California, the largest U.S. state by economic heft and population, has taken its lumps. High taxes and exorbitant real estate costs are among the reasons California’s unemployment rate is above the national average.
Although California faces a long road back to its economic glory days, that road is not insurmountable and some analysts currently see opportunity in the Golden State’s ultra-competitive regional banking sector. Keefe, Bruyette and Woods says a “brisk real estate market recovery and improving economic fundamentals” in the state’s metro areas make the firm constructive on California’s mid-cap banks this year.
KBW went on to note that “Relative to other regions in the U.S., we believe that, as a group, larger community banks in metropolitan California are better positioned to deliver attractive growth and profitability for investors.”
The research firm’s top ideas among California banks include SVB Financial (SIVB), PacWest Bancorp (PACW), Cathay General (CATY), CVB Financial (CVBF), East West Bancorp (EWBC) and First Republic (FRC) with the top idea being Los Angeles-based PacWest Bancorp.
PacWest, KBW’s top idea among California mid-cap banks, is KBWR’s thirteenth-largest holding at a weight of 2.25%. SVB Financial and First Republic, both of which offer exposure to soaring property values in urban areas of Norther California, are KBWR’s largest and third-largest holdings, combing for 7% of the ETF’s weight.
In aggregate, the aforementioned stocks, which are rated outperform by KBW, combine for about 15% of KBWR’s weight, according to PowerShares data.
There are signs that investors are increasingly willing to bet on a Golden State economic recovery. For example, KBWR has just over $50 million in assets under management, but over $27 million of that total has come into the ETF in the past year. In just the past month, KBWR is up nearly 9% while the Financial Select Sector SPDR (XLF) is up just 5%.
While California is one of the most competitive banking markets in the country, the dominant banks in the state, as is the case with other large banking markets such as New York and Texas, are among the country’s largest. In addition to San Francisco-based Wells Fargo (WFC), Bank of America (BAC) and J.P. Morgan Chase (JPM) are among California’s banking giants.
Previous cycles pared the number of independent California banks down to 200, according to KBW, but as the research firm notes, the upshot of that scenario is that weaker institutions have been shaken out. That could prove to be a positive for KBWR.
Other California-based banks in the ETF include Los Angeles-based City National (CYN), which was not highlighted in the KBW note. The stock, which is 1.8% of the ETF’s weight, is up 35% in the past year.
PowerShares KBW Regional Banking Portfolio