KRE: Regional Banking Has Strong Long-Term Value
Summary
- Regional bank stocks sit well below their highs, despite the halt in the bank run and lack of losses.
- Regional banks remain essential to the U.S. economy, offering more personalized services and diversification.
- We expect regional bank stocks held by SPDR® S&P Regional Banking ETF to slowly recover and benefit from higher interest rates, enabling them to focus on short-term shareholder returns.
- The Retirement Forum members get exclusive access to our real-world portfolio. See all our investments here »
Anne Czichos
The SPDR® S&P Regional Banking ETF (NYSEARCA:KRE) has struggled substantially. Despite some recoveries recently, the company is worth 30% less than its peak at the start of March. However, as we'll see throughout this article, regional banks have some unique offerings that make them a valuable long-term investment.
Customer Service
Despite the fact that First Republic Bank (OTCPK:FRCB) no longer exists, there's a legacy of the strong service it provided to customers.
That's something that regional banks consistently offer. They can offer better rates, better customer service, better deals, and better opportunities. It's something that can clearly be seen with customers upset about the fall of these banks. With major banks hitting their asset limitations, and the diversity benefit of regional banks, regional banks are here to stay.
Federal Insurance
However, the fear remains the same. What about a run on the banks?
The Federal Deposit Insurance Corporation insures $9 trillion worth of assets, and with recent impacts, its fund needs a $16 billion refill. The total fund value is more than $120 billion, which is a fraction of the insured assets. Of course, if there was a run on all the banks, it would fail. However, it is a comfortable level the federal backstop can handle.
Total federal bank deposits are $17.5 trillion, which means 51.5% of assets are insured. Bank runs remain an unsolvable problem. No bank in the United States can handle a run on it across all of its customers. However, a heavy insurance rate can help to protect the company with the fears of a run on the bank.
It's worth noting though that only the largest banks by uninsured deposit % have suffered. Or those with some fundamental flaw in their model, such as Silicon Valley Bank.
The ETF Advantage
The benefit of an exchange-traded fund, or ETF, is the minimal risk while still taking advantage of the potential of regional banking ETFs.
ETF Holdings
The top 10 holdings make up roughly 28% of the total assets of the ETF. New York Community Bancorp (NYCB) is the largest asset here, followed by M&T Bank Corporation (MTB) and then Regions Financial Corporation (RF). The top holdings are all strong regional banks, but there's hefty diversification by weight. That means that the risk of an individual bank run is minimal.
Thesis Risk
The largest risk to our thesis is what we stated above. No bank can handle a bank run, but large banks are much better positioned to survive it. Multiple regional banks have failed, and there's no guarantee the banks above won't have a run. That could substantially hurt the value of the regional bank ETF in a way that it can't recover.
Conclusion
Regional banks remain essential to the U.S. economy. The fact that not even uninsured deposits were lost in the recent regional bank failure says something. Current indications are, with the exception of the recent First Republic failure and repurchase by JPMorgan (JPM), the run on the regional banks has ended.
The run started with Silicon Valley Bank of SVB Financial Group (OTCPK:SIVBQ). There was a fundamental issue there, though. Silicon Valley Bank triggered the run themselves, fundamentally messing up the short-term cash requirement of customers with long-term loans. An ETF helps with individual risk like this, though, helping to increase overall returns.
Let us know your thoughts in the comments below.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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