MW Regional-bank stocks are catching up to larger rivals. How to play the sector from here.

By Steve Gelsi

A KBW analyst still prefers big banks over regional names, but sees opportunities for investors who want to chase the rally in smaller bank stocks

Investors have been more bullish on regional-bank stocks lately, though the big banks have still outperformed this year.

Regional-bank stocks have been outperforming larger bank stocks in recent weeks, in a reversal of trends from earlier in the year. So how should investors play the sector from here?

KBW analyst Chris McGratty thinks the universal banks are the better place to be - though that's not to say there aren't opportunities for those who want to invest in smaller names. Regional banks derive a larger percentage of their revenue from their loan businesses, so the growing prospect of lower interest rates and more favorable lending conditions could lift their profits.

"You still want to be overweight universal banks but we do have ideas within the regional banks that are attractive," McGratty said.

Among his picks: Citizens Financial Group Inc. (CFG), KeyCorp (KEY) and Regions Financial Corp. $(RF)$, which collectively offer a combination of relative value to others in the sector or a favorable asset mix on their balance sheets, as well as healthy returns on equity.

Among other smaller regional banks, KBW sees potential in East West Bancorp Inc. $(EWBC)$, UMB Financial Corp. $(UMBF)$ and Old National Bancorp (ONB).

Citizens Financial Group's stock is attractive because it offers a multiyear improvement story on its equity growth, as well as an optimized balance sheet and access to capital-markets revenue through its investment bank, McGratty said.

"You get exposure to a potential increase in loan growth along with a benefit from improving capital markets and the stock is very, very inexpensive," he said - noting that Citizens shares are trading at an 18% discount to peers based on price to tangible book value.

In raw numbers, Citizens has a price-to-book-value ratio of 0.95. Compare that to the metrics for other similarly sized peers: First Citizens Bancshares Inc.'s $(FCNCA)$ ratio is 1.2, Fifth Third Bancorp's $(FITB)$ is about 1.56, Huntington Bancshares Inc.'s $(HBAN)$ is 1.33 and and KeyCorp's is 1.25, according to FactSet data.

Meanwhile, East West Bancorp is a stock the KBW team "really likes" due to its excess capital and midteens return on equity, while its shares trade at an "attractive" valuation of 11 times estimated 2026 profit, McGratty said.

The valuation "is quite reasonable" due to the company's 15% return on tangible common equity, or ROTCE, and its "significant" excess capital position, he noted.

And UMB Financial and Old National Bancorp shares have been "very cheap" on a relative basis, while their banking businesses are "very profitable," McGratty added.

Old National Bancorp trades at less than nine times KBW's estimated 2026 estimated earnings and is projected to produce a peer-leading 19% ROTCE, he said.

For its part, UMB Financial trades less than 11 times its estimated 2026 estimated earnings and is projected to generate "above-peer" ROTCE of 18% and organic loan growth in the upper single digits, according to McGratty.

Also read: Here's why this is a golden age for banks - but some of their stocks may be too high

Regional-bank stocks have done some catching up in recent weeks, with the KBW Regional Banking Index XX:KRX gaining 4.5% over the past month, outpacing the 1.3% gain by the KBW Nasdaq Bank Index BKX over the same time period.

That said, regional banks in aggregate have still dramatically underperformed on the year. The KBW Regional Banking Index is up 3.9% in 2025, while the KBW Nasdaq Index, which includes blockbuster stocks such as JPMorgan Chase & Co. $(JPM)$, is up 16.1%.

"Regional stock prices have lagged and valuations are less expensive, so there could be money moves by investors to rotate from money-center banks to regionals," McGratty told MarketWatch.

At last check, the probability of an interest-rate cut by the Federal Reserve at its September meeting in 22 days stood at 88.2%, according to the CME FedWatch Tool, after a relatively dovish speech by Fed Chair Jerome Powell in Jackson Hole, Wyo., last week.

Also read: Powell just gambled big in Jackson Hole. Will it pay off?

While bigger banks continue to beckon investors with their more diversified businesses that include much larger capital-markets, credit-card and asset-management units than regional banks, an interest-rate cut would also improve the economics of smaller banks, McGratty noted.

KBW analyst Chris McGratty says larger, more diversified bank stocks are still preferable over smaller firms, but some regional-bank stocks currently offer value.

Lower rates may allow banks to lower the interest paid on customers' deposits, while helping lenders maintain their balance sheets for less cost.

That market dynamic may help banks reprice their balance-sheet components, boost asset yields, lower funding costs and grow profit margins on loans and deposits, McGratty said.

Lower rates could also help stimulate economic activity and boost loan volume.

Still, McGratty said larger banks offer more diversified businesses that are better insulated from market changes. Also, the benefits from banking deregulation now in the works by the Trump administration are more meaningful for larger banks, he added.

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

August 26, 2025 15:43 ET (19:43 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.