Even with the benefit of three interest rate increases by the Federal Reserve, regional bank stocks and exchange traded funds are struggling this year. The iShares U.S. Regional Banks ETF (NYSEArca: IAT), which tracks a large basket of regional banks, is down 5% year-to-date.
However, some data points suggest there are some solid trends at play for large regional banks. 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.
“Ratings for all banks in Fitch Ratings’ annual U.S. large regional bank peer review were affirmed last month, supported by still-benign asset quality amid controlled loan growth, ample liquidity and capital. Stable Ratings Outlooks were maintained on all but one bank, ZION, which remains on Rating Outlook Positive,” said Fitch Ratings in a note out Monday.
Opportunistic traders who want capitalize on the short-term volatility have a number of leveraged and inverse ETF options to enhance potential returns. For instance, the Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) can capitalize on short-term views on further strength in the financial sector, or the Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) can express short-term hedge of the opposite.
Risks to Consider With Regional Banks
While most large regional banks have favorable credit ratings, there are some risks to consider.