Zions, Western Alliance stocks soar after J.P. Morgan says buy, because they are 'substantially mispriced'

By Tomi Kilgore

Zions stock leads S&P 500 gainers, after J.P. Morgan's Steven Alexopoulos swings to bullish from bearish

Investor sentiment toward regional banks had gotten so negative, J.P. Morgan analyst Steven Alexopoulos said it was time to back away from his bearish stance on the sector, and even turn bullish on three beaten-down stocks.

He upgraded Western Alliance Bancorp (WAL) and Comerica Inc. (CMA) to overweight from neutral, and doubled upgraded Zions Bancorporation (ZION) to overweight from underweight, saying the banks' stocks "appear substantially mispriced to us."

The upgrades, along with upbeat calls from others on Wall Street and the Biden administration saying it will monitor "market developments," including short-selling pressure, or bearish speculation, helped spark a big rally in the banks' stocks.

Western Alliance's stock rocketed 51.3% in afternoon trading, putting them on track for the biggest one-day gain since they ran up 63.5% on Sept. 18, 2008. Alexopoulos said the stock had suffered "outsized selling pressure despite favorable updates on deposit flows and balance sheet repositioning.

"With big disconnect between stock price selloff and fundamentals, we see significant upside potential in [Western Alliance] shares," Alexopoulos wrote in a note to clients.

Zions' stock surged 18.5%, the biggest gain since Nov. 9, 2020, and enough to pace the S&P 500 index's advancers.

"While fundamental outlook remains unchanged, with the stock now substantially mispriced along with very elevated implied cost of equity, we see favorable risk/reward," Alexopoulos wrote. (Favorable risk/reward refers to his belief that the potential reward from buying outweighs potential downside risk by enough to buy the stock.)

Comerica shares were the S&P 500's third-best performer, as they shot up 15.2%, which was also the best gain since Nov. 9, 2020.

"With [Comerica] shares selling off over the past week despite no change to fundamentals of the business, we see very favorable risk/reward and significant upside potential in this high quality franchise," Alexopoulos wrote.

Prior to Friday's rally, shares of Western Alliance had plunged 51.0% week to date, while Zions' had tumbled 28.5% and Comerica's had sunk 28.0%.

The upgrades are part of Alexopoulos' move to neutral on the sector, after being at underweight since his preview of third-quarter 2022 results.

He said that since regional banks reported first-quarter 2023 results, which were not as bad as feared, the sector had been victim to "intense shorting/selling pressure," as bears felt empowered after First Republic Bank (FRCB) was placed in receivership and as bullish funds reconsidered their investments amid concerns over net interest margin, credit and deposit runs.

Basically, Alexopoulos said that "with too many on one side of the boat," he was moving to the middle.

"With sentiment very negative and a potential sector re-rating on the horizon, we now move to the middle of the boat and adopt a neutral sector stance," Alexopoulos wrote. "While we considered a bullish sector stance (given how lopsided sentiment is at the moment), with a credit cycle still looming, we think a neutral stance is more appropriate," he added.

The SPDR S&P Regional Banking exchange-traded fund (KRE) rose 5.3% in afternoon trading Friday, but was still down 11.0% this week and off by 41.3% over the past three months. In comparison, the S&P 500 was down 1.0% this week and has slipped 0.2% the past three months.

-Tomi Kilgore

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05-08-23 0756ET

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