Let’s start with the bad news.

Commercial real estate loan failures in the mid-sized regional banking industry have become a thorn in the economy’s foot, writes Andrew Smith for Newsday. According to a Wall Street rating agency’s report, commercial real estate failures will likely affect smaller banks because most of these banks have a larger portion of their portfolios allotted to commercial real estate loans. (Why regional banks are faltering).

Non-performing loans are on the increase and the Fitch report noted that commercial mortgage defaults are accelerating, which has been evidenced by the quarterly reports of many banks.

On the bright side, regional banks could become more dominant in the United States as policymakers reassess risk in the financial system and enact more strict regulations, reports  Karey Wutkowski for Reuters. The notions of “too-big-to-fail” and “systemic risk” may change the country’s banking model to accommodate more mid-sized banks, says Denis Salamone, chief operating officer of Hudson City Bancorp.

For more information on regional banks, visit our regional banks category.

• SPDR KBW Regional Bank ETF (NYSEArca: KRE): down 26% year-to-date

• Regional Bank HOLDRs (NYSEArca: RKH): up 5.9% year-to-date

Max Chen contributed to this article.

]]> http://www.etftrends.com/2009/11/regional-bank-etfs-the-bad-and-the-good.html/feed/ 0 http://www.etftrends.com/2009/09/financial-etfs-why-are-regional-banks-faltering.html http://www.etftrends.com/2009/09/financial-etfs-why-are-regional-banks-faltering.html#comments Fri, 04 Sep 2009 22:00:46 +0000 Tom Lydon http://www.etftrends.com/?p=17061 As the financial sector and its exchange traded funds (ETFs) have been on a rollercoaster ride over the past year, not all of the sector’s ETFs are created equal. 

While the bulge-bracket banks have boomed, local and regional banks have been depressed by a spate of bankruptcies. Small U.S. financial institutions have seen 106 bank closures and some analysts think there are more to come.

Daniel Harrison of Index Universe states that the polarization between the performance of large and small financial institutions has been felt acutely in the ETF arena, where many have used ETFs to hedge against long stock positions.

Regional banks performed so well at the height of the financial crisis, thanks to their avoidance of exotic and complex financial instruments (such as credit default swaps) that took down their larger brethren. But that doesn’t mean that smaller banks were invulnerable to trouble themselves. Now that big banks are doing so well, why are the smaller banks suddenly faltering?

• Exposure to commercial real estate. Commercial defaults have risen to 2.25%, up from 1.61% in the first quarter. It’s expected to rise to 4.1% before year’s end.
• Home foreclosures. Despite government efforts to stem the tide, the fact is that homeowners are still foreclosing, and small banks make many of these loans. The rate of foreclosures is up to 13%, says Kent Bernhard Jr. at Portfolio Magazine.
• Unemployment. As unemployment continues to rise, it will put a strain on personal loans, mortgages, commercial loans and credit.
• Bad loans in general are running three to four times higher than they were two years ago.
• It’s tough to raise money when you’re small. If small and regional banks could raise capital, it could mitigate the problems.

When comparing the big banks with regionals, there is a fairly large discrepancy when it comes to performance.  The SPDR Financial Select Sector (XLF), which tracks the large institutions, is up 14% year-to-date, compared to the SPDR KBW Regional Banking (KRE), which is down 30.5% year-to-date.

This doesn’t mean that opportunities don’t exist for investors who are considering regional banks.  The Regional Bank HOLDRs (RKH) is up 0.7%.  What differentiates this ETF from KRE is its level of diversification.  Nearly 93% of RKH’s assets are held in its top 10 holdings as compared to 27% in KRE.  It is vital for investors to educate themselves and know exactly what an ETF holds in order to gain the exposure they’re seeking to regional banks.

For more stories on financials, visit our financial category.

Kevin Grewal contributed to this article.

There have been a number of stellar performers in recent weeks – these are just a few that caught our notice. Bear in mind that wherever you choose to place your money, always have a strategy for both entry and exit, since no trend lasts forever.

