Market Insider

Regional banks on the rebound

Regional banks rebound

September is shaping up to be a strong month for regional banks as investors weigh the possibility of an accelerated timeline for higher interest rates.

The S&P commercial bank industry group, which consists of 11 regional banks as well as Bank of America, Wells Fargo, JPMorgan Chase and Citigroup, is one of the top-performing industries in the broader in the month of September. The group has gained around 3 percent month to date.

The S&P regional bank subsector is also up around 1 percent since the beginning of the month.

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"We believe the outperformance in regional bank stocks this month is a reflection of the market's view that short-term interest rates will go up in 2015," said Terry McEvoy, head of bank research at Sterne Agee. "In our view, 2014 is an ideal time for investors to begin accumulating shares of regional banks."

Some market pros say regional banks are poised to profit from the onset of rate hikes in 2015 from the Federal Reserve as their operating models allow for larger returns on loans.

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"If you just look at rising interest rates, the regional banks will give you the most 'bang for that buck' so to speak," said Scott Miller Jr., a managing partner at Blue Bell Private Wealth Management.

Miller, whose Pennsylvania-based fund has roughly $285 million in assets under management, said that while regionals offer prospects for heftier returns, they can also be riskier investments than larger, more diversified banks in a rising rate environment.

"The difference with the regionals is that since they're less diversified, they're more dependent on making money from loans and more dependent on making those commercial and personal loans," Miller said. "That's why you're going to see them the most affected."

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He said one place where investors can capitalize on returns from regional banks is in ETFs like the SPDR S&P regional bank ETF, ticker KRE. It consists of 82 regional banks with an average weighted market cap of $4.6 billion. Among the top holdings are First Republic Bank, Signature Bank and Prosperity Bancshares.

KRE has underperformed the S&P 500 so far this year, down around 4 percent, but surged more than 30 percent over the past two years.

SunTrust Bank signage is displayed outside of a branch in Miami.
Mark Elias | Bloomberg | Getty Images

As far as individual stocks, SunTrust Banks is among the top-performing regional bank stocks this month, up more than 2 percent since Sept. 1. Analysts remain bullish on the bank, predicting an upside move of nearly 10 percent in the next 16 to 18 months according to FactSet.

Sterne Agee's McEvoy maintains a "buy" rating on the stock with a price target of $48, 24 percent higher than where SunTrust trades today.

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"We think they will benefit from the ongoing housing recovery in markets like Florida and we think by the end of 2015 their balance sheet will be ideally positioned for rising rates supporting strong loan growth in 2016," McEvoy said.