In the last few months, a lot has happened in the U.S economy – mostly positive, to lend credence to predictions that there will likely be multiple rate hikes from the Feds in the coming months. And since banks borrow low and lend high, it is easy to understand why they (the banks) would be prime beneficiaries of any rate hikes to come.
The debate however is: Which Banks? Are the usual heavyweights (Bank of America, JP Morgan, Wells Fargo) a better bet for your portfolios, or should you look closely at adding the smaller regional banks instead?
Torque around town
Our thesis is that, because smaller banks in and around cities and towns are more exposed to daily banking – lending and deposit taking – it is they that could offer better torque to portfolios in a rising rate environment. Not to say that the big players won’t benefit. However, it is our belief that the rising tide of interest rates will raise the regionals much higher than the larger banks.
To verify our thesis, that Regional players are likely a better bet than the “usual” heavyweights – at least in the immediate near term, here’s what we did:
Compared two ETFs – Financial Select Sector SPDR ETF (NYSEARCA:XLF), which is a proxy for the heavyweights, and iShares US Regional Banks ETF (NYSEARCA:IAT), which serves as a proxy for smaller financial institutions, specifically regional banks
Compared two Regional players – The PNC Financial Services Group, Inc. (NYSE:PNC) and Regions Financial Corporation (NYSE:RF)
Added two heavyweights into the mix – Bank of America Corporation (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM)
The objective of this exercise was to try and validate:
Whether collectively, the big players (as represented by their proxy ETF), outperformed the collective might of the small guys – the Regionals?; and
Whether individually, the big banks have done better than the individual regionals on a YTD basis?
Looking at the screen above, at the time of our analysis, we have established that:
While XLF has risen by an impressive 5.98% YTD, it’s smaller cousin IAT has given investors a much higher 9.78% (obfuscated behind BAC in the screen above)
On an individual basis, the big players – JPM (8.99%) and BAC (9.83%) and have handily beat their ETF proxy by about 3 and 4 percentage points respectively
Both regional entities in our sample, PNC (12.20%) and RF (14.68%), have not only outperformed their own ETF proxy, but are also leading the Big Bank proxy by more than a country mile!
And finally, both individual regional names have handily outperformed the individual heavyweights in our analytical sample
In fact, if we added yet another big gun, Wells Fargo & Company (NYSE:WFC) to the mix (-5%), the YTD picture for the big banks doesn’t look too bright!
Clearly, at least over the period of our analysis, portfolio managers and retail investors that threw their lot with the two regionals would have done much better than had they owned the two heavyweights in the U.S banking sector.
The editor owns shares of JPMorgan Chase & Co. and Bank of America Corporation.