Turkey has several factors in its favor: the central bank has reduced rates to its lo a record low, consumer confidence is on the rise and jobless claims are declining. The country’s stocks have recently recovered to pre-crisis levels and it is reflected in the country’s ETFs.

• iShares MSCI Turkey Invest Mkt Index (TUR): up 76% year-to-date; up 19.5% in the last two weeks

Oil is what makes the world go ’round, and the price of oil may continue to rise as economies recover. Once the global economy sees normalcy, some feel that it’s likely that oil will see higher demand and a lower supply, which would naturally result in the higher price of oil and gas at the pumps.

• United States Gasoline (UGA): up 82.1% year-to-date; up 14.5% in the last  two weeks

Coal has a couple of good things going for the sector: reduction in capital expenditure by producers, a weaker U.S. dollar, as well as increases in both steel and electricity consumption. Lobbyists are also fighting on Capitol Hill for more perks for the industry.

• Market Vectors Coal ETF (KOL): up 93% year-to-date; up 14.9% in the last two weeks

In retail, some high-end consumers are increasing their intake of goods. Many countries are reporting rises in exports and trade surplus, and some luxury retailers are quietly discounting items to drum up more business. So far, the tactic seems to be working.

• Claymore/Robb Report Global Luxury (ROB): up 32.4% year-to-date; up 11.9% in the last two weeks

The ETF that tracks regional banks is producing impressive results considering that many believe regional banks are closing or in trouble because of commercial REITs. MarketWatch says strong profits and good reports from large banks has helped buoy the financial sector and regional banks may be along for the ride.

• SPDR KBW Regional Banking (KRE): down 25.2% year-to-date; up 23.7% in the last two weeks

Max Chen contributed to this article.

Six of the banks that closed were subsidiaries of one larger bank, the Security Bank Corporation, based out of Macon, GA. Over the past year, Georgia has seen 16 banks go down, the most of any single state, according to Catherine Clifford for CNN Money.

Earlier in the evening, Waterford Village Bank, of Clarence, NY, was shut down, and the FDIC was named the receiver. More than five years have passed in New York since a bank was taken over by FDIC. Friday’s seven closures will cost the FDIC fund $812.6 million, bringing the total cost for failed banks to $14.21 billion this year.

Smaller regional banks have had a challenging time of late. As the U.S. commercial real estate market continues to to deteriorate, regional banks may take the biggest hit.

Recovery within the commercial real estate market seems far off – offices are vacant, apartment rentals and hotel rates remain sluggish. Many regional banks reported losses in the second quarter from weakness in residential and commercial real-estate and construction loans, reports Barron’s.

REIT indexes are 60% below their 2007 highs, but many investors remain wary of the groupbecause of worsening fundamentals. Private-equity firms are in the worst position, and real estate owners with a lot of debt are in the most trouble.

Is this a sign of more to come?

• SPDR KBW Regional Banking (KRE): down 24.7% year-to-date

• Regional Bank HOLDRs (RKH): down 3.3% year-to-date

For more stories aboiut regional banks, visit our regional banks category.

Analysts expect more problems in commercial real estate, which includes mortgages on office and apartment buildings and shopping malls, along with construction, development and industrial loans, reports Colin Barr for CNN Money. U.S. banks currently hold around $1.8 trillion in commercial loans and poor economic conditions have observers fearing that a chunk of these loans will go bad.

Higher credit costs already led to second-quarter losses in regional banks. Banks have been buttressing their reserves for potential future credit losses. However, more borrowers are falling behind on loans and some question whether the reserves will hold. Thin reserves mean some banks could “face material provisions ahead,” which could eat away at profits over the next year.

Some real estate players claim banks are just sitting on bad loans instead of liquidating them. This trend potentially suppresses new lending and intensifies the problems in a falling market. Meanwhile, bankers blame weak loan demand and deny their hand in troubled credits.

