) -- Regional banks have had an impressive run since mid-November, but there is a case to be made that the regionals' outperformance of megabanks is due for a pullback.


KBW Regional Bank ETF

(KRE) - Get Report

is up 12.9% since the Nov. 12 market close, while the


(KBE) - Get Report

, in which


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Wells Fargo

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JPMorgan Chase

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Bank of America

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U.S. Bancorp

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together account for more than 40% of overall holdings, is down by 0.1% over the same time period.

The reason for this outperformance seems clear. Many of the largest holdings in the regional ETF, including

East West Bancorp

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Hancock Holding Company



MB Financial

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have seen their stocks pop after they bought failed banks from the Federal Deposit Insurance Corp. Other regional banks have seen their shares rise just on the expectation they will do similar deals.

However, as strategists at Keefe Bruyette & Woods and Sandler O'Neill have pointed out, regional banks haven't been forced to raise nearly as much capital as the 19 largest banks that underwent government stress tests this year. They will need to raise many billions more in capital, the strategists argue, and they aren't likely to find it nearly as easy as the big guys did.

It seems inevitable that some of the regional banks that have grown through acquisitions will run into trouble. Putting institutions together is never easy. And not all of those banks that have rallied just on the expectation that they will do a deal will succeed.

There are undoubtedly some regional banks out there that will have a stellar year in 2010, but as a group, and at least over the short term, the big banks may be a better bet.


Written by Dan Freed in New York


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Regional banks soar after buying failed rivals.