The Market's Measure
Yielding To Regional Banks’ Temptation

Yielding To Regional Banks’ Temptation

Do those ‘in the know’ really know?

Pssst! Want the inside scoop? Follow the money. Insider money, I mean.

Bank directors started their Christmas shopping last week—some in stocking stuffer bits and pieces, some in wholesale lots—with outright purchases of their companies’ shares. Five community banks and holding companies—Sussex Bancorp (Nasdaq: SSBX), Brookline Bancorp (Nasdaq: BRKL), First Merchants Corp. (Nasdaq: FRME), Access National Corp. (Nasdaq: ANCX) and Community Bankers Trust Corp. (Nasdaq: ESXB)—figured prominently in recent SEC filings by insiders.

So, how much to make of this? It’s certainly not unusual for community bank directors to be boosters of their companies’ stocks. But one can’t forget that directors have the, um, inside track on their institutions’ financial health and prospects. Bank directors ought to know more stuff or at least ought to know stuff sooner than us pedestrians.

Are community banks a buy now? That depends entirely on your view of the yield curve.

While low interest rates have been a boon to many sectors in the U.S. economy, they’ve been the bane of small banks. Narrowing in the spread between short-term and long-term rates has squeezed these institutions’ profit (read: net interest) margins mightily, forcing them to rely more and more on fee income.

 

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There’s a glimmer of hope, however, for regional banks. Prospects brightened with last week’s surprisingly upbeat government jobs report. The Federal Reserve, in its most recent missal, stated that faster progress on the economic front could quicken the pace of rate hikes. The odds of snugging up at the short end of the yield curve just bettered and, with buying pressure on the long end relieved with the end of qualitative easing, there now seems more room for widening in the yield spread.

 

Regional bank ETFs offer a “neighborhood” approach to the sector. Though community bank performance has lagged that of money center institutions for much of the year, the little guys are buoyant on hopes of an improving U.S. economy. All are rebounding from an October swoon. Small bank ETFs include:

 

  • SPDR S&P Regional Banking ETF (NYSE Arca: KRE) — With $2.1 billion in assets, this is the largest fund in the sector. It’s 81 stocks wide and charges 35 basis points (.35 percent) a year. Though KRE is off 1.7 percent for the year, it, like its competitors, has broken above its 50- and 200-day moving averages.
  • iShares U.S. Regional Bank ETF (NYSE Arca: IAT) — IAT has popped through upside resistance and has gained 5.8 percent this year, largely due to heavy concentration in some of its 53 portfolio components. The iShares fund is pricey, with an annual expense ratio at 45 basis points. IAT has $639 million in assets.
  • First Trust NASDAQ ABA Community Bank ETF (Nasdaq: QABA) — This $106 million fund is the broadest (114 issues at last count) and is the most expensive (60 basis points). QABA has lost 1.1 percent since the top of the year.
  • PowerShares KBW Regional Banking ETF (NYSE Arca: KBWR) — An equal-weighted portfolio of 50 issues, KBWR is down 1.9 percent for the year and remains technically the weakest, as well as the smallest, fund in the sector. KBWR manages $33 million in assets.

 

 

Brad Zigler is former head of marketing and research for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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