U.S. regional bank stocks have seen a significant uptrend over the recent weeks, reaching levels reminiscent of those during the onset of the Silicon Valley Bank crisis in March.
The SPDR S&P Regional Banking ETF (NYSE: KRE), a pivotal gauge tracking more than a hundred industry players, has surged 35% in the past two months, marking its strongest two-month rally since January 2021.
The rally of regional banks has been bolstered by the gradual improvements in financial conditions in the United States, largely attributed to the Federal Reserve's recent shift towards a more accommodative monetary policy stance.
Previously, elevated interest rates had placed regional banks in a precarious position. Declining loan demand and rising funding costs had exerted significant pressure on these banks' net interest margins (NIM).
However, the anticipated decrease in interest rates for 2024 has played a pivotal role in alleviating the strain on regional banks, propelling them to become one of the industries with the most robust performances in the recent market phase.
Key Contributors To Regional Bank Rally
Upon analyzing the KRE ETF constituents, ten regional banks have reported returns exceeding 40% in the last three months:
NamePrice Chg. % (3M)Price Chg. % (1M)
- Customers Bancorp, Inc. (NYSE: CUBI) 77.42%25.50%
- Metropolitan Bank Holding Corp. (NYSE: MCB) 58.17%43.82%
- Glacier Bancorp, Inc. (NYSE: GBCI) 56.21%27.52%
- Lakeland Financial Corporation (NYSE: LKFN) 47.86%17.09%
- Live Oak Bancshares, Inc. (NYSE: LOB) 46.86%31.71%
- Bank of Hawaii Corporation (NYSE: BOH) 46.20%28.66%
- FB Financial Corporation (NYSE: FBK) 44.83%20.13%
- Cadence Bank (NYSE: CADE) 44.30%20.42%
- Independent Bank Corporation (NYSE: IBCP) 43.95%18.13%
- Premier Financial Corp. (NYSE: PFC) 42.28%17.05%
Regional banks tend to flourish in an environment of solid economic growth, moderate inflation, and decreasing interest rates.
Conversely, stagflation - characterized by stagnant economic growth paired with rising inflation - can be detrimental to the sector due to lower loan growth and potentially higher deposit interest rates.
A recession coupled with low-interest rates could create a complex scenario for the industry, possibly favoring only the larger, more robust banks. While a slow economy reduces loan demand, banks may benefit from decreased costs.
The latest projections from the Fed suggest a moderate US economic growth of 1.4% in 2024, slightly below the trend and well under the 2.6% growth seen in 2023.
Inflation is expected to decrease to 2.4% by the end of 2024, still marginally above the Fed's 2% target. Additionally, the federal funds rate is projected to be cut by 75 basis points to 4.6%, with market expectations leaning towards even steeper rate reductions.