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 outperform the broader market.
While the broader market generally declined on concerns over Greece — the Dow Jones Industrial Average recently slid 15 points to 10959 and the Standard & Poor's 500 index slipped a fraction to 1187 — financials stood out as a bright spot.
Many regional banks set new 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 outperform. The index of banks in the S&P 500 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 preannouncements 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 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, the KBW Banking Index climbed 2.3%. Regions Financial gained 5.1% to $8.61, while Zions rose 4.6% to $24.27. SunTrust grew 3.4% to $28.69, and Fifth Third increased 2.2% to $14.26. U.S. Bancorp, which was boosted to buy from hold by NAB Research analyst Nancy Bush, rose 1.7% to $26.93.
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 added this contrasts to last year when quality or safe—haven names were outperforming.
"In some respects, I think it's just that the financials are rallying," Fitzsimmons said. "With what has happened in the last year or two, I would suspect a lot of investors don't want to be sitting on the sidelines while that rally happens. 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. due to an increase in his forecast for balance sheet shrinkage, though he did boost his price target on the stock.
Many other analysts also have been positive about the sector in recent days.