients. Large banks gained 9% during the second quarter, while small and midsize banks gained 6%.

Life insurers, which gained 17%, and broker dealers, which gained 10%, were the best performing financial stocks during the second quarter.

The analysts said they expect institutional investors to continue to favor banks in the third quarter. Small and midsize banks have shown the best performance among any sector of financial stocks from July 1 to Aug. 22, gaining 10%. Large banks are up 5% over the same period, while financial stock were up 6%.

Because of this strong performance, institutional investors have increased their weighting in banking stocks and are likely to keep doing so, the analysts said. Institutional funds have increased their overweighting of large banks' stocks by 9 basis points and small to midsize banks by 4 basis points so far in the third quarter.

On the whole, financial stocks have slightly underperformed the market so far this quarter, gaining 2.8%, compared to a 3.4% rise in the S&P 1500 index.

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