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Regional Banks Showing Signs Of Recovery As Stocks Rebound

Regional banks are among the most beaten-down sub-industries at the moment, as those stocks remain mired at the bottom of the pack.

However, plenty of investors make the mistake of missing rallies because they're anchored to the idea that specific sectors, or even the market as a whole, remain in the doldrums.

Over the past few weeks, the charts of regional banks, including Zions Bancorporation NA (NASDAQ: ZION), Comerica Inc. (NYSE: CMA) and KeyCorp (NYSE: KEY), are showing a familiar trend: Stocks that were crushed for one reason or another eventually show renewed price strength. 

All three are among the smallest weightings within the S&P 500 index but were the biggest gainers in the financials sector recently. They were also among the biggest gainers in the broader S&P 500. 

Risk Remains Despite The Gains

There's still risk in regional banks. Some industry analysts believe that if interest rates rise again this year, some banks may be forced to slash the value of assets on their balance sheets.  

However, regional banks appear to be stabilizing for the moment, with stocks trading well above their May lows. 

One shift in sentiment about the industry as a whole may be due to a potential requirement that larger banks increase their capital requirements by 20% to help stave off another crisis. 

Beaten-down stocks can rally due to various factors. In the case of regional banks, investors were cautious about the prospects of even financially sound companies, dragging down the entire industry. 

Some of that worry seems to be waning. 

Tradeable Rally

For example, Zions Bancorporation, the 34th largest domestic bank in terms of assets, is up 22.60% in the past month. As a glimpse of the Zions Bancorportion chart clearly shows, the stock still has a lot of work ahead before it regains its prior highs, but the recent rally has certainly been tradeable.

Zions' main focus is as a commercial bank serving small and mid-sized businesses in the western U.S. There are enough similarities there with Silicon Valley Bank to give some investors agita understandably. Still, recent revenue and earnings performance has been strong. In the most recent quarterly earnings report, CEO Harris Simmons attempted to reassure investors about the health of the bank's deposit base. 

Dallas-based Comerica is similar in size to Zions. The Comerica chart also shows a nascent rally. The stock has posted a gain of 3.46% in the past week and 10.70% in the past month. 

Upside Amid Downgrades

Comerica analyst ratings show a "moderate buy" on the stock, with a price target of $67.97, an upside of 59.10%. Numerous analysts downgraded the stock after the company's most recent earnings report, yet most continue to agree there's plenty of upside left in the stock. 

KeyCorp has also shown solid gains recently, helping to buoy the entire regional banking sector, but recent price performance isn't on par with Comerica and Zions. 

KeyCorp shares are up 2.43% in the past week and up 5.14% in the past month.

This stock has staged a tradeable rally in recent weeks, but analysts continue to expect an earnings decline this year before growth rebounds in 2024. 

KeyCorp analyst ratings reveal a consensus view of "hold," although analysts have a price target of $15.90, an upside of 50.43%.

Don't Miss Nascent Rallies

You can't say the coast is clear for regional banks, mainly because the interest-rate risks that tanked Silicon Valley Bank and others remain. However, it's worth keeping up-to-speed on sector performance so you don't miss any nascent rallies. 

For example, in recent months, some investors missed the rally in tech because they were still operating under the 2022 mental model that placed tech in the doghouse.

So what's driving the upside in regional banks? A few things.

Investors Shopping For Bargains 

When a stock is undervalued relative to its intrinsic worth, investors eventually start to see it as a bargain and begin scooping up shares. Market sentiment can also shift; no sector remains at the bottom of the barrel forever. In the case of regional banks, there may be a sense that the worst of the surprise news is behind us. 

Additionally, short squeezes can occur when short-sellers are forced to buy shares to cover their positions, leading to an increase in share price.

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