Written by Kevin Grewal, Editorial Director at www.SmartStops.net
NEW YORK (
) --As regional banks unleashed first-quarter earnings, improved performance in the equity and credit markets helped them top expectations.
The world's largest trust bank,
The Bank of New York Mellon
, exceeded expectations by boasted a profit of $601 million, or 49 cents per share. The primary driver behind this boost in profits came from a rise in assets under custody and fee revenue, two factors indicative of an improving economy and boost in investor confidence.
BNY Mellon's total assets under custody and administration rose to $22.4 trillion, a 15% increase from a year earlier and were attributable to higher-market values and increased business. As for fee revenue, the bank indicated a 13% increase year-over-year, to $696 million for the quarter. BK has gained nearly 17% over the last year and closed at $32.42 on Thursday.
beat Wall Street's expectations by reporting earnings of 27 cents per share, as net interest income and average deposits rose. On the downside, overall income for the regional bank dropped 39% over the past year as it wrote off more bad loans than initially anticipated and saw an increase in net charge offs of 26%.
As for the future, the bank suggests that credit problems are easing and reduced provisions for credit losses by 15% from a year earlier, which could lead to higher profitability in the coming quarters. BBT is up nearly 61% from a year earlier and closed at $34.34 on Thursday.
Another regional bank to reap the benefits of higher revenues from its fee-based business and a slowdown in consumer loan losses was
. The Minneapolis-based bank reported nearly a 27% increase in profits and was in line with analyst expectations, releasing earnings of 34 cents per share.
Additionally, the bank has stated that it is generating enough capital to raise its dividend payout, but will refrain from doing so until a sustainable economic recovery is in place. In regards to loan losses, US Bancorp expects losses to remain relatively stable in the next quarter and has set aside $1.3 billion for further losses. USB has gained 46% over the last year to close at $27.37 on Thursday.
Although the trend in regional banks appears to be heading in the right direction, it is important to keep in mind their heavy dependency on U.S. consumer demand for loans. Granted, economic indicators are improving, illustrated by a decline in initial jobless applications and an uptick in sales of U.S. previously owned homes, and President Obama is trying to encourage lending to small businesses, but consumers continue to save more and remain reluctant to borrow.
Some ETFs that are likely to be influenced by the performance of regional banks include:
SPDR KBW Regional Banking ETF
, which holds 50 different regional banks with
Webster Financial Corp
as its top holding. KRE is up 38% over the last year and closed at $29.58 on Thursday.
iShares Dow Jones US Regional Banks
, which holds 66 different regional banks and includes US Bancorp,
PNC Financial Services Group
and BB&T Corp as its top holdings. IAT is up nearly 48% over the last year and closed at $27.12 on Thursday.
PowerShares Dynamic Banking
, which holds 30 different regional banks with
Fifth Third Bancorp
M&T Bank Corp
as its top holdings. PJB is up 17% over the last year and closed at $14.52 on Thursday.
To help mitigate the heavy dependency of the sub-sector on consumer demand for loans, the use of an exit strategy that identifies price points at which upward trends in these equities could come to an end is helpful.
According to the latest data at
, the price points are as follows: BK at $30.94; BBT at $32.67; USB at $26.28; KRE at $27.00; IAT at $25.49; PJB at $13.94. These price points are reflective of market conditions and volatility and updated daily data can be found at www.SmartStops.net.
Written by Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.