Regional Bank Stocks Aren’t Out of the Woods Yet. Why It’s Time to Lighten Up.

A credit scare took down regional bank stocks. A repeat could cause the group to fall even more. (Alamy)

The market is betting that the credit concerns that hit Zions Bancorp and Western Alliance will fade. If it’s wrong, select bank stocks could slump again.

Bank stocks started to drop last week when JPMorgan Chase revealed a $170 million hit from the bankruptcy of Tricolor, a small auto lender, leading CEO Jamie Dimon to muse that “when you see one cockroach, there are probably more.” More showed up last week, when Zions and Western Alliance both revealed exposure to bad credits. The SPDR Regional Banking exchange-traded fund dropped 8.3% from Oct. 14’s close through the end of trading on Oct. 16.

Regional banks have now started to recover. It helped that Zions and Western Alliance reported earnings —and said the credit issues are contained. Zions management explained on its earnings call that the company’s $49 million of cash set aside to absorb uncollectible loan amounts are largely a result of the two auto credits and represent a negligible portion of total loans outstanding to all of the bank’s borrowers. The stock rose 1.4% on Tuesday after the report, while regional banks have made back nearly half their losses.

An optimist would say the market overreacted and now it’s time to get on with our lives. A pessimist, however, would look and see the need for careful risk management. Trivariate Research founder Adam Parker offers a strategy for the pessimists. To avoid the potential impact on a portfolio from a possible resurgence of bank credit woes, he started by screening for bank stocks that have a 0.7 correlation or higher to Zions—a correlation of one means two assets trade in lockstep—a sign that the market treats them in a similar fashion.

He then screened for stocks that have had returns on tangible equity at or below 10% in the past year, and are more volatile than the broader market, a sign that investors view them as riskier fare. They also have to trade at price-to-book values greater than the SPDR S&P Regional Banking ETF’s aggregate one times, making them more expensive versus their typical peers.

It’s very possible the companies that pass the screen have no credit problems to speak of, but the stock market has a tendency to sell first and ask questions later. The screen includes Live Oak Bancshares, Triumph Financial, Texas Capital Bancshares, Seacoast Banking Corporation of Florida, Peoples Financial Services, and KeyCorp . The banks didn’t immediately respond to requests for comment.

Rather than trying to figure out which bank stocks could be most at risk of a decline, it might be best to just lighten up on regional banks generally—especially since the ETF has gained over 24% since hitting its 2025 low in April.

Sometimes, it is better to be safe than sorry.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com