Bank stocks and financial sector exchange traded funds may continue to strengthen as strong fundamentals help support this market segment’s outlook.
Year-to-date, the Financial Select Sector SPDR (NYSEArca: XLF) gained 1.2%, iShares U.S. Financials ETF (NYSEArca: IYF) added 1.4% and Vanguard Financials ETF (NYSEArca: VFH) rose 2.2%. Additionally, bank specific plays such as the SPDR S&P Bank ETF (NYSEArca: KBE) increased 6.4%% and PowerShares KBW Bank Portfolio (NYSEArca: KBWB) advanced 3.5% so far this year.
Supporting the financial sector, U.S. banks revealed record quarterly profits to start 2018 as a result of the new tax laws, rising interest rates and improving economy. According to the Federal Deposit Insurance Corp., the industry reported $56 billion in net income in the first quarter, up 27.5% from the prior-year quarter, reports Ryan Tracy for the Wall Street Journal. If we did not factor in the effects of the new U.S. tax law, profits still would have been $49.4 billion.
To put this in perspective, the highest previous quarterly income since 2011 was $48.1 billion in the second quarter of 2017.
Sudden Spike in Volatility Contributes to Increased Trading
Furthermore, the sudden spike in volatility and surge in market trading has contributed to increased trading revenue in the financial industry. Banks added over $1 billion in trading revenue, which jumped 15% to $8.2 billion, to the highest level since Q1 of 2009.
On Tuesday, the House is expected to vote on Senate-approved legislation aimed at easing post-crisis financial rules, which include a number of restrictions tied to the 2010 Dodd Frank financial-overhaul law, the Wall Street Journal reports. President Donald Trump is widely expected to sign the legislation into law as early as this week if the House advances the bill.
The updated legislation includes provision that would cut the number of banks subject to the Federal Reserve’s oversight by raising a key regulatory threshold to $250 billion in assets from $50 billion. Additionally, the bill would relax regulatory requirements for smaller financial firms that have been weighed down by the onerous post-crisis regulations.
Small-cap financial stocks and related ETFs may also benefit from the relaxed rules on smaller banks, including the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA), PowerShares S&P SmallCap Financials Portfolio (NYSEArca: PSCF) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR).
For more information on the banking sector, visit our financial category.