The Invesco KBW Bank ETF (KBWB ) is up an impressive 43.47% year-to-date, one of the better showings among non-leveraged industry exchange traded funds.
That stellar showing is confirmation that KBWB, which follows the widely observed KBW Nasdaq Bank Index, is benefiting from, among other factors, expectations that the Federal Reserve will raise interest rates at least once next year, delivering a boost to banks’ net interest margins in the process.
Of course, rising rates are efficacious for bank stocks. KBWB is proving as much in 2021. Still, banks need to boost loan growth, and it appears that they’re moving in that direction. One way KBWB components can efficiently accomplish that objective is to loosen credit standards for consumer borrowers.
“On 8 November, the New York Federal Reserve Bank released its quarterly Senior Loan Officer Opinion Survey (SLOOS),” according to Moody’s Investors Service. “The latest SLOOS reveals that bank consumer lenders continued to loosen underwriting standards for credit cards, auto loans and residential mortgages in the third quarter, as consumer loan asset quality stayed very strong.”
To the point about credit issuance and standards, KBWB allocates nearly 32% of its weight to Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB), and Dow component JPMorgan Chase (NYSE:JPM), all of which are major credit card issuers.
Issuing more credit cards, car loans, and other consumer fare is one thing. Ensuring that those loans don’t go bad is another, and with the global financial crisis still fresh in many investors’ minds, those considering KBWB are right to also consider the strength of the consumer and consumers’ access to employment. It appears that KBWB member firms are confident that lowering credit standards today won’t turn into a problem tomorrow.
“Lenders reported material easing of underwriting standards for credit cards and residential mortgages, and a less pronounced easing of standards for auto loans. This marks the fourth quarter of continued loosening, which has weakened consumer underwriting standards,” adds Moody’s.
Demand for credit cards is soaring, and with the holiday shopping season essentially here, those are two pluses for KBWB holdings. Conversely, auto and mortgage loan demand is easing.
“Net demand for credit card loans continued to strengthen in the third quarter, while demand for auto and residential mortgage loans declined. We expect growth in card balances to be supported by retail sales during the coming holiday season, but excess savings and supply chain disruptions could still constrain spending,” concludes Moody’s.
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