KBWB Has A 'Magnificent 6' Leading The Charge

seekingalpha07-24

sommart As of July 22, 2024, six of the 24 constituents of the Invesco KBW Bank ETF (NASDAQ:KBWB) - representing 42.83% of its weight, had announced their Q2 earnings. Across the first half of the ...

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Across the first half of the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4705862-kbwb-has-a-magnificent-6-leading-the-charge\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0640476718.USD","symbol_name":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQ \"AU\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4705862-kbwb-has-a-magnificent-6-leading-the-charge","article_id":"2453623065","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1492189677/image_1492189677.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2453623065","pubTimestamp":1721757300,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"sommart As of July 22, 2024, six of the 24 constituents of the Invesco KBW Bank ETF (NASDAQ:KBWB) - representing 42.83% of its weight, had announced their Q2 earnings. 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Across the first half of the year (H1 2024):  $Citigroup Inc(C-N)$.'s (C) revenues (net of interest expenses) exceed that of the same period by 1% while net income is down 12%. Relative to Fiscal Year (FY) 2023, however, net revenue is at 35% while net income is at 72%. In order: markets, personal banking, and services were the highest contributors to revenue (nearly 73%), while services and markets were the biggest contributors to income (nearly 90%). Total allowances for credit losses were up by nearly a billion dollars relative to the end of 2023.  Outside the $8 billion in revenue generated by the sale of Visa shares back to the company, the biggest spurts in revenues for JPMorgan Chase & Co. (JPM) came from investment banking fees (35% of total) and asset management fees (9%) relative to the same period last year. Consumer and Community Banking had the highest increase in provision for credit losses.  Wells Fargo & Company's (WFC) loans were down 2.25% from the end of the year - an early indicator of declining interest income - while assets remained around the same. However, both revenue and net income for H1 2024 are at the halfway mark relative to 2023. 51% of Bank of America Corporation's (BAC) allowance for credit losses was from credit cards issued. The proportion is little changed from 2023 (50.5%) with allowance for both total credit card losses essentially unchanged. Commercial loans show similar trends. Both revenue and net income in H1 2024 are at the 51% mark relative to 2023, with interest income accounting for over 54% of revenue. The Goldman Sachs Group, Inc. (GS) provisioned $282 million for credit losses on its credit card portfolio in Q2 2024. Steps to reduce exposure to consumer lending continue apace, while net earnings for H1 2024 nearly run par for the entirety of FY 2023. Note: Goldman Sachs' results were covered extensively in its own article. Nearly 92% of Morgan Stanley's (MS) revenues in H1 came from institutional securities (46%) and wealth management (43%) with the two divisions accounting for 51% and 43% of net income, respectively. Of the 50% share for Institutional Securities in total allowances for credit losses, 54% of it was for commercial real estate.  Overall, these banks could be construed as America's \"Magnificent 6\" (or \"Big Six\" if this is too derivative) given that they occupy varying spots on the spectrum of modern banking: Goldman Sachs and Morgan Stanley constitute the closest to the ideal of a \"pure play\" investment bank model leaning heavily on markets and wealth management, Citigroup and Wells Fargo lean heavier on consumer banking while the other two - Bank of America and JPMorgan - are hybrids. Add State Street and Bank of New York Mellon, and these would be the eight U.S. global systemically important banks (G-SIBs). Most other constituents of the KBW Bank ETF predominantly fall closer to the consumer banking end of the spectrum: Source: Invesco Fund Holdings Disclosure as July 19, 2024 In the Federal Reserve's stress test conducted in June, three hypothetical events were predominantly tested in its \"adverse scenario\": unemployment surges to 10%, commercial real estate values plunge 40%, and housing prices fall 36%. Among the 32 participants of the stress test, it was estimated that the participants would incur aggregate losses of $684 billion on loans and other positions. Source: Federal Reserve Stress Test 2024 Results Projected consumer loan losses represent 40% of total losses, while commercial loan losses accounted for 43%. Losses from credit cards alone represented 26% of total losses. Given this, the portion of the spectrum running from the \"hybrid\" to the \"consumer banking\" does have causes for concern. However, the Federal Reserve also held that all participants passed the stress test: the aggregate maximum decline in participants' \"core\" Common Equity Tier 1 (CET1) Ratio was only 2.8%, which fell within an acceptable range: Source: Federal Reserve Stress Test 2024 Results Large banks, \"hybrid\" or otherwise, have the wherewithal and business diversification to achieve an asset/revenue source mix