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The Importance of Monitoring Banking Sector Indicators

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Indicators shed light on expected performance

An indicator is any measure or factor that helps predict future trends in the industry or economy. Some indicators might coincide with or follow a trend. If they can help confirm this trend, they’re called coincident and lagging indicators.

Stock prices are influenced by a number of factors. These include macroeconomic factors at the top level such as GDP (gross domestic product), employment growth, inflation, and so on. Then there are sector-specific factors, such as loan growth or delinquencies in the banking sector. Finally, stock price is influenced by company-specific factors such as management, product offerings, and so on.

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Banking sector indicators

You can monitor the performance of the banking sector by tracking certain key banking sector indicators:

  • interest rates, yield curves, and net interest margins
  • the state of the economy as gauged by GDP growth, employment growth, inflation, currency fluctuations, and so on
  • changes in regulatory requirements
  • asset quality indicators – delinquency and charge-off rates
  • loan and deposit growth at banks

Loans: One of the biggest for banks

Loan and deposit growth is one of the most important banking sector indicators. Factors such as industrial capacity use and inventory levels influence commercial and industrial loan growth at banks.

Similarly, residential real estate loan growth is affected by indicators such as housing starts, mortgage applications, homeownership rates, and so on. Consumer loan growth is driven by consumer spending, savings, and income levels, employment rates, et cetera.

Our series Healthy Loan and Deposit Growth in May: A Good Sign for Banks focuses specifically on loan and deposit growth in the banking sector.

Series overview

In this series, we’ll take a close look at key banking sector indicators. We’ll learn what indicators are currently pointing to and what to watch for in the future. Understanding how and why indicators move should help you understand current and future performance in the banking sector.

Monitoring these indicators should help you predict the performance of banks such as J.P. Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citigroup (C).

Together, these four banks form ~27% of the Financial Select Sector SPDR Fund (XLF). The above graph shows XLF price movement over a decade.

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