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Portfolio Manager Insights
A new dawn for regional banks
U.S. regional banks, overshadowed since the 2023 collapse of several midsize lenders, have re-emerged amid a favorable financial landscape, says Fidelity’s Tom Allen.
- The convergence of favorable interest-rate dynamics, industry consolidation and regulatory shifts has pushed regional banks into a transformative phase, according to Fidelity Portfolio Manager Tom Allen, who likes the category for its improved profitability outlook and attractive valuations.
- “The yield curve is the lifeblood of a bank’s business model, and its move from inverted to normalized has breathed new life into lenders’ profitability,” explains Allen, who co-manages Fidelity Advisor® Mid Cap II Fund with Maurice FitzMaurice. “This has allowed banks to realize the benefits of their core business model: borrowing at lower short-term interest rates while lending at higher long-term rates.”
- In helming the diversified equity strategy since 2004, Allen prefers companies with a high return on capital, long-term revenue growth and a healthy balance sheet, trading at what he believes is a reasonable valuation.
- Regional banks rely heavily on net interest margin – the difference between interest received and interest paid – because they don’t have a large income stream from capital-markets activity, he says.
- The industry experienced a historic wave of consolidation in 2025, fueled by a favorable regulatory environment, according to Allen, adding that mergers have increasingly been driven by the need for greater scale to fund massive investment in artificial intelligence and digital infrastructure.
- Looking to capitalize, Allen has recently increased the fund’s exposure to Huntington Bancshares. In February, the firm completed its acquisition of smaller rival Cadence Bank in a $7.4 billion deal, creating a top-10 regional banking powerhouse that, according to Huntington CEO Stephen Steinour, should be well-positioned to expand into attractive markets while leveraging a robust platform for future investments.
- This outlook is in stark contrast to sentiment following the 2023 regional banking crisis and the high-profile failure of several lenders, notes Allen, who believes the segment has cast aside that shadow to achieve a strong result in late 2025.
- “Regional bank stocks remain largely undervalued and trade at a significant discount to the broader equity market,” he says. “This valuation gap suggests significant ‘catch-up’ potential for banks, particularly if earnings growth accelerates.”
- Accordingly, the fund has held a position in regional lender Old National Bancorp, which acquired a private bank in what Allen considers a strategically advantageous transaction.
- “Market participants have discounted the stock due to temporary balance-sheet distortion, and we believe this reaction is misguided, overlooking the acquisition’s long-term benefits,” says Allen. “Such mispricing creates an opportunity for investors seeking to capitalize on undervalued securities – a key tenet of our investment approach.”
FEATURED FUND
Fidelity Advisor Mid Cap II Fund (FIIMX)
Seeks long-term growth of capital.
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