The big banks are sitting on a huge pile of money. What will become of it?
the Invesco KBW Bank ETF (NASDAQ: KBWB) is 16.26% higher over the past month, waking up from a long sleep. This rally could be the start of something more substantial if the increasingly optimistic views of analysts on bank stocks prove to be correct.
KBWB tracks the widely followed KBW Nasdaq banking index.
“The Index is a modified market capitalization weighted index of companies primarily engaged in banking activities in the United States. The index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and Nasdaq, Inc. and is made up of major US national money centers, regional banks and savings institutions that are publicly traded in the states -United “, according to Invesco.
A catalyst for KBWB is that some of its reputable components rely on massive amounts of cash previously set aside to cover bad loans. If the economy improves and default rates remain low, that cash can be converted back to earnings per share.
“The four largest American banks – JPMorgan Chase, Bank of America, Citigroup and Wells fargo – amassed nearly $ 100 billion in cash for loan loss reserves in the third quarter. Industry at large has established its largest collective reserve since 2010, when mortgage defaults triggered a recession that required a massive bailout from banks and other businesses, ” Hugh Son reports for CNBC.
Things are looking up for the big banks
The problem with banks setting aside large sums of money to cover bad debt is that the strategy weighs on profits. These reserves come directly from profits, but if the economy improves, KBWB’s holdings may not need to cover as many bad debts as expected, meaning these reserves could eventually be turned into profits. .
Some analysts believe bank stock performance is set to improve after falling behind amid pandemic-induced income concerns over low interest rates and weak loan growth, as well as credit problems. In addition, there are short-term catalysts for KBWB and friends, including strong credit quality.
“But the story may end differently this time. A combination of factors – promising vaccines that should allow a reopening of the US economy, surprisingly resilient bank customers, and the expectation of lawmakers to approve another round of stimulus – should allow banks to start releasing reserves in the second half of 2021, according to five banking analysts interviewed by CNBC, ”reports Son.
KBWB is slightly higher over the past week and is near its highest levels since March.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.