Credit demand is strong – Demand for credit and corresponding growth in lending are both robust. Commercial and industrial (C&I) and real estate loan growth are expected to grow at a brisk pace in 2016 as well. As of the end of October, C&I and real estate lending were up 10.9% and 5.2%, respectively, on a year-over-year basis.3 As shown in the chart below, both measures are near their post-recession highs and highlight a healthy demand for credit, which should benefit bank profitability, in my view.
What are the risks to bank stocks?
Although tightening labor markets are likely pushing the Fed closer to a rate increase, the current environment is not without risk. Growth in US industrial production has been slowing, and Europe is seeing ongoing political instability – including a leadership change in Portugal, an upcoming election in Spain, terrorist attacks in France and protests over economic policy in Greece. Political risks in Europe are difficult to quantify, but they could inflame credit stress and reduce risk appetite to the detriment of global economic growth.
It is unusual for the Fed to tighten monetary policy during periods of decelerating industrial production, but the Fed has dragged its feet waiting for clear signs of wage inflation, and the services and consumer sectors are helping to carry US economic growth. The Fed is also pushing banks to raise capital to levels that allow for loss absorption, which always has the potential to reduce bank profitability.
After consulting with an advisor, investors looking for an opportunity to invest in bank shares may wish to consider the PowerShares KBW Bank Portfolio (KBWB). Based on the KBW Nasdaq Bank Index, the fund seeks to reflect the performance of companies that do business as publicly traded banks or thrifts.
1 Bloomberg L.P., Nov. 11, 2015
2 FDIC Quarterly Banking Profile, Second Quarter 2015, Volume 9, Number 3 – As of date?
3 Bloomberg L.P., Oct. 30, 2015
Read more Expert Investment Views by Nick Kalivas.