ZION - Regional banks revive after a brutal week as J.P. Morgan gets more constructive

2023-05-05 11:00:41 ET

Regional bank stocks rebounded in early Friday trading after slumping the first four days of the week on fears over deposits, regulation, and overall stability of small- to mid-sized banks.

The KBW Nasdaq Regional Banking Index ( KRX ) rose 3.5% at 10:48 AM ET Friday, after having slumped 12% in the week's first four sessions. Today's action outpaces the S&P 500's 1.5% rise.

One analyst, J.P. Morgan's Steven Alexopoulos, has moved to Neutral stance on U.S. mid- and small-cap banks after regional bank Q1 earnings weren't as bad a feared in potential deposit flows. "With sentiment this negative, in our view it won’t take much to see a significant intermediate-term favorable re-rating of regional bank stocks," he wrote in a note to clients.

His shift for the industry comes against a changing landscape with the potential for regulatory changes (such as FDIC insurance levels) or stock trading (such as a ban on short selling) or the Fed to pivot, Alexopoulos said.

For specific names, he upgraded Western Alliance Bancorporation ( WAL ), Comerica ( CMA ) to Overweight from Neutral and Zions Bancorporation ( ZION ) to Overweight from Underweight.

Leading Friday's regional bank stock resurgence, PacWest Bancorp ( PACW ) soared 54% , after sinking 69% in the Monday-Thursday period.

Western Alliance ( WAL ) jumped 33% , partly recovering from a 51% descent. Comerica ( CMA ) gained 13% after losing 28% in the previous four sessions, and Zions ( ZION ) advanced 17% after falling 28% earlier in the week.

Other regional banks making strong gains: U.S. Bancorp ( USB ) +4.9% , KeyCorp ( KEY ) +7.4% , Truist Financial ( TFC ) +7.4% , and Axos Financial ( AX ) +5.1% .

With the recent decline in regional bank shares, short sellers have made $7.4B since the beginning of March, Semafor's Liz Hoffman said , citing S3 Partners data.

Alexopoulous noted that the average bank in his coverage trading at 6.6x 2023 EPS estimate, 0.9x 2023E tangible book value, and 16% implied cost of equity "implies to us that being short the banks has become a very crowded trade."

As pressures building on banks, "with every passing day it gets more likely that some form of relief will be provided to the sector," he said. That could occur in the form of the FDIC insurance cap being lifted, a Fed pivot, or for unusual stock and option trading in banks to be examined. He also mentioned the potential for reforms on the types of information that can be spread on social media or even traditional media.

Some analyst notes had speculated on the possiblity of temporarily banning short sales of banks to calm the markets. Odeon Capital's Dick Bove said that if shorting continued at the current rate, "it is quite likely the SEC would demand a short-term pause to allow fear to subside."

In an early Friday note, Bove said short covering is likely since the stocks had been "so devastated." And while that's likely to lead to a relief rally, the fundamentals of the industry remain unchanged, he said.

Among pressures on the banking industry that he lists: two Senate hearings in the next weeks, regulators are likely to require more capital, accounting rule changes, banks tightening lending and offloading securities, loan losses rising and stressed bank earnings.

More on the Bank Crisis:

• Bank rout: Contagion fears, market manipulation or self-fulfilling prophecy?
• Western Alliance bounces off of 60%+ drop after regional bank denies sales talk
• Regional bank ETFs hit mult-year lows as PACW, WAL and FHN tank
• PacWest Bancorp Plummets on Renewed Solvency Concerns

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