The PowerShares KBW Bank Portfolio (NASDAQ: KBWB) is one of the many bank exchange traded funds that is scuffling this year, but investors should not be hasty in departing this sector. Not with some credible catalysts still at play.
KBWB tracks the widely followed KBW Nasdaq Bank Index. That index “is a modified-market capitalization-weighted index that seeks to reflect the performance of companies that do business as banks or thrifts that are publicly-traded in the US. The Index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and is composed of approximately 24 companies representing leading national money centers and regional banks or thrifts,” according to PowerShares, the fourth-largest U.S. ETF sponsor.
Some good news for KBWB and friends is that the financial services sector is widely regarded as perhaps the only sector in the U.S. that is attractively valued relative to the broader market and its own long-term averages.
The financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
“Large banks remain inexpensive in a market focusing more closely on stretched valuations. Although a return to the pre-financial crisis valuation high is not expected, the BKX was trading at 1.76x tangible book value in the week ended June 9, and had recently crossed above the post-financial crisis highs before settling back to hold the old highs established between 2014 and 2015,” said PowerShares in a recent note. “It has been trading at a near 50% discount to its pre-financial crisis price-to-tangible-book ratio of 3.51. In contrast, the S&P 500 Index was trading at 8.78x tangible book value and trading 35.6% above the Oct. 2007 pre-financial crisis valuation high.”
With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Although the Fed unveiled its second rate hike of 2017 earlier this month, the central bank’s dovish tone punished regional bank stocks and ETFs.
“There is a chance for bank valuations to expand as the regulatory environment eases. The Treasury Department’s banking regulation plan released June 12 appeared to be well-received by Wall Street analysts, stoking hopes that banks might be able to more efficiently utilize their balance sheets and improve returns on capital. Moreover, the Treasury Department’s plan came on the heels of the House of Representatives passing the Financial CHOICE Act, which is a roll back of the Dodd-Frank financial regulations,” according to PowerShares.
For more information on the banking sector, visit our financial category.