Regional bank indexes are now back to where they were when a March crisis began, a significant moment for an industry recovering from one of its most challenging years since the 2008 financial crisis.
Two major indexes that track mid-sized lenders are currently trading above levels last seen in the moments before the March 10 fall of Silicon Valley Bank, an event that triggered widespread panic in the banking system.
The SPDR S&P 500 regional bank index (KRE) and the KBW Nasdaq US regional bank index (^KRX) had their best single-day performance in the last month on Wednesday. They closed Thursday above where they were on March 9, the day before Silicon Valley Bank went down.
Another index composed of even bigger banks, KBW Nasdaq US bank index (^BKX), also closed Thursday above the level it last reached on March 9.
The climb back to pre-SVB levels is happening because of a dovish shift at the Federal Reserve, which is hinting that it is done raising interest rates after its most aggressive tightening campaign since the 1980s. On Wednesday Fed officials said they now expect the central bank to cut rates three times in 2024.
The news was a relief to regional bankers who have been struggling to earn more robust profits. Elevated rates have made their deposits more expensive, created higher paper losses on bonds held for investment, and made life more difficult for their borrowers.
"This is nothing but good for our business," Don McCree, head of commercial banking for regional lender Citizens Financial (CFG), told Yahoo Finance.
Citizens was up more than 6% Thursday, along with many other regional banks that experienced market pressure earlier in the year.
Scott Siefers, a large and regional bank analyst with Piper Sandler, added that "I'm certainly hopeful that the worst is behind us."
Regional bank stocks have notably lagged the S&P 500 this year, even as they’ve recovered from the drubbing they took last spring. Their low point came in May when the indexes were down 30% from the beginning of the year.
The two regional bank indexes are still down 2% and 8% on the year, as of midday trading Thursday.
To be sure, executives and analysts aren’t ready just yet to declare the industry has moved past its problems. Deposit costs, for one, are expected to continue rising until interest rates are actually lowered.
The bull case for banks still depends not on "when" the Fed shifts next year so much as "why," according to Siefers.
"If it's because we've tackled inflation and can get back down to a more accommodative policy that would be great, but if we're having to cut rates really aggressively, because the economy goes into some unforeseen tailspin, that would be a totally different story," Siefers said.
Delinquency rates on certain bank loans are rising and commercial real estate remains another source of worry, especially for loans tied to office space.
Last quarter the percentage of non-owner-occupied commercial real estate loans that were 90 days or more past due rose to their highest level since 2014, according to the FDIC.
"The rally is most welcome but won't change credit outcomes in commercial real estate," Chris Whalen, a bank investor and analyst with Whalen Global Advisors, told Yahoo Finance over email. "Credit is the next shoe to drop for banks."
The best scenario for regional banks may not arrive until short-term rates fall below the level of long-term rates, which would allow mid-sized institutions to charge more for loans than they pay out for deposits.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
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