The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, and rival regional bank ETFs were among last year’s most disappointing assets. The group plunged even as the Federal Reserve boosted interest rates four times.
Helped by some recent mergers and acquisitions activity and improved sentiment toward the broader financial services sector, KRE and friends are rebounding this year and some analysts think that trend can continue.
Rising interest rates historically benefit regional banks, but that has not been the case this year. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“Mark Tepper, founder of Strategic Wealth Partners, notes that while a flattening yield curve and historically low interest rates are a headwind for financials, the beginning of bank regulation rollbacks could spark even more M&A activity in the space,” reports CNBC.
A Helping Hand
egional bank stocks and sector-specific ETFs shook off the broader market weakness after BB&T (NYSE: BBT) made a deal to buyout SunTrust Banks Inc. (NYSE: STI), combining the banks to form the sixth-largest U.S. retail bank.
On Thursday, KRE and the iShares U.S. Regional Banks ETF (NYSEArca: IAT) advanced 0.7%.
BB&T and SunTrust struck an all-stock deal in what amounts to the largest U.S. bank merger since the financial crisis, with a combined company value of $66 billion, the Wall Street Journal reports. The newly merged bank will have about $442 billion in assets.
“Tepper added that before the merger announcement, the market value of both BB&T and SunTrust was already nearing the big bank threshold and together they now have access to ‘greater scale, great cost efficiency [and]better geographical reach,’” reports CNBC.
KRE and IAT are up an average of 16.2% this year. KRE remains 7.62% below its 200-day moving average.
For more information on the financial sector, visit our financial category.