It’s been a banner year for bank stocks and the related exchange traded funds. Just check out the Invesco KBW Bank ETF (NASDAQ: KBWB).
KBWB, which tracks the KBW Nasdaq Bank Index, is up a scorching 33.58%, with much of that performance attributable to a spike in 10-year Treasury yields earlier this year. On a related note, analysts and investors are bullish on bank stocks, including KBWB member firms, in anticipation of the Federal Reserve hiking interest rates next year.
Remember that in late 2016 and into the following year, bank stocks soared in anticipation of Fed tightening. While the financial services sector is usually the most positively correlated to higher borrowing costs, some market observers believe thar investors must acknowledge potential regulatory risk in the new year.
“Both sides of the political spectrum would probably like changes to existing bank regulation. Some Democrats might want some of the prior administration’s moves undone, like changes to the Volcker Rule. But the next vice chair for supervision—whom President Biden is set to soon nominate—may prioritize other policy areas, like addressing climate risk or the rise of cryptocurrencies. Many significant changes also need the backing of the Fed’s board of governors, whose composition is in flux,” reports Telis Demos for the Wall Street Journal.
KBWB investors will want to monitor how the Fed treats banks’ shareholder rewards plans. The group was punished in 2020 as the central bank forced banks to rein in buybacks and halt dividend growth amid the coronavirus pandemic. Conversely, part of the fire fueling KBWB components this year is the resumption of dividend growth.
Banks didn’t endure significant credit losses during the pandemic, and balance sheets throughout the industry are strong today. Those could be signs that regulators might not fiddle with shareholder rewards too much. However, how big consolidation gets and how much scrutiny it draws are other issues for KBWB investors to stay abreast of in 2022.
“Then there is the increasingly prominent issue of bank mergers and acquisitions, with many Democrats calling for much tougher criteria or even a moratorium for banks of a certain size,” according to the Journal. “While the very biggest global banks may not be doing massive deals large regional banks are still consolidating. And in a break with the past, acquiring banks’ stocks have sometimes reacted positively to deals, with investors liking the advantages of size.”
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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.