Confirming the intensity of bank stocks’ rally, the Invesco KBW Bank ETF (NASDAQ: KBWB) is higher by almost 34% since the start of 2021.
A performance like that through barely more than four months may be enough to chase some late-arriving investors off, prompting them to think upside for bank stocks is limited from here. On the contrary, some market observers see plenty of reasons why bank equities, including KBWB components, are in the early innings of their rallies.
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“But there’s more to the bull case for bank stocks than avoiding last year’s problems. Banks were already in a strong position heading into the economic slowdown,” reports Carleton English for Barron’s. “While near-zero interest rates haven’t helped, banks have been able to lean on heightened trading and advisory businesses to support shares. And even as the economy recovers, investment banking activity is still expected to remain robust. Not to mention, banks are set to be helped by an increase in loan growth in the back half of the year and the expected resumption of normal share repurchases and dividends.”
The Tailwinds Tally Is Only Growing
An array of imminent and medium-term catalysts augur well for KBWB’s odds of building on what’s already an impressive year-to-date run.
“Loan growth should improve in the back half of the year, with Demba noting that bankers are starting to have in-person meetings again,” according to Barron’s. “Net interest margins are expected to expand as banks will soon be able to deploy their high deposit bases into higher-yielding loans.”
KBWB tracks the widely followed KBW Nasdaq Bank Index.
“The Index is a modified-market capitalization-weighted index of companies primarily engaged in US banking activities. The Index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and Nasdaq, Inc. and is composed of large national US money centers, regional banks and thrift institutions that are publicly traded in the US,” according to Invesco.
Plus, rather than dabbling in the futures market, investors can use KBWB as a play on climbing Treasury yields because bank stocks are positively correlated to that scenario. Banks are also cutting costs and valuations are still attractive.
“Banks are rationalizing their footprint by closing and consolidating unnecessary branches, which has the potential to cut annual operating costs by 1% and improve earnings per share by 2%, assuming a 15% reduction in branches,” adds Barron’s. “Bank valuations haven’t gotten too high. By Demba’s measure, regional bank valuations stand at 12.7 times expected 2022 earnings per share, just below the 20-year median of 14.4 times forward earnings and well below the 20-year high of 20.3.”
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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.
