Regional Banks -- More Stress Ahead

NEW YORK (TheStreet) -- When I analyze regional banks, I focus on the 24 banks in the PHLX KBW Banking Index (BKX), which may have peaked at $50.69 on March 19. This index includes the four banks considered "too big to fail" -- JP Morgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC).

The BKX is up 55.7% since the October 2011 low and is up 24.1% year to date. Looking at the weekly chart for BKX we show that technical momentum (12x3x3 weekly slow Stochastic) reading is declining with BKX above its 200-week simple moving average at $46.00, which is a neutral configuration. My monthly, annual and quarterly value levels are $46.09, $42.98 and $41.10 with a weekly risky level at $51.30.

Fundamentally, 11of the 24 members of the BKX are rated a buy according to ValuEngine with the other 14 rated hold. The buy-rated regional banks are: BB&T Corp (BBT), Citigroup, Capital One (COF), Fifth Third Bank (FITB), Huntington Banc (HBAN), Keycorp (KEY), PNC Financial (PNC), Regions Financial (RF), State Street (STT), US Bancorp (USB) and Wells Fargo (WFC).

Regions Financial recently repaid its $3.5 billion in TARP money received from the federal government. The company used proceeds from the sale of Morgan Keegan to Raymond James (RJF) and a $900 million common stock offering to raise the funds.

Wells Fargo recently mailed a notice to companies that have a Small Business Line of Credit Account indicating that the interest rate will rise significantly in this month. This increase may cause some small businesses clients to hold off hiring / expansion plans. With the prime rate at 3.25% the line of credit interest rate goes from 5.75% to 8.25%, as the spread to the funds rate rises from 2.50% to 5.00%.

An issue for all 24 big banks is increased assessments to fund the FDIC Deposit Insurance Fund (DIF). Under Dodd-Frank the DIF must be expanded to 1.35% on insured deposits by Sept. 30, 2020. The current reading is an anemic 0.13%. If this rule was in effect today the DIF would have to be at $94.2 billion versus the current $9.2 billion. By Sept. 30, 2020, this amount could be doubled given the 62.6% growth rate of insured deposits over the past four years. Insured deposits are up as a flight to safety of up to $250,000 per bank. These bigger banks are subject to assessments based upon total assets at a higher percentage than the smaller community banks.

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