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JPMorgan made a bold call on Friday, upgrading three regional banks despite a renewed rout in the sector this week that the investment bank says is partly due to short sellers. JPMorgan bank analysts led by Steven Alexopoulos made the following moves: Western Alliance upgraded to overweight from neutral Comerica upgraded to overweight from neutral Zions Bancorporation upgraded to overweight from underweight Regional bank stocks have been under heavy pressure again this week after First Republic failed and was sold to JPMorgan Chase before trading began on Monday. Alexopoulos said in a note to clients that the moves have been too dramatic. “Since regional banks reported 1Q23 results, which were not as bad as feared in terms of potential deposit outflows, regional bank stocks have seen intense shorting/selling pressure tied to a mismatch of (1) short-sellers feeling empowered post FRC [First Republic] being placed into receivership and (2) many long-only funds rethinking their capital allocation strategy into regional banks given concerns over NIM, credit and, new to the equation, deposit runs,” stated the note. “To this end, we believe a sell-off in regional banks has become a catalyst itself to cause further fear and selling pressure.” The SPDR S & P Regional Banking ETF , down 15% through Thursday this week, jumped 6% on Friday. The banks that JPMorgan upgraded have been hit even harder than the broader sector. Entering Friday, Western Alliance was down 51% for the week. Shares of Zions and Comerica had each fallen by about 28%. JPMorgan said in the note that those three stocks “appear substantially mispriced to us.” All three rebounded on Friday, with Western Alliance gaining more than 49%. The regional bank stocks have fallen despite the fact that the companies reported lower deposit outflows than First Republic. Western Alliance said Wednesday that it is not seeing abnormal deposit flows and still expects deposits to grow by $2 billion in the second quarter. Those deposit trends and potential regulatory changes could help the stocks rebound, according to JPMorgan. “We see a changing landscape, including the potential for regulatory changes (such as with FDIC insurance levels) or stock trading (such as a ban on short selling) or for the Fed to pivot (in line with market expectations). In the meantime, we see the favorable updates coming from select banks (such as WAL) that deposit balances have remained stable (or increased) helping to counterbalance very negative sentiment,” the note said. —With reporting by Michael Bloom
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