Banks could delay increasing deposit interest payments if the Federal Reserve raises rates, which could further bolster their livelihoods business and support the outlook for financial sector-linked exchange-traded funds.
The Fed signaled it would raise rates in March, the first of several potential hikes in 2022. With higher interest rates, customers would typically see higher savings rates for their bank deposit accounts. However, that might not be the case this time around.
Banks have little incentive to raise deposit rates to attract more customers since they already have cash, reports the Wall Street Journal.
The government stimulus has already bolstered Americans’ bank account balances, and many businesses are teeming with cash after a series of belt-tightenings during the COVID-19 pandemic. Total deposits in US commercial banks have now jumped to $18.1 trillion from $13.3 trillion at the start of 2020.
Therefore, banks, which profit from the difference between what they collect on loans and what they pay out on deposits, stand to benefit from this wider gap in their bread and butter lending business after the Profit margins have fallen to new lows in response to the near-zero rate environment.
According to Bankrate.com, the average rate on savings accounts at the largest US banks was 0.06% in 2021. Meanwhile, many high-yield savings accounts now offer rates around 0, 5%, compared to 1.5% at the start of 2020.
In fourth-quarter earnings calls last month, bank executives already warned that those rates wouldn’t budge with Fed hikes this time around.
The “overall rate paid will be lower during this next rate hike cycle,” Jenn LaClair, chief financial officer of Ally Financial Inc., previously said.
Deposit rates would only start to rise when banks make more loans, which would require a large cash base to back up.
“You’re not going to see deposit rates increase by any magnitude until banks have a lot more loans on their books than they have today,” said Pete Gilchrist, head of retail deposits and commercial banks at Curinos, at the WSJ.
As investors turn to bank stocks, some may turn to financial sector-related ETFs to take advantage of the rebound, including the Selected Financial Sector SPDR (NYSEArca: XLF)the Fidelity MSCI Financial Services Index ETF (NYSEArca: FNCL)the iShares US Financials ETF (NYSEArca: IYF)and the Vanguard Financials ETF (NYSEArca: VFH). Broader financial sector ETFs include strong leanings towards large banks, but these large sector players also include other non-pure banking players in the financial sector spanning capital markets, insurance companies, services diversified financials and consumer credit, among others.
On the other hand, investors can also turn to more bank-focused ETFs, such as the iShares US Regional Banks ETF (NYSEArca:IAT)the SPDR S&P Regional Banking ETFs (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-linked ETFs follow a more equally weighted indexing methodology, so their holdings tilt toward mid-sized or smaller companies.
For targeted exposure to the smaller bank segment, investors can look to options such as First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) and the Invesco S&P SmallCap Financials Portfolio (NYSEArca: PSCF).
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