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The Banking Sector Recovers; Now It's Looking for Some Profit

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Part 7
The Banking Sector Recovers; Now It's Looking for Some Profit PART 7 OF 10

Dismal 1Q Growth in Gross Domestic Product: Is It Bad for Banks?

Gross domestic product grows at 0.2%

The US gross domestic product (or GDP) grew at a bleak rate of 0.2% in the first quarter of 2015. GDP growth was 2.2% in the fourth quarter of 2014. In comparison, GDP growth in the 19-member Eurozone was 0.4% for the quarter.

Several reasons, including the weather, a strong dollar, the West Coast port strike, and the crash in oil prices, contributed to the low growth. Most of these factors are transitory, and their effects will likely go down as the year progresses.

Dismal 1Q Growth in Gross Domestic Product: Is It Bad for Banks?

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It’s worth noting that GDP growth has been seasonally low in the first quarter since 2010. It tends to recover in subsequent quarters. The above graph shows the quarterly US GDP growth over the last three years.

Banking sector benefits from a growing economy

Economic growth impacts banks’ performances in several ways. The Fed is closely monitoring GDP growth along with unemployment and inflation levels to make a decision on an interest rate hike. The much-anticipated rate hike is expected to boost banking sector performance. In addition to boosting net interest margins, the prevailing rates also have an indirect impact on a bank’s profitability. The rates impact loan demand and default rates on loans.

Sound economic growth also results in increased capital market activities, which translate into higher fee-based income for banks for services like underwriting, mergers and acquisitions, and advisory.

Traditional banks, including Wells Fargo (WFC) and U.S. Bancorp (USB), and regional banks such as BB&T (BBT), KeyCorp (KEY), and Regions Financial (RF) should benefit from a growing economy and higher interest rates. WFC and USB together form ~11.4% of the Financial Select Sector SPDR ETF (XLF).

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