The banking industry can generate revenue on rising interest rates, but exchange traded fund investors shouldn’t bank on higher profits.
Chris Mutascio, an analyst at Stifel Financial Corp.’s KBW unit, warns that rising rates won’t necessarily translate to higher profit growth, reports Laura Marcinek for Bloomberg.
In a slow growth environment, banks can struggle to increase lending. Meanwhile, rising rates are already cutting into mortgage revenue.
Still, higher rates would help bankers see wider “spreads” or profit margin between what they pay for short-term deposits and long-term yields earned on lending. [Regional Bank ETFs Still Showing Promise as Rates Rise]
“If you’re a bank that takes in deposits and lends money out, you’re probably going to appreciate a steeper curve more than an institution that focuses more on trading,” Scott Warman, treasurer of M&T Bank Corp. (MTB), said in the aritcle.
Regional bank saw their first-half earnings increase 21% year-over-year as lenders took back money from reserves that had been intended to cover future losses.
Currently, the sector is starting to transition from growth backed by tapping reserves to growth backed by better lending and margins on improving rates. Consequently, Mutascio warns that investors may be betting on bank stocks too early.
“We’re pricing in this net interest margin expansion that may not be till two years from now,” Mutascio added.
The SPDR S&P Regional Bank ETF (KRE) has gained 28.6% year-to-date.
SPDR S&P Regional Bank ETF
For more information on regional banks, visit our regional banks category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own KRE.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.