Regional Banks Still a Bullish Bet

Regional banks didn't participate in yesterday's rally -- why?

   

This morning all eyes were on earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC). Both banks beat analyst earnings expectations despite fears of a slowing economy, and traders responded well on top of yesterday’s unexpected rally.

One group that did not fare as well were regional banks, which had been on the move higher in the past two weeks on the premise that higher rates would improve their net interest margins, which is a proxy for profits. Mortgage rates tend to go up faster than the banks’ cost of money, so they earn the difference as a big fat profit. But now that it looks as if mortgage rates may ratchet back lower, the promise of their higher margins just kind of went “poof!”

But, of course that is not the end of the story for the regional banks. They are the largest makers of mortgages, and therefore will benefit from a rise in the sales of homes over time. But they won’t have that immediate shot in the arm that investors had craved — and that is why they pulled back Thursday while every other sector took off.

Today regional banks like BB&T Corp (BBT) and Hudson City Bankcorp (HCBK) have about recovered their mild losses of yesterday. I’m still bullish on these names in particular and regional banks in general, so I would recommend keeping an eye on regional banks as a way to leverage the slow, but steadily growing strength in the domestic markets.

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