California, the largest U.S. state by economic heft and population, has taken its lumps. High taxes and exorbitant real estate costs are among the reasons California’s unemployment rate is above the national average.
Although California faces a long road back to its economic glory days, that road is not insurmountable and some analysts currently see opportunity in the Golden State’s ultra-competitive regional banking sector. Keefe, Bruyette and Woods says a “brisk real estate market recovery and improving economic fundamentals” in the state’s metro areas make the firm constructive on California’s mid-cap banks this year.
KBW went on to note that “Relative to other regions in the U.S., we believe that, as a group, larger community banks in metropolitan California are better positioned to deliver attractive growth and profitability for investors.”
The research firm’s top ideas among California banks include SVB Financial (NasdaqGS: SIVB), PacWest Bancorp (NasdaqGS: PACW), Cathay General (NasdaqGS: CATY), CVB Financial (NasdaqGS: CVBF), East West Bancorp (NasdaqGS: EWBC) and First Republic (NYSE: FRC) with the top idea being Los Angeles-based PacWest Bancorp.
Investors need not buy all of those stocks because the PowerShares KBW Regional Banking Portfolio (NYSEArca: KBWR) features solid exposure to the group. [Regional Banks Rally to End the Year]
PacWest, KBW’s top idea among California mid-cap banks, is KBWR’s thirteenth-largest holding at a weight of 2.25%. SVB Financial and First Republic, both of which offer exposure to soaring property values in urban areas of Norther California, are KBWR’s largest and third-largest holdings, combing for 7% of the ETF’s weight.
In aggregate, the aforementioned stocks, which are rated outperform by KBW, combine for about 15% of KBWR’s weight, according to PowerShares data.