Small-Cap ETFs May Strengthen After PPP Help Community Banks

After facing problems when applying for the Payroll Protection Program through larger banks, small businesses may permanently turn to smaller community banks that have proven to be more accommodating, potentially bolstering small-cap financial sector exchange traded funds.

According to Greenwich Associates, six million unhappy small businesses may change banks after suffering through PPP problems when applying through their large banks.

“More than one in five small businesses and one in seven middle market companies indicate they are likely to switch banks” after negative Payroll Protection Program (PPP) application experiences during the COVID-19 crisis, according to a Greenwich Associates report.

Greenwich Associates argued that the PPP loan process was seen as a very public stress test for the banking system, and community banks coming out ahead. Big banks got overwhelmed and turned away many small businesses during the two PPP application tranches, but community banks kept their doors wide open, accepting loan applications even from businesses that weren’t normal customers.

Specifically, Greenwich Associates pointed to three areas that big banks failed while community banks stood out, including communication where community banks communicated more and better than big banks, personalization where big banks took a conform-to-us approach but community banks bent over backward to deal with each customer on a one-on-one basis, and adaptation where big banks buckled down under the flood of PPP applications but community banks saw the program as an opportunity to attract new customers.

For example, Capital Bank successfully secured $234 million in PPP loans for 1,156 applicants, all but a few of which were in the DMV area.

“Our shared philosophy empowers us to achieve the unthinkable,” Capital Bank CEO Edward Barry said in a note. “It’s what makes us perfectly aligned to help small businesses who are dedicated to uplifting their own communities. As nearly 50% of the applicants weren’t even clients prior to applying, the PPP experience showed how our bank really punched above its weight class to defend our regional economy.”

ETF investors may also capitalize on this shift in business through financial sector-related ETFs that focus on smaller banks. For example, the Invesco S&P SmallCap Financials Portfolio (NYSEArca: PSCF) tracks the S&P SmallCap 600 Capped Financials & Real Estate Index, which includes financial names taken from the widely observed small-cap index. Additionally, the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) tracks the NASDAQ OMX ABA Community Bank Index, which also covers smaller banks or thrifts.

For more information on the financials sector, visit our financial category.