The banking industry has raised billions of dollars in new equity, but some expect problems ahead, which is adding to price declines. For example, office rental rates dropped 23% in New York and 11% in Washington from 2008 highs. Vacancy rates increased 14% in Manhattan and 11% in Washington in the first quarter.

• SPDR KBW Regional Banking (KRE): down 31.2% year-to-date

• Regional Bank HOLDRs (RKH): down 8.2% year-to-date

• iShares FTSE NAREIT Industrl/Offc Cp Idx (FIO): down 5.9% year-to-date

For more information on financials, visit our financial category.

Max Chen contributed to this article.

The alternative energy industry is readying itself for a brighter future, especially with the Obama administration’s fervent endorsement of the sector.  Globally, more countries are beginning to realize the significance of alternative energy and its benefits to long-term economic goals.

• Claymore/MAC Global Solar Energy (TAN): up 9.1% year-to-date; up 104.5% off its March 9 low

India’s stocks rose after the Congress Party won the elections, and the victory raised hopes of a revival in foreign direct investment and economic growth, along with tax reform and increased spending in infrastructure.

• iPath MSCI India Index ETN (INP): up 54.6% year-to-date; up 102.7% off its March 9 low

Coal, like most other commodities, has been on the rise. China may help boost the price of coal by increasing value-added taxes to coal producers. The Obama administration is expected to put a cap-and-trade program into action, which could ultimately help the coal industry.

• Market Vectors Coal ETF (KOL): up 57.2% year-to-date; up 101.2% off its March 9 low

Regional banks were greatly aided by governmental assistance with programs that allowed banks to unload troubled assets and patch up balance sheets.

• SPDR KBW Regional Banking (KRE): down 35.8% year-to-date; up 95.7% off its March 9 low

Turkey’s economy is also beginning to prosper as a surge in consumer confidence and drop in unemployment rate prompted the Central Bank to ease money lending. The country’s industries are also likely to profit from their close proximity to Middle Eastern oil supplies.

• iShares MSCI Turkey Invest Mkt Index (TUR): up 40.3% year-to-date; up 94.0% off its March 9 low

Max Chen contributed to this article.

As of Wednesday, TARP paybacks from 10 financial banks that wanted out from under the regulations that came with the taxpayer money totaled $68 billion. Robin Sidel for The Wall Street Journal reports that by returning the TARP capital, they are on their own to deal with financial problems and recessionary climes.

This widely expected move creates a definite line between banks that are healthy and those worse for wear. This payback was widely anticipated after the Treasury Department gave permission to return the money last week.

• Financial Select Sector SPDR (XLF): down 6.4% year-to-date; J.P. Morgan Chase (JPM), 12.8%; Goldman Sachs (GS), 7% and Morgan Stanley (MS), 2.8%.

First Trust has filed for a community bank ETF, the first of its kind. It would track the NASDAQ ABA Community Bank Index, which holds small- and mid-cap community banks listed on the NASDAQ stock exchange, Index Universe reports. The index has a variety of criteria in place to ensure that its components are strictly local institutions.

The difference between the huge national and multi-state banksfrom a community bank is that these smaller banks are locally owned and operated. Most community banks do not offer some of the services that larger banks offer such as brokerage services and multi-million dollar financing, explains Creditor Web.

Community banks also differ from regional banks in that the latter is a mid-size depository institution that is larger than a community bank, but smaller than an institutional bank. A regional bank does not have international presence and would have many retail branches, according to Investor Glossary.

• SPDR KBW Regional Banking (KRE): down 35.8% year-to-date

For more stories on regional banks, visit our regional banks category.

For more stories related to financials, visit our financial category.

The fact is that thousands of banks in the United States are doing fine, and analytic indicators like capital-to-asset ratio or liabilities-to-asset ratio paint a healthier picture for such banks, writes Martha C. White for The Big Money. Banks that held their ground were usually those that stuck to good ol’ fashioned lending.

It is the smaller regional or community banks that are showing good results since they never got entangled with derivatives trading that brought on this whole mortgage debacle.

