NEW YORK — SunTrust Banks Inc. and other regional banks traded at the bottom of the S&P 500 Wednesday, which analysts said could be a pullback from recent strength.
Credit Suisse analyst Craig Siegenthaler said a lot of investors bought shares shortly after second-quarter earnings, but the buying has now slowed down.
"I believe after earnings, the stocks were down and cheap on a longer-term earnings forecast," Siegenthaler told Dow Jones Newswires. "[Long-term investors] were buying, thinking the stocks were not going to get any cheaper. Short-term investors were thinking there was no negative catalyst until the next earnings, so they would buy, hold and hope economic data was positive."
Now, those investors are taking profits as the stocks have risen sharply from their lows.
Siegenthaler added that fundamentals aren't expected to improve for regional banks for at least a couple more quarters, with credit quality continuing to be weak.
"We think what's going to happen is the pullback is going to continue into third-quarter results," he said. "The question is whether investors step in and buy again. We don't think so because the fourth quarter is going to be worse than the third in terms of negative earnings and losses."
He said the banks need to see improvements in delinquency trends and nonperforming loans — as well as positive economic data — to warrant a rebound.
Morgan Keegan analyst Robert Patten, meanwhile, believes shares will pull back for a couple weeks and then rally going into earnings.
"Investors want the group to pull back so they can own some of these names," Patten said, adding that while a pullback was likely, he's still bullish longer term. "There's profit-taking, but we will see some buying come back in because a lot of people missed the move."
In recent trading, SunTrust shares dropped 5.8% to $20.48 after earlier falling as low as $20.04. Even with Wednesday's losses, SunTrust shares are up about 28% over the past three months. As of Tuesday's close, shares had more than tripled from their low of $6 in February. A representative of SunTrust declined to comment about the stock move Wednesday.
Other regional banks among the top decliners in the S&P 500 included Huntington Bancshares Inc., down 5.7% to $4.01, and Regions Financial Corp., down 3.9% to $5.91. KeyCorp slid 4.1% to $5.90.
Big banks, meanwhile, posted smaller declines in the session. JPMorgan Chase & Co. slipped 35 cents to $41.32, while Goldman Sachs Group Inc. slid 85 cents to $159.32. Citigroup Inc. edged up 1 cent to $4.55.
Sandler O'Neill analyst Kevin Fitzsimmons said shares of the regional banks had been climbing on glimmers of optimism about the economy.
"I think what you're having now is probably a lot of institutional folks in the market looking at this run the group has had and concluding maybe it has been too far and too fast relative to the fundamentals they see out there," Fitzsimmons said in an interview. "It's probably a natural pullback from portfolio managers looking at those gains they've had from the group and taking profits."
Fitzsimmons said that while there have been positive signs in the economy, many of the banks still aren't making money.
"Dealing with credit issues sometimes tends to lag the economy," Fitzsimmons said. "As long as we have unemployment still being such a big issue and commercial real estate looming out there as a potential shoe to drop...it makes it far from certain to declare we're in a full-fledged recovery for this group."
He added that many of the larger regional banks have raised capital, but some of the smaller and mid-cap banks might face pressure as they have yet to address those concerns. In addition, it's possible the larger regional banks could seek to raise more capital to repay TARP funds, though they seem to be fine at this time.
"I think that with the continued challenges the group faces, it warrants a healthy pullback here," Fitzsimmons said. "For some of these companies that are still not profitable, I would want to see more of a discount on tangible book value than we see now."