Earnings Surprises Rally Regional Bank ETFs

by on October 23, 2009 | ETFs Mentioned:

This earnings season, which many analysts have called the most important in decades, has certainly had its shares of disappointments. Boeing reported a larger-than-expected loss and reduced its full year guidance to levels more than 40% below Wall Street expectations. AMR, parent of American Airlines, reported a huge loss, hurt by a tough environment and inability to rein in costs as efficiently as some competitors.

Suburban Bank BranchBut the vast majority of companies have either met or exceeded Street expectations, in many cases by a wide margin. High profile announcements from Apple, Amazon, eBay, and McDonalds have given stocks a boost, with most major benchmarks up since reporting season began last week.

But perhaps the biggest upside surprises came Thursday when a series of banks reported better-than-expected profits (or better-than-feared losses) for the third quarter. PNC, the fifth-largest U.S. bank by deposits, posted a profit of $559 million, or $1 per share, crushing the average analyst estimate of 28 cents per share.

Fifth Third reported a net loss of $97 million for the third quarter as it charged off more commercial mortgages and set aside nearly $1 billion for loan losses. The results were in line with analyst expectations, but shares surged nearly 7% anyways, suggesting that investors still expect the worst ahead of earnings calls from major financial institutions.

SunTrust posted a loss of $317 million, or 76 cents per share, but apparently beat the expectations (or at least the fears) of many investors, as shares rose more than 5%.

Almost all financials ETFs have posted solid gains on the year as the industry has continued to recover from the unprecedented meltdown of 2008. But regional banks have missed out on the rally, falling as concerns build about exposure to local construction projects and commercial real estate, as well as worries about high unemployment rates in certain areas. “Commercial real estate remains a very serious problem,” Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee earlier this month. “We are concerned, both because the fundamentals are weakening and because the financing situation is bad (and) could provide a source of a lot of stress, particularly for small and regional banks that have a very heavy concentration in commercial real estate.”

Thursday’s earnings reports obviously did nothing to change sentiment over the health of the commercial real estate markets or the inevitability of an uptick in defaults. But they went a long way to reassure investors that financial institutions are taking the threat very seriously, establishing sufficient reserves and taking appropriate loss provisions to withstand a meltdown.

Regional Bank ETFs Surge (Finally)

The iShares Dow Jones U.S. Regional Banks Index Fund (IAT) surged  4.5% on Wednesday, while the SPDR KBW Regional Banking ETF (KRE) gained 5.4%. Even after the boosts, IAT and KRE are down about 10% and 26%, respectively, for the year. See a breakdown of how the holdings, expenses, and historical performance of these ETFs compare here. To stay up to date on how the rest of earnings season impacts ETFs, sign up for our free ETF newsletter.


Disclosure: No positions at time of writing.