required to pare losses and stay functioning. However, a vast majority of the country's 4,000+ banks fall in the \"regional and small banks\" category serving local communities and operating along consumer banking lines, aren't quite as well-entrenched in diverse business areas within modern banking and would likely be hard-pressed to survive. In Reuters' July 17-23 poll of 100 economists in the industry, however, the majority consensus now contends that the Federal Reserve would likely start cutting rates starting from September onwards. This will likely be a source of relief for many of the aggrieved regional and small banks and cause a shift in strategy for large banks. Rate Cuts: For Me or For Thee? Many respondents in the Reuters poll also stated that inflation for the rest of the year was more likely to be higher than what they forecasted rather than lower. While a majority of media have tempered language on monthly releases on Year-on-Year (YoY) Consumer Price Index (CPI) levels, the fact remains that, on an aggregated basis, affordability concerns plague the majority of America's citizenry. A portion of this could be attributed to the fact pattern that an earlier article outlined: given that the U.S. government grows ever more dependent on debt issuances in order to remain functioning, it effectively translates to more money entering the system. The more money in the system, the more persistent the inflation. So, while the language around the nearly inevitable rate cut later this year might be comforting language about strong and persistent consumer spending and a relatively low unemployment rate, it may not necessarily be related to any indicator of relief for the average American facing the ongoing affordability crisis. Be that as it may, the rate cuts would have an interesting effect on the banking sector: banks' interest earnings on their \"cash\" positions as well as floating-rate loans tied to benchmark rates (such as credit cards or corporate lines of credit) would decline. Meanwhile, interest expenses on instruments such as high-yield savings accounts and certificates of deposit - the likes of which are predominantly used by many customers of small and regional banks - would also decline. If earnings decline more than the savings on expenses, the bank could be treading water. The other way around is a temporary \"high\" in that the bank must now seek additional income via the issuance of debt and the resulting interest payments. Continually lowering rates until they're at near-zero levels (as it had been done in the past) essentially compels citizens/consumers to abandon low-yield instruments and instead invest in the likes of real estate, ETFs, mutual funds, et cetera. Similarly, institutional borrowers would find incentive to refinance existing debt and/or attempt expansionary exercises - ranging from building new facilities to even acquiring a competitor or related business. For regional and small banks to capitalize on this opportunity, they would need an advantage, which a Federal Reserve proposal to essentially hold more capital in reserve might have granted. This was reportedly amended at the bequest of large banks - including the eight U.S. G-SIBs. What was originally estimated to raise core capital requirements for the largest categories of banks by 19% has now been amended to half that, leaving large banks to be ever-more competitive against smaller banks in dealmaking, business development among clients, and even rewards for shareholders. In Conclusion As an investor, 2023 would have worked out to be a disastrous year to hold on to KBWB as opposed to, say, holding the broad-market S&P 500 (SPX in index form; SPY in ETF form) or the tech-heavy NASDAQ 100-Index (NDX) in index form; (QQQ) in ETF form: Source: Created by Sandeep G. Rao using data from Yahoo! Finance However, there were numerous spurts of outperformance for the tactical investor to capitalize on versus the other two instruments in various limited-duration windows throughout the year. In the Year To Date, however, KBWB has shown substantial improvement in relative performance: Source: Created by Sandeep G. Rao using data from Yahoo! Finance If current trends were to continue wherein investors continue to repose faith in large banks as earnings stay strong while tech valuations rationalize, KBWB - which incorporates virtually every major large bank and then some - is poised to outperform both instruments in YTD terms. Tactical investors have also been reaping quite a substantial amount of benefit from the outsized swings in banking stocks versus the other two instruments in the year so far as well.  However, it bears remembering that banks are extremely sensitive to consumer behavior. Beyond a certain point, continuing affordability headwinds make for an adverse lending environment. For instance, as the June edition of the Survey of Consumer Expectations (SCE) Credit Access Survey from the Federal Reserve Bank of New York indicated, the application rate for any kind of credit over the past twelve months decreased to 41.2% in June 2024, down from 43.4% in February 2024. Further survey results and other indicators will be instrumental in fleshing out the outlook on a more current basis.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2453623065"}