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 S&P Regional Banking ETF 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 six percent. Additionally, KRE, the largest regional bank ETF by assets, is nearly twice as correlated to rising Treasury yields as is the more diverse Financial Select Sector SPDR XLF.

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 U.S. Regional Banks ETF IAT, an ETF that has climbed by more than four percent over the past month.

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, reports Benzinga's Jayson Derrick. 

Barker's top super-regional idea is Citizens Financial Group Inc. 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. STI, which he rates 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 US Bancorp USB, KeyCorp KEY and PNC Financial Services Group Inc. PNC with outperform ratings. US 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.

Todd Shriber owns shares of XLF.