The Banks of the KBW Index

The Banks of the KBW Index

by Pininvest Analysis

US major Banks & Savings on

  • constituents
  • 67.8% 1y performance
  • 32.4% volatility
Check the investment theme exit_to_app

The banks of the KBW index are large cap financial institutions and money centers and the PowerShares KBW Bank ETF, tracking the index, has been very successful in 2017

By presenting our theme as a unit list, we wish to explain this performance but also to focus on the differences between these major institutions

Performance did not really take off convincingly before the fall ’17 – from Sept. 21 to be precise – and in the absence of significant macro-economic factors, we are tempted to assign the late year strong run mainly to regulatory expectations

  • Relaxing part of the Dodd Frank regulatory framework, reducing compliance costs
  • Across the board tax reductions, from which the banks, large contributors, are expected to benefit 

Because the regulatory changes are a ‘one-off’, performance in the run-up to the decisions of the US Administration should not be indicative of future performance in 2018

Taking a longer view, the KBW banks do not present similar business profiles and should probably not be evaluated on a ‘one-size fits all’ basis

  • Global banks are very powerful entities, certainly ‘too-big-to-fail’ and placed in a unique position by mutually supporting specializations – their international exposure is another major factor and also a risk for institutions like City Bank , which the national entities do not share
  • Commercial banks (national and regional) – with foremost Wells-Fargo – exercise for most part the traditional banking functions. In a sense, this ‘commercial’ financial segment will benefit, or suffer, from national US trends, anticipating developments of  the economy at large
  • Trust banks, such as Bank of New York Mellon - should be set apart because their custodial functions (administration of fixed income securities) exposes a different risk set

In summary, the theme and could be tracked as a global indicator of the banking industry but the notable differences between the constituents are worth considering in their own right