Bank stocks rallied Tuesday as investors started making their picks for winners in 2010, and as Senate Banking Committee Chairman Chris Dodd's retirement plans seemed to pave the way for a successor viewed as friendlier to the industry.

The KBW Bank Index jumped 1.28%, to 45.23, outpacing the 0.02% increase in the Dow Jones industrial average and the 0.05% gain in the broader Standard & Poor's 500 index.

JPMorgan Chase & Co., U.S. Bancorp and BB&T Corp. all gained after KBW Inc.'s Keefe, Bruyette & Woods division promoted the stocks in a report to clients, citing the companies' potential for strong earnings power and growth via acquisitions. JPMorgan Chase shares rose 0.55%, to $43.92, while U.S. Bancorp climbed 1.07%, to $23.71, and BB&T surged 2.11%, to $26.58.

Other gainers included Bank of America Corp., up 1.17%, to $16.39, which KBW highlighted as a value play for looking inexpensive relative to normalized earnings. But another of the firm's "value" picks, KeyCorp, fell 0.65%, to $6.13.

Some of the strongest gainers in the session were among the worst performers in 2009, perhaps a signal that investors who had bet against the stocks are starting to cover their short sales. Citigroup Inc. shares, which lost more than half their value last year, rose 3.12% on Wednesday, to $3.64.

Marshall & Ilsley Corp. rose 4.36%, to $6.23. The company, which owns M&I Bank in Wisconsin, recently completed a cash tender offer for roughly $400 million of debt to increase its Tier 1 capital and lower its interest expense. Zions Bancorp, which announced in a regulatory filing that it agreed with an investor to exchange $40 million of subordinated debt for notes with a stock-conversion feature, saw its stock jump 8.7%, to $15.

The sector may have gotten an extra boost from expectations that South Dakota Democrat Tim Johnson will replace Dodd as head of the Senate banking panel. Industry representatives describe Johnson as being especially supportive of community banks, and he already has been negotiating with Dodd's staff on a way to make sure national banks keep their ability to preempt state consumer protection laws — a privilege that would have been taken away under Dodd's original proposal for financial industry reform.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.