The financial sector’s loan growth has expanded to its strongest since 2008, potentially boosting the outlook for bank-related exchange traded funds in this earnings season.
So far this year, financial sector stocks have fallen behind the broader equities market. The SPDR S&P Bank ETF (NYSEArca: KBE) has declined 2.8% so far this year while the Financial Select Sector SPDR (NYSEArca: XLF), which has 37.0% of its portfolio allocated to banks, is up 7.3%. In contrast, the S&P 500 is up 8.3% year-to-date.
However, bank stocks could begin to pick up as strong loan growth translates to improved revenue and earnings. Total loans and leases at U.S. commercial banks was 6.2% higher than they were year-over-year as of September 17, reports John Carney for the Wall Street Journal.
Specifically, commercial and industrial loans have increased 12.1% year-over-year. Commercial real-estate loans rose 7.3%. Additionally, overall real-estate loans were up 2.5%.
Additionally, consumer debt is finally turning higher, with year-over-year growth in the period through September up 0.7%. In comparison, this area of lending was stuck in a contraction from November 2013 through mid-July this year.
After three years, banking loan growth is also shaking off the grips of the Comprehensive Capital Assment Review, or Federal Reserve mandated stress tests. According to a recent Bank of England working paper, loan growth typically declines following a new capital requirement regiment but recovers three years later. Consequently, after three years of adjusting to the new regulatory requirements, the financial sector may be starting to break free of the stress-test drag.
Loan growth also has more room to expand. Accounting for this year’s gains, growth is still below its long-term average and still a far shot away from historical peaks. If economic growth remains positive and consumer and business confidence continue to strengthen, the sector may enjoy additional loan growth.
Furthermore, in an expanding economy, the Federal Reserve will be more likely to hike rates, which will also mean greater returns on loans and improved net interest margins for banks. [Regional Bank ETFs for a Rising Rate Environment]
SPDR S&P Bank ETF
For more information on the financials sector, visit our financial category.
Max Chen contributed to this article.