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Bank ETFs in Focus on Stress Test Results, Easing Regulation

Sweta Killa
·5 min read

The banking corner of the financial sector has caught investors’ attention following news that regulators have eased restrictions created in the aftermath of the Great Recession. The KBW Bank Index rose 3.4% on the Jun 25 trading session with Bank of America Corp. BAC and JPMorgan Chase & Co. JPM leading the way.

Though the move has brought the much-needed relief to bank stocks, the stringent stance on banks’ shareholder payouts in its latest round of stress testing is expected to be a drag.

Easing of Volker Rule

FDIC officials plan to loosen the restrictions set by the Volcker Rule that will allow banks to easily make investments in various areas of venture capital. The rule change has scrapped the requirement for banks to set aside cash for derivatives trades between different affiliates of the same firm. This could free up an estimated $40 billion in capital in the banking industry, per Bloomberg. That capital could be used to bolster other parts of the business that are now stressed by the COVID-19 crisis.

The relaxation came amid lower rates and the coronavirus pandemic, which had hit the sector badly. In particular, bank stocks were beaten down on fears that the record high unemployment levels would result in surging defaults on loans (read: Bank ETFs Gain as Economy Reopens).

The Volcker Rule was originally established as part of the 2010 Dodd-Frank Act, with the aim of preventing banks from acting like hedge funds and taking irresponsible risks with their investments.

Stress Test Results

The Fed stated that 33 of the nation’s largest banks are healthy, citing that all the banks appear strongly capitalized to withstand the coronavirus crisis. But the central bank said it would impose dividend caps and restriction on share buybacks in the third quarter of this year to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event.”

Big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year. The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings (read: Top-Ranked Beaten Down ETFs to Buy Now).

Further, for the first time in the decade-long history of the stress test, the banks will have to resubmit their payout plans again later this year and restrictions on payouts could remain in effect. They may have to repeat this cycle every quarter, the regulator said. Notably, the biggest U.S. banks voluntarily suspended share repurchases, which make up roughly 70% of capital payouts for the industry, in March.

ETFs in Focus

Given the good and bad news, bank ETFs have been on a limelight. Though these funds have gained more than 3% in yesterday’s trading session, investors should keep a close eye given the volatility in this corner of the market.

Invesco KBW Bank ETF KBWB

This fund provides exposure to companies primarily engaged in U.S. banking activities by tracking the KBW Nasdaq Bank Index. With AUM of $511.3 million, it holds 25 stocks in its basket and trades in solid volume of 658,000 shares per day on average. It charges 35 bps in annual fees. KBWB has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

SPDR S&P Regional Banking ETF KRE

This fund, having AUM of $1.1 billion and average trading volume of around 10 million shares, offers exposure to regional banks. It follows the S&P Regional Banks Select Industry Index, charging investors 35 bps a year in fees. KRE holds 131 securities in its basket and has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Biden Gains Popularity, Demands Tax Hike: ETFs at Risks).

SPDR S&P Bank ETF KBE

This fund offers equal-weight exposure to 87 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 77% share while thrifts & mortgage finance, diversified banks, asset management & custody banks and other diversified financial services take the remainder. It has amassed $1.3 billion in its asset base while trading in heavy volume of 3.1 million shares a day on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

iShares U.S. Regional Banks ETF IAT

This ETF offers exposure to 55 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. The fund has amassed $232.9 million in its asset base and sees a good volume of 155,000 shares a day. It charges 42 bps in annual fees and has a Zacks ETF Rank #4 with a High risk outlook.

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JPMorgan Chase Co. (JPM) : Free Stock Analysis Report
 
Bank of America Corporation (BAC) : Free Stock Analysis Report
 
SPDR SP Bank ETF (KBE): ETF Research Reports
 
iShares U.S. Regional Banks ETF (IAT): ETF Research Reports
 
Invesco KBW Bank ETF (KBWB): ETF Research Reports
 
SPDR SP Regional Banking ETF (KRE): ETF Research Reports
 
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