Banks are regaining momentum
The intensifying trade war between the US and China, which has spread to other parts of the world including Canada and Mexico, led to a massive sell-off in banking stocks in the first half of 2018. The Invesco KBW Bank ETF (KBWB), which provides the best exposure to the broad US banking industry, lost ~2.6% of its value during this period.
However, the banking industry has witnessed a sharp recovery since the start of the second half of 2018, as reflected by the upward movement in the prices of the KBW Bank ETF. The ETF is up ~6.5% since the beginning of July 2018, which not only erased the first-half loss on a year-to-date (or YTD) basis but led to a gain of ~3.8%.
What’s driving the recent optimism?
The optimism surrounding the banking industry is mainly attributable to strong second-quarter 2018 bottom-line results reported by the majority of US banks.
Furthermore, the Federal Reserve’s hawkish monetary policy has made investors confident about banks’ growth prospects. It’s a general trend that spreads and net interest margins for banks expand in a rising interest rate scenario. In the year so far, the central bank has raised interest rates twice and intends to increase them two more times in 2018 and three times next year.
Apart from this, the Fed’s June stress test results have given investors faith in banks’ financial strength. It should be noted that the Fed in late June announced that 34 of the 35 major US banks had cleared the Dodd-Frank Stress Test, which measures a bank’s financial strength to endure a major economic crisis. On the basis of the aforementioned test results, the Fed allows banks to increase their payouts to shareholders.
Additionally, strong economic growth, a healthy job market, and tax cuts are other tailwinds that have been creating a friendly business environment for the banking sector. The trend has been welcomed by Wall Street, as reflected by its higher ratings as well as target prices for the banking stocks.