Title: Friday POW! — Time to bank on the regionals? Show: Haymaker Substack — Friday POW! (written post, paid) Author: David Hay / The Haymaker Team Date: 2026-07-31 URL: https://haymaker.substack.com/p/friday-pow-b1b Note: Written post — no timestamps; text verbatim. Chart/image placements are shown in square brackets where the post embeds a Bloomberg visual. Standard Haymaker legal disclosure block omitted.
Time to bank on the regionals?
While the market pays 30x + for everything that touches AI, this entire sector trades at 11x earnings because it broke three years ago and no one has forgiven it. That's where we often like to look.
Key Highlights
Cheap on an absolute and relative basis: ~12x forward earnings versus a long-run average well above that and a market multiple roughly double it. You are paid to wait, with a ~2.4% dividend yield on top.
The net interest margin (NIM) inflection is confirmed, not just a pipedream: Q1 2026 earnings showed deposit costs finally rolling over and NIMs widening across the group, which is the single most important operating trend for banks, and it just turned positive.
Two real catalysts building: a regional-bank M&A/consolidation wave unlocked by regulatory clarity, and a lighter Basel III regulatory revamp that could free up capital and buyback capacity.
Diversification by design: equal-weighting across ~150 banks means no single blow-up can sink the thesis (like we saw in 2023)
A genuine value/cyclical rotation vehicle if money keeps leaving crowded growth for the "real economy."
Regional banks are the most hated (neglected?) corner of the U.S. market that isn't actually broken anymore. The SPDR S&P Regional Banking ETF (KRE), an equal-weighted basket of roughly 150 U.S. regional and community lenders, still carries the psychological scar tissue of March 2023, when First Republic, Silicon Valley, and Signature banks all failed and the whole group got repriced for possible extinction.
Three years later the sector has quietly healed: deposit costs are rolling over, net interest margins (NIM) are finally widening, the balance sheets are far better managed, and a consolidation wave is building. Yet KRE trades around $70, at roughly 11x forward earnings, which is a steep discount to both its own long-term average and the broader market because the stigma outlived the crisis. That gap between a repaired fundamental picture and a still-punished valuation is what we think is the investment opportunity here. This is a contrarian, catalyst-driven pick, and we want to lay out the bull case and the bear case, because each one has credence (though, as we'll see, the technical picture favors the bulls).
The Setup: A Rebounding Sector at a Crisis Multiple
The core of the pitch is simple: the market is still pricing regional banks for the last war. The 2023 failures were about a correctable mistake, where a handful of banks were sitting on massive unrealized losses in long-duration bonds against flighty, uninsured deposits. That imbalance has been substantially addressed across the group. However, the multiple never fully recovered. At ~12x forward earnings, KRE embeds a permanent risk premium for a crisis that has already passed, which is exactly the kind of lingering odor that creates mispricing. The ETF has recovered strongly off the lows (up roughly 28% over the past year) but it still lags the broader market and trades at a discount that its improving fundamentals no longer justify.
The Earnings Engine Is Turning
For a bank, everything flows from net interest margin, or the spread between what it earns on loans and pays on deposits. Through 2023-2024, that spread got crushed as deposit costs spiked. That has now reversed: Q1 2026 confirmed deposit costs are rolling over while loan yields hold, widening NIM across the group. Critically, this is happening even without Fed rate cuts, because the yield curve has steepened meaningfully (long rates moving up faster than short rates), and banks make money borrowing short and lending long. So the earnings tailwind does not actually require the Fed to cut (a steeper curve does much of the work) which makes the thesis more robust than the simplistic "rate cuts save the banks" version.
The reality is that bank stocks love steep yield curves; the extraordinary performance of Japanese banks since 2022 is a vivid example of that phenomenon. (Japan has the steepest yield curve in the developed world.) Who said you can't make a lot of money on banks?
[Five-Year Price Chart of Sumitomo Financial - Bloomberg chart]
Valuation
The most apt valuation toolkit for KRE is earnings, tangible book value, return on tangible common equity (ROTCE), and dividend yield, so that's how we'll frame it. As of late July, KRE trades near $76 at roughly 12x earnings, about 1.4-1.5x tangible book, and a ~2.2% dividend yield; having run ~25% over the past year to sit just under its 52-week high of $78.10. We'll say the uncomfortable part first: the deep-discount entry is most likely behind us. This is now a re-rating that is visibly underway thanks to strong fund inflows and a "banner year" call from KBW, not the bottom-fishing setup it was in the high-$60s.
