Scalper1 News
Regional banks had underperformed the big banks in 2014 thanks to a narrowing spread between long- and short-term rates. This hurt their net interest margin, which a key metric for the sector. Though the scenario improved for regional banks in late 2014 on the closure of the Fed’s QE program, a snow-capped Q1 in the U.S. pointed to a staggering domestic economy, with just 0.2% growth. As a result, since its March meeting, the Fed expressed no intention of a hurried rate hike in the U.S. which in turn pushed the U.S. bond yields lower. The yield on the benchmark 10-year Treasury note reached as low as 1.68% this year at end of January, while the yield on the 3-month Treasury note was 0.02% then. The reduced spread (1.66 percentage points) between short- and long-term yields thus wrecked havoc on regional banks as these look to borrow money at short-term rates, and lend the capital at long-term rates. While we do not deny that six long years of a low-rate environment have lessened borrowing costs for banks, a sharper decline in the lending rates resulted in a shrinking interest rate spread and affected net margins and banks’ profits. Widening Interest Rate Spread This tough business backdrop took a turn recently, as the Fed commented that bond yields might witness a steep ascent when the rate hiking decision is actually taken. This induced a selloff in U.S. long-dated treasuries sending yields on 30-year U.S. Treasury to a five-month high . Not only the U.S., the Eurozone economy too behaved in the same fashion as the Fed chair expressed worries pertaining to overvaluation in equity markets. As of May 6, 2015, the yield on 10-year Treasury note was 2.25% (the highest this year) and the yield on 3-month Treasury note was 0.02%, indicating a spread of 2.23 percentage points. If this situation continues for long, regional banks and the related ETFs are sure to benefit, given that they generate cash from paying interest on short-term deposits while receiving payments from longer-term securities. Investors should note that there was another reason for one of the worst treasury selloffs this year on May 6. Per CNBC , as much as $8 billion of bond sales by the tech giant Apple (NASDAQ: AAPL ) was partly responsible for this selloff. To add to this, the oil behemoth Royal Dutch Shell (NYSE: RDS.A ) (NYSE: RDS.B ) also announced that it would enter the U.S. bond market after 18 months. Thanks to the above mentioned facts, investors should pay close attention to the following regional banking ETFs. These funds could surge ahead if the spread finds a way to widen even more from here: SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) This is one of the largest and the most popular ETF in the banking space with an AUM of nearly $1.78 billion and average daily volume of roughly 3.7 million shares. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. The product holds a well-diversified basket of 91 stocks. It uses an equal-weighted strategy and hence minimizes concentration risks. None of the individual stocks form more than 1.33% of total fund assets. Though the fund has given more than 1.6% returns in the year-to-date frame (as of May 5, 2015), it has started to pick up lately gaining about 1.2% in the past one month. The fund was up 0.66% on May 6. PowerShares KBW Regional Banking Portfolio ETF (NYSEARCA: KBWR ) KBWR is another option in this space, though it is less popular and relatively illiquid with an asset base of under $50 million and an average trading volume of less than 5,000 shares a day. The product holds a basket of 50 companies, mostly from the small-cap space. The fund does a great job in diversifying its assets well among individual holdings as none of the stocks have more than 3.94% exposure. KBWR is up 1.6% so far this year and was up 0.89% on May 6. SPDR S&P Bank ETF (NYSEARCA: KBE ) The fund tracks the S&P Banks Select Industry Index, giving investors exposure to the U.S. banking space. The fund holds a basket of 65 stocks with the top three holdings – MGIC Investment Corp. (NYSE: MTG ), Radian Group (NYSE: RDN ) and Susquehanna Bancshares (NASDAQ: SUSQ ) – each having less than 2% allocation to the portfolio. Sector-wise, regional banks occupy around 77% of the fund’s assets. The fund charges about 35 bps in fees a year. It is up 2% so far this year and gained 0.5% on May 6. Original Post Scalper1 News
Scalper1 News