According to The Big Money, several banks were noted for their survival through the current financial ordeal.

1. BB&T (BBT) profited enough to shell out 47 cents per share. The $3.1 billion TARP money it received may also put it in a position to buy up its weaker and smaller competitor banks.
2. Beal Bank ignored the credit boom and halted loans in the secondary market. As a result, it showed a 8.1% on return to assets ration in 2008.
3. Hudson City Bancorp’s (HCBK) percentage of nonperforming loans only edged up less than 1% as of last month, quite below the industry standard. This bank also steered away from derivatives such as credit-default swaps.
4. Signature Bank (SBNY) raised $148 million in a public offering. Now, it is showing strength and has also given back its $120 million in TARP money.
5. US Bancorp (USB) is known for its conservative lending and was in an area with less speculative real estate bubbles. Back in November, the Office of Thrift Supervision sold the deposits and assets of Downey Savings & Loans to US Bancorp in a show of confidence.

• SPDR KBW Regional Banking (KRE): down 21.1% year-to-date; Signature Bank is 3.9%

• iShares Dow Jones U.S. Regional Banks (IAT): down 23.6% year-to-date; BB&T is 6.7%, Hudson City Bancorp is 4.1%; US Bancorp is 18%

• Regional Bank HOLDRs (RKH): down 19% year-to-date; BB&T is 3.7%, US Bancorp is 18.4%
  

Max Chen contrtibuted to this article.

The recent Public/Private Investment Partnership (PPIP) along with other monetary and fiscal initiatives should allow banks to unload troubled assets and patch up their balance sheets, writes Morgan Keegan for Barron’s.

The program is a boon for regional banks, as it should get rid of troubled loans. Nevertheless, regional banks may record more write-downs on troubled real estate loans or other real estate owned so that they may sell these assets under the PPIP.

These initiatives could also signal the beginning of private capital finding its way into financial institutions, and help banks pay back capital borrowed under Troubled Asset Relief Program (TARP).

Mark-to-market accounting and the reinstatement of the uptick rule may keep the rally going in the banking sector. Bank stocks have seen their stocks go up and it is beginning to cool down with investors going through the time-honored tradition of profit-taking. But mortgage “cram downs” and stress tests are still an overhang on bank stock valuations.

• KBW Regional Bank (KRE): down 29.9% year-to-date

• iShares Dow Jones U.S. Regional Banks (IAT): down 29.2% year-to-date

Max Chen contributed to this article.

Wall Street tends top focus on the banks and the policy makers in Washington, as they anticipate their next move. Investors have gotten creative and are searching for possibilities in sectors such as homebuilders and biopharma. Jeff Cox for CNBC reports that mergers and acquisitions could increase through the year as the government seeks to free up more capital that can be used by bigger companies and dissolve the smaller, less productive ones.

The expansion will move globally, but not to the IPO levels of before. There are great valuations out there, however. We’re going to see more global expansion and integration of companies, where the expansion tended to be more nationalized than in the past.

To make sifting through the M&A trend easier, ETFs offer a safer play and take the guesswork out of single stock picking. Choosing ETFs that cover the sectors where M&A activity will abound gives investors an opportunity to participate in the trend while reducing the risk of getting burned by individual companies that do bad deals.

Are you ready for a rebound, if this is it? Whether it is or not, there are ways to be prepared.

There are trillions of dollars sitting on the sidelines right now as investors ride out the storm, but when the bottom hits and a rebound begins, investors need to be mentally prepared and ready to go.

Most funds are far below the 200-day moving average, meaning it would be a long wait before a signal to buy is reached. We haven’t been so far below the long-term trend lines in decades. As a result, we have a short-term plan for getting back into the markets if the rebound is real:

• When a fund crosses above its 50-day moving average, put 25% of the value of your portfolio.
• When the fund goes up 5%, put another 25% in.

By the time this happens, the 200-day moving average should be well within sight.