Regional Bank Stocks Are Hated Again. It's Time to Buy. -- Barrons.com

By Jacob Sonenshine

Regional bank stocks have barely participated in the market's recent rally. They are, once again, too cheap to ignore.

Lenders have seen this movie before, and the sequel was that the stocks would then jump. After the Silicon Valley Bank collapse in March 2023, the SPDR S&P Regional Banking exchange-traded fund dropped 40% to its low of $36. When the market realized that many of the dozens of publicly traded regional banks weren't suffering from the problems that Silicon Valley Bank was, the bank fund rose 45% to $52 in a period of months.

That is the type of quick gain traders should prepare to benefit from.

The bank fund remains at $49, and has dropped about 4% this year, versus the S&P 500's almost 10% gain. The main reason is that short-term bond yields have risen, reflecting the fact that inflation remains too high for the Federal Reserve to lower interest rates. Higher yields pressure lenders' profit margins because they borrow short-term money to lend for the longer term.

Higher rates are also meant to slow down economic demand, potentially hurting sales and profits for companies in many sectors, though many sectors in the U.S. are benefiting from longer-term growth trends, powering their stocks higher. That leaves bank stocks with their own unique profitability challenge.

The group's underperformance probably can't get much worse. The aggregate market value of companies in the regional bank ETF is a hair under 1% of the S&P 500's market value, down from about 1.5%, where it hovered for years until the Silicon Valley Bank problem. Now, it is at its lowest value versus the S&P 500 in many years, according to 22V Research, and it hasn't gone much lower than that since the price hit bottom about a year ago.

The point is that any positive development regarding banks will probably lift the stocks, unlocking at least some period of outperformance.

The ETF "Looks to be bottoming relative to [the] S&P 500," writes John Roque, head of technical strategy at 22V Research. "They [clients] ask, "Is this a short?" I answer, "Chart says it's a long."

That is especially true if an investor assumes that bond yields won't rise much from here, and there is good reason for that assumption. The 2- year Treasury yield has risen to just over 4.8%, but every time it hits roughly 5.2%, it drops. That means it doesn't have much more potential to gain, while it could fall, especially if the Fed does eventually cut rates.

Lower short-term yields would enable the market to assume that bank profits margins can tick higher.

"They're [regional banks] unloved, cheap priced, they can have great trading rallies," said Rhys Williams, chief investment officer at Wayve Capital Management. "On any sign of maybe things are going to get better, they'll spike up."

At some point, perhaps sooner rather than later, these stocks will pop. You can bank on it.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 08, 2024 10:26 ET (14:26 GMT)

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