Bank of America: Three Catalysts May Help U.S. Regional Bank Stocks Catch Up
Bank of America Securities pointed out that U.S. regional bank stocks are lagging behind large bank stocks and the overall stock market, but policy and macro factors may change this situation. Analyst Ebrahim Poonawala listed three major catalysts: the Federal Reserve's annual stress test results, the June non-farm payroll report, and the expiration of the tariff suspension period. If the test results show that the capital adequacy ratio is above the required level, it may encourage funds to flow into regional banks; if the employment report shows cracks, it may trigger concerns about credit quality; reaching a free trade agreement with major trading partners will help credit growth
According to the Zhitong Finance APP, data shows that since the beginning of this year, as of last Friday's close, U.S. regional bank stocks (KRX) have fallen by 2.9%, lagging behind the 9.1% increase in large bank stocks and the 5% increase in the S&P 500 index.
Bank of America Securities stated that U.S. regional bank stocks have consistently underperformed compared to large bank stocks and the overall stock market; however, some policies and macro factors may change this situation. Analyst Ebrahim Poonawala listed several potential catalysts that could help regional bank stocks catch up, specifically noting that any positive factors that enhance market confidence in the Federal Reserve's interest rate cuts and achieving a soft landing for the economy will be key to boosting regional bank stocks.
The analyst wrote in the report: "Although regional bank stocks have performed poorly in the past, we believe that an improved macroeconomic outlook and a rebound in bank merger and acquisition activity will serve as catalysts for inflows into this sector."
The first catalyst identified by the analyst is the results of the Federal Reserve's annual stress tests. The tests showed that under hypothetical economic recession scenarios, all 22 banks tested had a Common Equity Tier 1 (CET1) capital adequacy ratio above the minimum requirement. The analyst believes that the test results may prompt a reallocation of funds to regional banks, as investors have begun to factor in the possibility of a reduction in CET1 capital requirements.
The second catalyst is the U.S. non-farm payroll report for June, which will be released on July 3. The analyst pointed out: "If there are significant cracks in the labor market, it may reignite concerns about credit quality—although most investors currently have little worry about this." He mentioned the recent trend of increasing initial and continuing unemployment claims.
The third catalyst is related to the 90-day tariff suspension period, which will expire on July 9. The analyst wrote in the report: "This event could serve as a positive or negative catalyst. If a free trade agreement similar to that of the UK can be reached with major trading partners, it would help investors believe that the 'peak of tariff turmoil' is in the past. This could benefit credit growth and the development of investment banking activities in the mid-market."
