According to UBS, These Four Regional Banks Are Worth Buying

According to UBS, the selloff in regional banks is overdone, and four names stand out as particularly attractive.

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On Thursday, bank stocks rose, but volatility has increased in the past week. Even though regulators said Sunday they would backstop SVB's depositors, the banking sector continued to nosedive, despite Silicon Valley Bank's (SVB) collapse. Regional banks were especially hard hit.

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As a result of concerns about European banking and Credit Suisse's financial health, large banks were also hit hard by the selloff. JPMorgan Chase and Goldman Sachs, for instance, dropped nearly 5% and almost 10% on Wednesday, before rebounding on Thursday.

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Reports that a group of financial institutions is in discussions to deposit about $20 billion in First Republic, the San Francisco-based lender that led Thursday's decline, boosted regional banks. Among all of the banks that closed last weekend, First Republic had the third-highest rate of uninsured deposits. It was followed by SVB and Signature Bank.

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Investors should remember, however, that not all regional banks are similar. UBS analyst Erika Najarian believes fears of deposit runs in superregional banks are overdone.

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The group does not seem to get enough credit for its sticky, operational deposits made by corporations (which will exceed $250k per account) via treasury management services, a business that is extremely hard to win due to its difficulties in implementing (and undoing),” Najarian wrote on Thursday.

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She said regional banks have time to address regulatory capital standards internally, particularly if liquidity squeezes subside, despite regulators tightening regulatory capital standards. The losses resulting from rising interest rates could also narrow or even reverse if interest rates remain under downward pressure, she added.

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In this regard, Najarian writes to investors that unrealized securities losses should not be viewed in a static fashion.

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Here are four stocks she considers to be standouts.

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• Truist Financial Corp

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• KeyCorp

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• Fifth Third Bancorp

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• Huntington Bancshares

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There is a compelling entry point in Truist Financial and KeyCorp stock after recent losses, Najarian said.

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Over the last two days, KeyCorp's stock fell by about 25% and Truist's stock lost more than 17%.

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At the same time, Fifth Third Bancorp shed about 16 percent of its market value during that period. While this is true, Najarian noted that thanks to a recent transformation of the Cincinnati-based company, its natural return on average tangible common equity (ROTCE), excluding special gains and losses, improved by 700 basis points as a result of the process. As a result of ROTCE, banks are able to assess how well their organization performs as a whole and how each of their business units performs differently.

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"At current levels, it appears that its transition into a high-quality regional stock has already been fully priced out of the stock," she wrote in an email.

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Her comments also praised Fifth Third Bancorp's chief financial officer and CEO. In addition to the CEO being credited with accelerating the bank's digital transformation, CFO Jamie Leonard has been recognized for his ability to manage balance sheet risk among peers, Najaorian said.

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There is one more bank that has taken a direct hit relative to its fundamentals, she said. Huntington Bancshares, whose retail deposit base has made up 63% of the bank's total deposits, is underrated when it comes to its operational corporate deposit base.

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As of Wednesday's close, Huntington had lost nearly 19% from Friday's close.