Along with benefiting from a rising rate environment, regional bank exchange traded funds could continue to grow on increased merger and acquisition activity and recovering loan growth.
So far this year, regional bank ETFs have lagged the broader market, with the SPDR S&P Regional Banking ETF (NYSEArca: KRE) down 6.2%, iShares U.S. Regional Banks ETF (NYSEArca: IAT) up 0.8% and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) down 6.9% year-to-date. Meanwhile, the S&P 500 index has increased 8.0%. [Not Believing Yellen, Regional Bank ETF Pops]
Financial sector observers argue that while smaller regional banks struggle to capture a larger share of a shrinking market, stronger banks will continue to grow and pick up smaller ones, fueling higher profits and dividends, reports Constance Gustke for CNBC. [Regional Bank ETFs for a Rising Rate Environment]
In 2007, there were 7,284 commercial banks, and in 2013, the number shrunk down to 5,876, the lowest number of banks since the Great Depression. Analysts believe the trend may continue, with additional consolidations ahead as smaller banks struggle to keep up with high regulatory costs.
Some analysts also believe the regional bank sub-sector will outperform in the financial space as large U.S. banks are hampered by post-financial crisis regulatory issues.
“Big banks are saddled with regulatory baggage,” Nicholas Galluccio, president of Teton Advisors, said in the article. “They’re still paying huge fines. But regional and community banks are the catalyst for mergers and acquisitions, which is going to pick up dramatically in the next few years.”
Additionally, regional banks’ valuations look more attractive. Chris Marinac, director of research at boutique broker/dealer FIG Partners, points out that regaionl banks are largely undervalued. For instance, KRE shows a price-to-earnings ratio of 15.2 and a price-to-book of 1.3, IAT has a 13.9 P/E and 1.3 P/B, and KBWR has a 15.6 P/E and a 1.4 P/B. In contrast, the S&P 500 index is currently showing a 17.8 P/E and a 2.4 P/B.
“Regional banks are making more money,” Marinac said in the article, “They’re in the early innings of a profit comeback, as loan credit quality continues to grow.”
SPDR S&P Regional Banking ETF
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Max Chen contributed to this article.