Regional Banks Outperform Broader Market

NEW YORK — Shares of regional banks climbed Tuesday as investors continued to be confident in the sector amid improving credit quality and ahead of earnings, helping the stocks to outperform the broader market.

While the broader market traded near flat on concerns over Greece — the Dow Jones Industrial Average recently slid 3.1 points to 10970 — financials stood out as a bright spot.

Many regional banks set 52-week highs early in the session, including Regions Financial Corp., Zions Bancorp, SunTrust Banks Inc., Fifth Third Bancorp and U.S. Bancorp.

Oppenheimer analyst Terry McEvoy said investors have been buying regional banking stocks since the beginning of the year, helping them to outperform. The index of banks in the Standard & Poor's 500 index is up about 35% year to date, according to FactSet, versus a 6.5% gain in the entire index.

And with earnings reports only a couple of weeks away, interest in the sector has continued.

"Usually at the end of a quarter, if there's bad news to report from an individual bank, it's disclosed," McEvoy said, adding he hasn't seen any major negative pre-announcements in his coverage universe. "That has also given investors confidence in first-quarter results."

McEvoy said he believes regional banks are about 80% to 90% of the way through the capital-raising process this cycle.

"The good news is that investor demand has been very strong as banks have raised capital, and stock-price performance has also been quite positive," McEvoy said, adding that first-quarter earnings could show an inflection point in terms of credit quality trends. "That is exactly what the industry needs to continue to get back to making money and building capital on their own."

In recent trading, Regions Financial gained 4.9% to $8.59, while Zions rose 4.8% to $24.33. SunTrust grew 3.1% to $28.61, and Fifth Third increased 2.7% to $14.33. U.S. Bancorp, which was boosted to buy from hold by NAB Research analyst Nancy Bush, rose 2.5% to $27.14.

Bush said in a report that, while U.S. Bancorp's stock has been deemed "too defensive" by many institutional investors, she believes the bank's momentum will "gain strength even after many of the 'recovery' stocks have run out of gas."

Sandler O'Neill analyst Kevin Fitzsimmons said the regionals have been gaining in recent weeks on several indicators that have been perceived as positive for an economic recovery.

"The names getting the most upside are large regional banks seen as more leveraged to recovery plays--they're perceived to have the most upside in a recovery," Fitzsimmons said. He said this contrasts to last year when quality or safe-haven names were outperforming.

Meanwhile, Credit Suisse analyst Craig Siegenthaler boosted his estimates and price target for Regions Financial, citing a reduction in his reserve build assumption. He also lowered estimates for Synovus Financial Corp. (SNV) due to an increase in his forecast for balance-sheet shrinkage, though he did boost his price target on the stock.

Siegenthaler also said SunTrust could be an attractive takeover target for a foreign bank.

Sandler's Fitzsimmons agreed foreign banks could be interested in the various large regionals, but said "there's nothing out there that makes me think that's a near-term event."

Many other analysts also have been positive about the sector in recent days. Wells Fargo on Tuesday boosted its view on the U.S. banking sector to market weight from underweight, saying its upgrade is "supported by the combination of increasingly positive economic data, greater clarity on asset-quality trends, less fear of pending regulatory changes, and still-reasonable valuation for most of our coverage compared to 'normalized' multiples." The firm also boosted its valuation ranges on BB&T Corp., KeyCorp, Fifth Third, SunTrust and U.S. Bancorp.

BB&T recently rose 1.9% to $33.55, while KeyCorp was up 4.2% to $8.50.

Still, Sterne Agee analyst Adam Barkstrom warned that valuations for the regionals are "quite lofty."

"One of the things that those who are bullish have started talking about in the past couple months is this whole normalized earnings argument," Barkstrom said. "But even on a normalized basis, they're still trading at huge premiums."

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