That said, the re-rating is not finished, and we think the multiples show why. At ~12x, the group still trades at roughly half the S&P 500's multiple and below the ~14-16x it carried in prior up-cycles. On tangible book (the metric that actually governs bank valuations) ~1.4–1.5x is a full recovery from the sub-1x trough of 2023, but still short of the ~1.7–2.0x the group commanded in rosier times. The engine that closes that gap is ROTCE (return on total capital employed): as deposit costs roll over and NIM widens, sector return on tangible equity is climbing from the low-teens toward the mid-teens, and a bank earning ~14-15% ROTCE justifies a materially higher multiple of book than returns stuck near 11%. That normalization is earnings-driven, not sentiment-driven, which is what we believe makes the re-rating durable rather than a momentum blip.
Technicals
Here's the above-referenced chart action that we find so intriguing… and confirmational of our positive stance on this sector: As you'll note, multiple upside breakouts have occurred. (By the way, the Japanese banks generated a terrific breakout signal in early 2023.)
[Five-Year Price Chart of KRE (overhead resistance lines displayed) - Bloomberg chart]
Further, we've reviewed literally hundreds of stock charts lately and we've been struck by the plethora of multi-year range expansions that have occurred with regional banks. In point of fact, the mega-banks like JPMorganChase (JPM), Bank of America (BAC) and Citigroup (C) broke out a year or two ago (2024, in the case of JPM and C; we glowingly highlighted JPM, and its CEO, Jamie Dimon, back in January of 2024 and since then it's been an outstanding performer, more than doubling from ~$170 to $353.)
The Catalysts
Two forces could turn a cheap sector into a re-rating one over the next year. First, M&A. There are ~150 sub-scale regional banks in this index, and a deregulatory environment with clearer approval pathways is exactly the setup that unlocks consolidation — mergers that deliver cost synergies, scale, and premium takeouts. In a fragmented, cheap sector, a consolidation wave lifts everything, and an equal-weighted ETF captures the takeout premiums broadly. Second, capital relief: a softened Basel III regulatory stance would free up capital that regional banks could redeploy into buybacks and lending, directly boosting per-share earnings. Either catalyst firing would force the market to re-rate the group; both firing would do it violently.
Arguing the Other Side
We are not going to pretend this is a clean setup, because it isn't.
Three real risks:
The rate-cut catalyst has faded, and that matters. Our thesis leans on curve steepening rather than cuts, which is more durable. But make no mistake, the easy "cuts widen NIM" tailwind the bulls counted on in February is gone, and a fresh inflation shock that pushes rates higher would revive genuine 2023-style duration and deposit stress. On the other hand, longer rates breaking out to the upside, as a result of perceptions that the Fed is behind the curve, is beneficial to this sector. (New Fed chair Kevin Warsh's performance this week has been roundly criticized for his failure to provide specifics on containing inflation.)
Commercial real estate (CRE) is a large overhang, and the ETF structure amplifies it. Roughly $875 billion of CRE debt matures in 2026, a refinancing wall against a weak office market; one large holding flagged a ~20% potential loss rate on its general-office book. Because KRE equal-weights, smaller banks, which typically carry heavier CRE concentration, get the same vote as the giants, so the structure that diversifies deposit risk actually concentrates CRE risk. This is the thesis-breaker to watch.
The deep-value entry is partly behind us, and deregulation cuts both ways. KRE is already up ~28% off the lows, so this is a "cheap sector re-rating further," not a bottom-fishing trade. And the money-center banks (via funds like KBWB) have crushed the regionals on deregulation and capital-markets strength. Put another way, the regionals are the laggards, and sometimes you're considered a laggard for a reason. Deregulation could also weaken smaller banks' resilience if stress-test and capital rules loosen too far.
The Bottom Line
KRE is a legitimately cheap and fundamentally repaired sector with two real re-rating catalysts and a confirmed earnings inflection, held back by a fading rate-cut hope and a genuine CRE overhang. As we've seen, the technical picture is highly encouraging. On balance, we think the risk/reward favors the owner: a 12x multiple already discounts a lot of the CRE risk, the NIM turn is real and curve-driven rather than cut-dependent, and the M&A/Basel catalysts are asymmetric to the upside. We rate KRE a Buy / Accumulate, sized for volatility and understood as a catalyst-dependent, higher-beta sector play rather than a sleep-at-night holding.
The thesis-crusher is a visible deterioration in office/CRE credit across the smaller holdings, or a fresh inflation shock that pushes rates higher in a disorderly manner. It's likely that either one would break the continuing up-trend thesis. Accumulate on weakness, size for the beta, and treat the CRE data as a critical factor.
The Haymaker Team