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.

Financial exchange traded funds (ETFs) have gained more than 100% off the March 9 market low, but the Federal Deposit Insurance Corporation (FDIC) reported that banks lost $3.7 billion in the second quarter in bad loans made to homebuilders, commercial real estate developers and small- and mid-size businesses, reports Eric Dash for The New York Times.

Deposit insurance fund dropped to $10.4 billion, a 16-year low. “Problem banks” have increased from 305 in the first quarter to 416. The decline in deposit insurance comes from money set aside to cover bank failures, but the reserves are so low that officials are considering a special assessment on banks, not counting elevated insurance fees, by the end of the third quarter.

Banks have cut out $48.9 billion, or 2.6% of assets, most of it tied to rising corporate and commercial real estate losses as well as write-offs on short-term debt and a jump in troubled credit card loans. Early trend signs show that quarterly increases in loan losses are slowing.

Federal bank regulators are anticipating hundreds of small- and medium-size banks to collapse in the coming months, and more money is being used to prevent losses. Federal officials warned the sector that a rebound won’t come soon and analysts say a recovery will come when the job market and broader economy stabilize.

• iShares Dow Jones U.S. Financial Services (IYG): up 18.7% year-to-date

• SPDR Financial Select Sector (XLF): up 19.4% year-to-date

• Regional Bank HOLDRs (RKH): up 5.7% year-to-date

For more information on financials, visit our financial category.

Max Chen contributed to this article.

The Commerce Department reported that new home sales rose 9.6% in July, marking the fourth straight monthly increase and beating expectations, reports Alan Zibel for the Associated Press. Sales rose to a seasonally adjusted annual rate of 433,000 from an upwardly revised June rate of 395,000 and are now up 32% from the bottom in January. The news sent the iShares Dow Jones U.S. Real Estate Index (IYR) up 0.3% in morning trading.

The real estate sector was given yet another boost as the Mortgage Bankers Association reported that mortgages applications to refinance loans jumped 12.7%. This is yet another indicator that homeowners are confident that the housing market is on the mend.

In the manufacturing industry, a report indicated that a surge in the demand for aircraft pushed new orders for long-lasting U.S. manufactured goods up at their fastest pace in two years. Durable goods orders in July rose 4.9%, the largest advance since July 2007, after falling 1.3% in June. New orders for transportation equipment, including vehicles and aircraft, jumped 18.4%, while capital goods rose 9.5%, reports Elizabeth Stanton for Bloomberg.

The Office of Thrift Supervision reported that U.S. thrifts squeezed out a $4 million profit in the second quarter, marking the industry’s first positive earnings since the third quarter of 2007. Although encouraging, unfortunately, the industry is not out of the woods yet as “problem thrifts” on the agency’s list continue to increase. Thrifts having significantly low capital reserves and other deficiencies rose to 40, up from 31 last quarter and 17 a year earlier. The news sent the Regional Bank HOLDRs (RKH) up 0.8% in morning trading.

Overall, all three major U.S. indexes rose in morning trading with the Dow Jones Industrial Average adding 0.2%, the S&P 500 jumping 0.2% and the Nasdaq adding 0.1%.

For more stories on real estate, visit our real estate category.

Kevin Grewal contributed to this article.

According to Megan Barnett at Minyanville they did, now they now are trying to catch up to smaller banks and foreign firms.  Major firms such as Goldman Sachs (GS), Bank of America (BAC) and JP Morgan (JPM) are on a hiring binge and some think that this might not be the greatest idea because things haven’t changed drastically for the sector in the last few months.

In fact, the watchdog of the Troubled Asset Relief Program (TARP) released a report Tuesday morning suggesting that the $700 billion bailout has done little to relieve banks of their troubled assets.  Additionally, many banks have reason to worry about the quality of some of their assets shrinking even more. Loan quality has decreased in the last 18 months as good creditors go bad while the few good borrowers pay down their loans.

The banking sector is starting to stabilize, but this doesn’t mean that it’s in the clear. Some ETFs that may be influenced by the outlook of the financial sector are the following:

• SPDR Financial Select Sector (XLF): up 12.1% year-to-date; JPM is 12.5%; BAC is 10.6%; GS is 6.8%

• iShares Dow Jones U.S. Financial Services (IYG): up 12.9% year-to-date; JPM is 14.1%; BAC is 11.1%; GS is 6.8%

• Regional Bank HOLDRs (RKH): up 2.2% year-to-date; JPM is 23.4% and BAC is 5.8%

For more news on the financial sector, visit our financial category.

Kevin Grewal 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.

Of the 300-plus banks that were going to participate in the federal funding program, many have withdrawn because of the strict requirements and limits, reports Stephen Labaton for The New York Times. The program would reopen the application window for banks with assets below $500 million, using the proceeds from repayments that the Treasury is anticipating from big banks.

Louis Story and Eric Dash for The New York Times report that federal policymakers have been creating ways to ensure that pay is more closely linked to performance. The newer rules would even apply to those banks, hedge funds and private equity firms that did not receive TARP funding.

• Regional Bank HOLDRs (RKH): down 10.6% year-to-date

• iShares Dow Jones US Financial Sector (IYF): down 4.1% year-to-date

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.

Laurie Kulikowski for TheStreet reports that the federal government on Tuesday said it would allocate the funds from the $700 billion troubled asset relief program, or TARP, in a bid to improve investor confidence in the banking system by jump-starting the credit markets.

Only 50% of the capital injection will be used for the largest banks and fiduciary processors. Many analysts believe the rest will go to regional banks.

Specific names within the regional space to benefit have not been announced, but as specific details within the plan become clear, more should be knon. Nine major financial institutions have agreed to participate on a voluntary basis, and the Treasury will purchase preferred shares in the institution.

Under the Treasury’s plan, a qualifying financial institution may issue senior preferred equity that equals the lesser of 1% of its risk-weighted assets, or $25 billion up to 3% of risk-weighted assets.

Participating banks will need approval from the Treasury to increase the dividend on its common stock, banks will need approval to buy back stock, and will be required to scale back their executive compensation packages.

Regional banks have managed to buck the trend that has weighed down financials this year, thanks to their lessened exposure to the toxic securities dogging the rest of the industry. But they’re certainly exposed to housing- and consumer-related credit. For many small banks, mortgage banking and other kinds of lending are key components of their businesses.

• KBW Regional Banks (KRE): down 15.1% year-to-date; up 37.1% in the last three months (black line)
• Regional Bank HOLDRs (RKH): down 30.2% year-to-date; up 21.1% in the last three months (green line)