Regional Banks Test Resistance After Fifth Third's Acquisition Approval

Regional banking stocks gained investors' focus this week after the Federal Reserve Board approved Fifth Third Bancorp's (FITB) application to acquire Chicago-based MB Financial, Inc. (MBFI) in a deal valued at $4.7 billion. The acquisition, once complete, builds Fifth Third's position in the Chicago market.

"From the outset, we have viewed MB Financial as a unique partner in our efforts to build scale in this strategically important market," Fifth Third CEO Greg Carmichael said in a news release, per an SEC filing.

Fifth Third's acquisition approval comes just a month after SunTrust Banks, Inc. (STI) and BB&T Corporation (BBT), two prominent southern regional banks, announced a $66 billion merger—a deal that will create the sixth largest bank in the United States. Analysts credit a rollback in bank regulations as the catalyst driving increased merger and acquisition (M&A) activity in the sector.

"The new regulation breaks banks down into five different categories according to their asset levels, and the regional banks of assets between $100 billion and $250 billion have less strict regulations than the bigger banks with let's say over $700 billion," Mark Tepper, president and CEO of Strategic Wealth Partners, told CNBC's Trading Nation program.

From a technical standpoint, regional banking stocks look like they could continue their first quarter momentum and push through a wall of near-term resistance. Those looking to swing trade a sector rife with M&A activity should add these three regional banking heavyweights to their watchlist.

Fifth Third Bancorp (FITB)

Cincinnati-based Fifth Third Bancorp provides a variety of financial services through its business segments. These include Commercial Banking, Branch Banking, Consumer Lending and Wealth & Asset Management. The regional bank's 1,121 full-service banking centers primarily operate throughout Midwestern states.

Fifth Third Bancorp topped analysts' fourth quarter earnings expectations, reporting earnings per share (EPS) of 69 cents in the period. The company said profitable relationship growth and improved balance sheet resiliency underpinned growth over the period. It also mentioned that ongoing MB Financial integration efforts and a clearly defined set of strategic priorities for the future should allow the bank to reach its long-term financial targets. Trading at $28.41 with a market capitalization of $18.43 billion and offering an attractive 3.31% yield, the stock is up 20.74% year to date (YTD), outperforming the S&P 500 by nearly 9% as of March 15, 2019.

Fifth Third's chart shows an inverse head and shoulders pattern forming over the past five months. Throughout the week, the stock convincingly pushed above the bottoming pattern's neckline and the 200-day simple moving average (SMA) as investors cheered the bank's acquisition approval. Traders who buy the breakout should place a stop-loss order beneath this month's swing low and look for the price to test the gap from May 21, 2018, at $30.95—ironically, the gap resulted from the merger announcement.

The PNC Financial Services Group, Inc. (PNC)

With a market cap of $58.79 billion, The PNC Financial Services Group, Inc. (PNC) offers its customers a range of financial services including retail and corporate banking, asset management as well as residential mortgage banking. Headquartered in Pittsburgh, the regional bank operates a network of roughly 2,500 branches and over 9,000 ATMs across 19 states and the District of Columbia. Despite the company missing analysts' fourth quarter top- and bottom-line projections, PNC Financial sits well positioned to benefit from increased margins, an improved lending environment and a diversified revenue mix. As of March 15, 2019, the stock issues a 3.02% dividend and has a YTD return of 11.67%.

After nosediving 22% from high to low in December, the PNC Financial share price recovered remarkably well in January—recouping roughly half of those losses. The stock's price spent February consolidating and has started to grind higher again in early March. The bulls' next major hurdle is breaking through a confluence of resistance at the $131 level, where the price may find headwinds from a long-term downtrend line and the 200-day SMA. If the stock moves above this area, expect a push to the next level of significant resistance at $137.50. Those who play the breakout could trail a stop order several candlesticks below the entry to ride momentum as far as possible.

KeyCorp (KEY)

KeyCorp (KEY) engages in retail and commercial banking with a focus on middle-market commercial clients through a hybrid community/corporate bank model. Although the Cleveland-based bank operates in 16 states, the Ohio and New York markets drive the lion's share of its revenue. KeyCorp posted fourth quarter adjusted EPS of 48 cents, beating the Street's predictions of 47 cents. Improvement in net interest income and a reduction in expenses drove income over the period. The Midwest bank trades at 10.2 times earnings, lower than the industry average multiple of 12.6. KeyCorp stock has a $17.57 billion market cap and is up 19.01% on the year as of March 15, 2019. Investors receive an enticing 4.07% dividend yield.

KeyCorp's share price appears to be forming an inverse head and shoulder pattern, with the right shoulder completing this week. Traders could either play an initial breakout of the pattern's neckline and a seven-month trendline at $17.50 or wait for the price to clear the resistance area and buy the first pullback. Think about setting a take-profit order near $21—in the proximity of last summer's swing high.