Performance of the loan portfolio
In 1Q15, US banks witnessed a growing loan portfolio backed by low interest rates and improving economic fundamentals. Total loans and leases in bank credit grew at a seasonally annualized rate of 8.1% over 1Q15. In comparison, loan growth was 5.6% the previous quarter and 5.3% for 1Q14.
The total outstanding loans for all commercial banks in the country is a key economic indicator that has shown tremendous improvement over the years. The total loan portfolio for US banks recovered from $6.5 trillion in 2010 to $8.2 trillion in May 2015. Commercial and industrial loans have led the recovery in bank loan portfolios. They increased by 12.6% in 1Q15 and contributed to more than half of the total loan growth of 8.1%.
Rationale behind strong growth
Since the beginning of 2015, economic indicators have been positive. This signals an improving economy. It led to growing demand for credit by businesses as well as individuals.
One of the primary factors behind the Federal Reserve’s QE (quantitative easing) measures was to bring down interest rates in order to kick start economic growth. It encouraged investments by individuals and businesses. This enabled banks to make loans available at cheaper rates. It encouraged investors to take on fresh loans. The relationship between investment and demand is straightforward. Investment grows through the availability of cheap credit. In turn, this leads to demand for products and services.
Banks within XLF
Banks form 48% of the Financial Select Sector SPDR ETF (XLF) portfolio. Out of these, Wells Fargo (WFC) has the largest weight of 8.65%. It’s followed by Bank of New York Mellon (BK) and JPMorgan Chase (JPM). They have weights of 8.47% and 8.12%, respectively. Overall, banks within XLF have been up by 4.19% YTD (year-to-date).
During the same period, diversified banks and consumer finance have been up by 3.02% and 2.56%, respectively. The best performing diversified bank has been Comerica (CMA). It’s up 11.23% YTD. Comerica is trading at a premium of 9% above consensus price estimates.