Regional banks had underperformed the bigger, better-known
banks last year but it appears that the situation is going to
change this year.
Some of the nation's largest banks like Bank of America (
) and Citigroup (
) reported lackluster to disappointing results recently, mainly
due to higher legal costs and low interest income.
On the other hand, some of the regional players like PNC,
Fifth-Third Bank, Comerica, and BB&T have reported much
better results, among others resulting from the mortgage
refinancing boom and solid loan growth. (Read:
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While the banking industry continues to face some serious
challenges, resulting from regulatory uncertainty, low interest
rates and sluggish loan, it appears that the regional banks are
in a better position to deal with these challenges.
Fed's latest quarterly survey showed that credit standards on
loans had eased modestly and the demand for business loans, prime
residential mortgages, and auto loans had strengthened but the
demand for other types of loans was about unchanged. (Read:
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It appears that the smaller banks are benefitting from
improvement in loan demand and mortgage refinancing boom. Many of
these banks reported healthy increase in loans, which was able to
offset the decrease in interest margin. On the other hand, loan
growth was almost elusive for the bigger banks and the margins
continued to shrink.
Capital rules now require big banks to maintain thicker
capital cushions than other institutions. While higher capital
norms reduce risk, they also reduce profitability. Further the
regional banks have very little or no exposure to Europe.
Additionally, rise in interest rates and steepening of the yield
curve will be beneficial for the regional banks. (Read:
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Further, for smaller banks asset quality has been gradually
improving, which will result in provision expenses continuing
their downward trend. Many banks have been releasing reserves as
a result of decline in the charge-offs, which peaked during
Smaller banks have simpler business models and focus on local
clients. Retail clients as well as small local businesses
now trust regional banks
more than the bigger banks as they believe that the
regional/local banks understand their needs better.
SPDR S&P Regional Banking ETF (
This ETF provides exposure to the regional banking segment of
the U.S. banking industry by tracking the S&P Regional Banks
Select Industry Index. The Index equally weighs its holding of 79
regional banks and thrifts and rebalances on a quarterly
KRE is currently Zacks #3 (Hold) ETF. It charges the investors
35 basis points in annual expenses and pays out 1.85% yield
PowerShares KBW Regional Banking Portfolio (
This is a new relatively fund, created in November 2011. It
currently holds 50 companies and follows the KBW Regional Banking
Index, which is an equal weighted float-adjusted market
capitalization index. Susquehanna Bancshares Inc is the heaviest
weighted stock in the index (3.71%) followed by Texas Capital
Bancshares (3.07%) and First Republic Bank (2.78%). Average
market cap of its holding is $1.6 billion.
KBWB is ranked #1 (Strong Buy) ETF. It charges the investors
35 basis points in annual expenses while the yield is 1.19% at
iShares Dow Jones U.S. Regional Banks Index Fund (
Being market cap weighted, this ETF is top heavy, with highest
weighting to US Bancorp (20.07%), followed by PNC Financial
(10.93%). Average market cap for the holdings is $21.22 billion
while the maximum market cap is $60.06 billion.
IAT is currently Zacks #3 (Hold) ETF. This is the most
expensive ETF of the three with expense ratio at 0.48%, while the
yield is currently at 1.82%.
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BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
ISHARS-DJ RG BK (IAT): ETF Research Reports
PWRSH-KBW RBP (KBWR): ETF Research Reports
SPDR-KBW REG BK (KRE): ETF Research Reports
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