Meanwhile, the rising interest rate environment is also good for net interest margins for banks and more so for insurance companies. Given the latest strength in the U.S. employment data, many anticipate the Federal Reserve to hike rates at least three times this year.
“Cannon notes that a bank’s book value per share increases as long as share repurchases don’t exceed earnings. Moreover, even if a bank distributes 150% of its earnings (50% in dividends and 100% in share repurchases) while repurchasing shares at two times book value, book value per share is still maintained, assuming no growth in assets,” according to Barron’s.
Some good news for XLF 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.
For more information on the financial sector, visit our financial category.