Banks could hold off on raising interest payments on deposits if the Federal Reserve hikes rates, potentially further bolstering their bread-and-butter businesses and supporting the outlook on financial sector-related exchange traded funds.
The Fed has signaled that it will hike rates in March, the first of potentially multiple hikes in 2022. With higher interest rates, customers would usually see higher savings rates for their bank deposit accounts. However, this might not be the case this time around.
Banks have little incentive to raise deposit rates to attract more customers since they are already flush with cash on hand, the Wall Street Journal reports.
Government stimulus has already beefed up Americans’ bank account balances, and many companies are flush with cash after a round of belt tightening during the COVID-19 pandemic. Total deposits at U.S. commercial banks have now burgeoned to $18.1 trillion, compared to $13.3 trillion at the start of 2020.
Consequently, banks, which profit from the difference between what they charge on loans and what they pay on deposits, are expected to benefit from this wider differential in their bread-and-butter lending business after profit margins plummeted to new lows in response to the near-zero rate environment.
According to Bankrate.com, the average rate on a savings accounts at the largest U.S. banks was 0.06% in 2021. Meanwhile, many high-yield savings accounts now offer rates at around 0.5%, compared to 1.5% in early 2020.
During the Q4 earnings calls last month, bank executives already warned that those rates aren’t going to move with Fed increases this time around.
The “overall rate paid will be lower in this next rising-rate cycle,” Jenn LaClair, chief financial officer at Ally Financial Inc., previously said.
Deposit rates would only begin to rise once banks make more loans, which would require a large cash base to back.
“You’re not going to see deposit rates jump with any sort of magnitude until banks have many more loans on the books than they do today,” Pete Gilchrist, head of retail deposits and commercial banking at Curinos, told the WSJ.
As investors look back into bank stocks, some may turn to broad financial sector-related ETFs to capture the rebound, including the Financial Select Sector SPDR (NYSEArca: XLF), the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL), the iShares U.S. Financials ETF (NYSEArca: IYF), and the Vanguard Financials ETF (NYSEArca: VFH). The broad financial sector ETFs include hefty tilts toward big banks, but these broad sector plays also include other non-pure bank plays in the financial sector covering capital markets, insurance companies, diversified financial services, and consumer finance, among others.
On the other hand, investors can also turn to more bank-focused ETFs like the iShares U.S. Regional Banks ETF (NYSEArca: IAT), the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the Invesco KBW Regional Bank Portfolio (NYSEArca: KBWR), and the SPDR S&P Bank ETF (NYSEArca: KBE). Potential investors should also note that State Street Global Advisors’ bank-related ETFs follow a more equal-weighted indexing methodology, so their holdings lean toward mid- or smaller-sized companies.
For targeted exposure to the small-sized banking segment, investors can look to options like the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) and the Invesco S&P SmallCap Financials Portfolio (NYSEArca: PSCF).
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