Regional bank shares rally may face correction, warn strategists

by Bernard Goyder

A breakout rally in the shares of US regional banks may be setting investors up for disappointment, according to some Wall Street strategists, who recommend betting on a pullback in the sector as earnings season gets underway.

The SPDR S&P Regional Banking ETF (KRE), an exchange-traded fund that tracks the performance of Main Street lenders, is up more than 8% over the last month, nearly double the S&P 500 Index’s gains over the same period. Tailwinds for the sector include the prospects of an M&A boom, an easier regulatory environment and expectations of higher-for-longer interest rates.

That rally, however — the ETF is up 29% from its April low — may have left the stocks more vulnerable to bad news ahead of earnings season, which kicks off next week. While Wall Street is still generally bullish on the sector, strategists at firms including Susquehanna International Group say now is the time to play defense. 

“After such a strong rally over such a short period of time, investors should be careful about chasing it up at these levels,” said Matt Maley, chief market strategist at Miller Tabak. “It’s quite possible that we might see a ‘sell the news’ reaction when they start to report.”

Christopher Jacobson, co-head of derivatives strategy at Susquehanna, on Monday wrote that investors should buy short-term puts on KRE to hedge gains through next week’s consumer-price index report and the start of earnings season. He had earlier suggested buying bullish calls on the ETF.

Some market participants may already be thinking along those lines. On Tuesday, a trader laid out over $700,000 on a bet that KRE will fall from about $63 a share to as low as $59.50 by July 18 in an options strategy known as a put spread. Another trader on that day bought bearish options on KeyCorp, a lender based in Cleveland, Ohio. The investor paid around $450,000 for the right to buy nearly 3 million KeyCorp shares below the current level.

In a July 9 note, Jacobson highlighted the KRE put-spread buyer as a sign that some investors are growing skeptical of the longevity of the regional bank rally. 

Economic Barometer

Investors view regional lenders as an important barometer for the health of the US economy, as mid-sized banks tend to be more sensitive to changes in credit conditions and the housing market than their giant peers. A crisis sparked by the failure of Silicon Valley Bank slammed the sector in 2023 and prompted lenders to expand retail deposits and restructure bond portfolios.

With the group roaring back from April’s tariff-induced swoon, chart-watchers note that regionals have momentum on their side: KRE has gained 6.1% after topping its 200-day moving average in late June. The ETF is up 4.6% year-to-date.

Analysts at HSBC remain bullish on the largest regional banks, keeping buy ratings on US Bancorp, PNC Financial Services Group Inc. and Truist Financial Corp. while turning more bearish on JPMorgan Chase & Co. and Goldman Sachs Group Inc. 

But they warned that asset quality deterioration or signs the regulatory environment will be less favorable than hoped, could hurt the likes of US Bank, PNC and Truist.

“There are some near-term risks facing the KRE,” said Terry McEvoy, a bank analyst at Stephens Inc. Those include credit quality risks and competitive pricing pressures that could impact net interest income, said McEvoy, who remains optimistic on the group’s long-term prospects. 

So does Maley, of Miller Tabak. Though the regionals could sell off in coming weeks, “investors should see a better level to add to positions later this summer,” he said. 

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