Despite declining interest, which weighs on banks’ net interest margins, the SPDR S&P Bank ETF (NYSEArca: KBE) is higher by nearly 24% this year. Even with an impressive rally, some market observers believe banks still offer plenty of value.

Banks typically make their money off the difference between long-term loans and deposits. With yields rising on later-dated debt, banks will be able to set more lucrative interest rates on loans and go back to generating greater profits on core businesses.

“Bernstein’s Inigo Fraser-Jenkins thinks that the time is right for value investors to get into or add to their positions in U.S. and European banks,” reports Ben Walsh for Barron’s.

Traders previously warned banks could face pressure as tepid market volatility could have contributed to more muted trading desk activity. Furthermore, the Federal Reserve has signaled its intentions to cut interest rates, which would further hurt the banking industry’s ability to generate profits from lending. However, third-quarter earnings from the sector were mostly steady, if not surprisingly strong.

“Overall, banks came out of third-quarter ‘earnings season with less bad earnings revisions,’” said Fraser-Jenkins in the Barron’s article.

Inside KBE

Market observers have previously warned that Wall Street banks could face pressure as tepid market volatility could have contributed to more muted trading desk activity. Furthermore, the Federal Reserve has signaled its intentions to cut interest rates, which would further hurt the banking industry’s ability to generate profits from lending.

While mortgage banking and cheap valuations could provide some support to U.S. bank, the sector performance largely depends on executive position credit conditions, the outlook for loan growth and their ability to cut deposit costs.

Bank depends heavily on net interest income or difference between the rates charged on long-term loans and the rates paid out for short-term borrowing. However, the spread diminished as rates on long-term debt plunged toward record lows.

The $1.74 billion KBE follows the S&P Banks Select Industry Index, which seeks “to provide exposure to the bank segment of the S&P TMI, which comprises the following sub-industries: asset management & custody banks, diversified banks, regional banks, other diversified financial services and thrifts & mortgage finance sub-industries,” according to State Street.

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

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.