A Super ETF For Super-Regional Banks

With 10-year Treasury yields higher by 9.1 percent over the past month, it is not surprising that regional bank stocks and exchange-traded funds, such as the SPDR KBW Regional Banking (ETF) (NYSE:KRE), are receiving renewed attention.

Regional bank equities and ETFs are known for being positively correlated to rising Treasury yields and KRE has reflected as much with a one-month gain of nearly 6 percent. Additionally, KRE, the largest regional bank ETF by assets, is nearly twice as correlated to rising Treasury yields as is the more diverse Select Sector Financial Slct Str SPDR fd (NYSE:XLF).

Winter's Fed Meeting Is Coming

As the December Federal Reserve meeting draws closer, investors should also consider super-regional banks, the larger versions of the banks held by KRE. Super-regionals can be accessed via the $613.1 million iShares Dow Jones US Reg Banks Ind.(ETF) (NYSE:IAT), an ETF that has climbed by more than 4 percent over the past month.

Piper Jaffray: Freshly Initiated Regional Banks

In a note out Tuesday, Piper Jaffray analyst Kevin Barker initiated coverage on a slew of regional banks with a positive bias, noting that these banks are "inexpensive" compared to long-term risk premiums and book value multiples. At the same time, many of the banks boast capital levels that are at multi-decade highs, credit losses are running "well below" long-term averages and the possibility of higher rates also provides the opportunity for "significant" upside optionality, reported Benzinga's Jayson Derrick.

Barker's top super-regional idea is Citizens Financial Group Inc (NYSE:CFG), a stock that is IAT's seventh largest holding at a weight of 3.3 percent. As Benzinga reported earlier, the analyst likes Citizens so much that he believes the bank can grow earnings 20 percent year-over-year for the next several years.

Barker is also bullish on SunTrust Banks, Inc. (NYSE:STI), which he rates at Outperform with a $50 price target. That implies decent upside for SunTrust, which currently trades just over $43. The Atlanta-based bank is IAT's fourth largest holding at a weight of 5.3 percent.

The analyst also initiated coverage of U.S. Bancorp (NYSE:USB), KeyCorp (NYSE:KEY) and PNC Financial Services Group Inc (NYSE:PNC) with Outperform ratings.

U.S. Bancorp and PNC are IAT's two largest holdings, combining for nearly 29 percent of the ETF's weight. KeyCorp is also a top 10 holding in the ETF at a weight of 2.6 percent.

Disclosure: Todd Shriber owns shares of XLF.

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