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Is it Finally Time to Bank on Bank ETFs?

This article was originally published on ETFTrends.com.

As was widely reported, bank stocks and the corresponding exchange traded funds turned in dismal performances in 2018. Even amid the backdrop of four interest rate hikes by the Federal Reserve, the SPDR S&P Bank ETF (KBE) plunged 19.60% for the year.

The equal-weight KBE “seeks to provide exposure to the bank segment of the S&P TMI, which comprises the following sub-industries: asset management & custody banks, diversified banks, regional banks, other diversified financial services and thrifts & mortgage finance sub-industries,” according to State Street.

Some market observers warned that banks may even be cutting back on lending as bankers are becoming more concerned over the late-cycle U.S. economy. Indicators such as credit-card charge-off rates have increased, though the rate leveled off over the summer. Still, it cannot be ignored that bank stocks are rebounding to start 2019. For its part, KBE is up 14.22%.

“Even as the yield curve flattened in 2018, bank net interest margins continue to expand, as shown below,” said State Street in a recent note. “Banks have been able to reprice rates on their assets at a faster rate and in a greater amount than liabilities, elevating the return-on-asset ratio to the highest since 1986.”

Positive Catalysts

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.

“Banks are also poised to benefit from easing financial regulation,” said State Street. “Following the approval of the Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, the Federal Reserve Bank proposed significant rollbacks of Dodd-Frank, including looser capital and liquidity requirements for large and regional banks. This is likely to reduce compliance costs and boost return of capital to shareholders in 2019.”

Long regard as value plays, bank stocks' credibility as value names was likely enhanced by the fourth-quarter tumble the group endured.

“Additionally, the fourth-quarter 2018 selloff has created attractive valuation opportunities for bank stocks,” according to State Street. “They are trading at the lowest level based on forward price-to-earnings since October 2011 and nearly in par to their book value. Relative to the broad market, they are at the bottom quintile over the last 15 years based on price-to-book and price-to-forward earnings.”

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

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