Bank On These Regional Bank ETFs - ETF News And Commentary
February 01 2012 - 2:00AM
Zacks
While the banks have come a long way since the onset of the
financial crisis, the industry continues to face some serious
challenges, resulting from regulatory uncertainty, low interest
rates, sluggish loan growth and sovereign debt crisis.
Bank regulatory landscape is continuously evolving with new laws
for almost everything from capital and liquidity standards to
derivatives trading rules and debit card fees. Capital rules now
require big banks to maintain thicker capital cushions than other
institutions. While higher capital norms reduce risk, they also
reduce profitability.
Continued low interest rate policy is further eating into banks’
earnings. We may add that in general, low interest rate environment
benefits the banks, as they can borrow at very low interest rates
and lend at higher interest rates but the current scenario of
prolonged low-rates is different as anemic loan demand and limited
investment opportunities hurt the return on assets. Also, Fed has
been aiming to flatten the yield curve, while banks typically
benefit from the steeper yield curve.(Also read Avoid Turmoil With
the Community Bank ETF)
Balance Sheet growth remains elusive as the loan demand
continues to be sluggish and margins continue to be thin. While the
credit standards have eased compared to extremely tight conditions
a couple years back and the banks are now much more willing to
lend, there has not been much loan growth except in the areas of
commercial and industrial loans.
Fed’s latest quarterly survey showed that credit standards on
loans remained almost unchanged in the recent quarter even though
there was some improvement in the loan demand. Most banks started
to tighten credit again as Europe's debt crisis worsened.
Sovereign debt crisis continues to impact the global financial
markets and while most U.S. banks do not have
significant exposure to European
economies, some larger ones have
exposure to their European counterparts, which in turn are
vulnerable to the events unfolding in that region.
According to a New York Times article, five large American banks
have more than $80 billion of exposure to so-called PIIGS
(Portugal, Italy, Ireland, Greece and Spain), the riskiest
countries within the Eurozone. Of this exposure, about $30 billion
is hedged by credit default swaps and while as things stands now,
these banks may not actually need to use the credit default swaps
(except for Greece), but in the event of an implosion, those hedges
may turn out to be imperfect.
As the industry slowly moves towards recovery, there are also
some positives to look at. For most banks asset quality has been
gradually improving, which will result in the provision expenses
continuing their downward trend. Many banks have been releasing
reserves as a result of decline in the charge-offs, which peaked
during 2009. (See Canada Equity ETFs Worth A Look).
Better
capitalization levels and increased awareness for risk management,
resulting from the regulatory actions are strong positives, even
though these have increased costs and uncertainly in the near
term.
Among the various sub-groups within the banking industry, the
big money center banks are most exposed to the higher regulatory
costs and sovereign debt crisis. Some of the smaller regional banks
are currently in a much better
shape with decent loan growth
and cleaner balance sheets. Most regional banks
are not exposed to the problems in the euro-zone or massive
mortgage lawsuits in the US. Further, some of the regional banks
may benefit from the asset sales by the big banks. Regional banks
also tend to do less trading and investment banking business, which
are weak areas for revenue growth in the current scenario.
We suggest that the investors should look at the following three
regional bank ETFs to gain exposure to this sub-group.
SPDR S&P Regional Banking ETF (KRE)
This ETF provides exposure to the regional banking segment of
the U.S. banking industry by tracking the S&P Regional Banks
Select Industry Index. The Index equally weighs its holding of 73
regional banks and thrifts and rebalances on a quarterly basis. The
fund was earlier following the KBW Regional Banking Index and
started following S&P Regional Banks Index (inception-September
2011) after October 2011.
PowerShares KBW Regional Banking Portfolio
(KBWR)
This is a new fund, created in November 2011. It currently holds
50 companies and follows the KBW Regional Banking Index,
which is an equal weighted float-adjusted market
capitalization index. Susquehanna Bancshares Inc is the heaviest
weighted stock in the index (3.09%) followed by CVB Financial
(2.96%) and SVB Financial Group (2.78%). Average market cap of its
holding is $1.5 billion.
iShares Dow Jones U.S. Regional Banks Index Fund
(IAT)
Being market cap weighted, this ETF is top heavy, with highest
weighting to US Bancorp (21.07%), followed by PNC Financial
(12.21%). Average market cap for the holdings is $18.87 billion
while the maximum market cap is $51.62 billion. This is the most
expensive ETF of the three with the expense ratio at 0.47%
|
KRE
|
KWBR
|
IAT
|
Total Assets
|
987.34 million
|
86.6 million
|
95.2 million
|
Expense Ratio
|
0.35%
|
0.35%
|
0.47%
|
Number of holdings
|
73
|
50
|
62
|
Volume
|
445,000
|
33,000
|
185,000
|
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