U.S. regional banks rally, capping whipsaw week By Reuters

Written by Manya Saini and Shibuiki Ogo

(Reuters) – Shares in Backwest Bancorp jumped 87 percent amid a broader rally in U.S. regional banks on Friday after analysts lifted a number of lenders they said were oversold, though some investors worried the surge could be short-lived.

Investor concerns about the health of medium-sized lenders have deepened in recent days after the collapse First Republic Bank (OTC:) and PacWest’s announcement that it was exploring strategic options to bolster its finances led to a brutal sell-off.

The beating in regional bank stocks underscores continued investor uncertainty about the health of the sector as market sentiment has begun to outpace balance sheet fundamentals.

Friday’s jump, buoyed by a stronger-than-expected jobs report that lifted major indexes on Wall Street, could be painful for some investors who bet heavily on regional banks.

“The Regional Bank Group completely ripped off fundamentals during this week’s sell-off,” Art Hogan, B. Riley Wealth’s chief market strategist, wrote in a note to investors.

JPMorgan (NYSE:NYSE:) analysts, led by Stephen Alexopoulos, raised their ratings for several regional banks on Friday, including Western Alliance (NYSE:NYSE:), Comerica (NYSE:NYSE:) and Zion Bancorp, saying stocks look “Massively Wrong” after seeing “Short Selling / Overselling Pressure”.

“With sentiment extremely negative and a possible sector reclassification on the horizon, we are now moving to the middle of the boat and taking a neutral stance on the sector,” the analysts wrote in a note to investors.

Western Alliance and Zion Bancorp gained 45% and 18%, respectively. Comerica Corporation up 16%, Keycorp stock up about 10%, First Horizon (NYSE:: Corp) stock up 5%, and Trust Financial (NYSE:: Corp) jumping 10%.

The KBW Regional Banking Index, which is down about 30% this year, was about 5% higher.

Dilution Rally

But some investors said the recovery may not signal a long-term shift in sentiment.

“It’s a comfortable rebound right after the big sell-off,” said Sandy Viller, a portfolio manager at Villere & Co. in New Orleans, adding that the market may also expect some kind of government support for the sector in the coming days.

Wall Street executives have urged regulators to provide greater protection for bank deposits, saying only forceful intervention can stop contagion, though some analysts said such a move was unlikely immediately.

“The latest moves in bank share prices are more about public confidence than deposits. That will be a more difficult issue for regulators to address,” he said. Citigroup Analysts (NYSE:).

On Friday, St. Louis Federal Reserve Bank President James Bullard reiterated regulators’ stance that the banking sector is fundamentally in good shape, telling the Economic Club of Minnesota that regional banks have “a couple of problems” but represent a small share of US financial intermediation.

Reuters reported on Friday that US Treasury Secretary Janet Yellen will tell her G7 counterparts next week that the banking system remains sound.

(Chart: US Bank Stocks Drop as Investors Worry About Failures – https://www.reuters.com/graphics/GLOBAL-BANKS/jnvwyrxlkvw/chart.png)

Reuters calculations showed that as many as 16 medium-sized banks have dumped more than $57 billion in market capitalization since last Friday.

Short sellers took in $430.47 million in paper profits betting against PacWest, Western Alliance, Zion and First Horizon on Thursday, according to data from analytics firm Ortex.

“The shift in momentum can cause massive short squeeze,” Hogan said.

Regional banks have hit back at the short sellers, writing in a letter to Securities and Exchange Commission Chairman Gary Gensler Thursday that many of these bets “do not appear to reflect the issuers’ financial condition.” Gensler said Thursday that the agency will investigate any manipulative behavior.