Like other bank exchange traded funds, the Invesco KBW Bank ETF (NASDAQ: KBWB) has delivered for investors this year.
The Invesco ETF, which tracks the KBW Nasdaq Bank Index, is higher by 30.33% due in large part to catalysts such as a surge in Treasury yields earlier this year, support from the reopening trade (bank equities are cyclical stocks), and the Federal Reserve signing off on boosted buyback programs and higher dividends.
Those are all important catalysts, but they are also effectively priced into KBWB and its components at this point in time. That means banks have to deliver the goods on other fronts, finding new ways to foster confidence and enthusiasm among investors. One way to do that would be to show investors loan growth is improving. After all, KBWB components are in the business of making loans.
An efficient avenue for boosting loan growth is to loosen credit standards, and it appears some lenders are doing just that.
“On 2 August, the quarterly US Senior Loan Officer Opinion Survey (SLOOS) was released. The latest SLOOS reveals that bank consumer lenders again materially loosened underwriting standards for credit cards, auto loans and residential mortgages in the second quarter, as consumer loan asset quality stayed very strong,” according to Moody’s Investor Service. “Lenders reported the greatest easing of underwriting standards for credit cards, followed by residential mortgages then auto loans.”
Loosening credit standards can cut both ways for investors. There’s risk in that maneuver and while the global financial crisis occurred more than a decade, it’s still fresh on the minds of many investors. Conversely, looser requirements could be a sign KBWB components are optimistic about the economy and believe borrowers will have the resources to meet obligations.
“Survey respondents compared lending standards today to the midpoint of the range from 2005 to present, and they vary: prime auto loan standards are modestly looser, while residential mortgage standards are tighter, prime card standards modestly tighter, and subprime card and auto loans standards materially tighten,” said Moody’s.
In other words, KBWB member firms may be extending more credit to borrowers with already good credit ratings, but they’re actively targeting subprime borrowers in significant fashion. Additionally, some market observers believe the looser standards are a temporary phenomenon and that banks will only indulge in the practice for a couple of quarters.
The demand for more credit isn’t going anywhere.
“Net demand for credit card loans and auto loans jumped in the second quarter and remained robust for residential mortgage loans. We expect growth in card balances to be supported by robust spending as travel and leisure rebound, but headwinds like excess savings and the emergence of coronavirus variants remain,” according to Moody’s.
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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.
