Banking Sector: This Beaten Down Sector Is Looking Cheap

Banking SectorFolks, we are clearly operating in a bear market mentality, but the world is not going to end and there will be better times ahead. It will likely worsen before improving, but the extreme selling in the big banks and domestically are overdone in my view. It’s true the bank sector could see more downside moves, but there will also be opportunities to accumulate on weakness long-term.

On Thursday morning, news of negative interest rates emerging in Sweden drove more selling capitulation in the domestic and global banking sector.

The big banks now trade at valuations of the recession based on price to tangible book value. This is excessive and clearly indiscriminate selling, at least to some degree.

Sweden will join Japan in pushing a negative interest rate environment to try to get the economies going.

The fear amongst banking sector investors is low and negative interest rates translate into pressures on the interest spread—the meat and potatoes of the banks.

The selling in U.S. banks, which are in much better shape now than during the recession, is obviously laced with fears of no additional interest rate hikes by the Federal Reserve this year and even whispers that we could see negative interest rates here.

The Fed could cut interest rates and reverse the hike made in December if the domestic economy worsens, but I don’t believe this will happen.

Domestically, while the Fed has tested an adverse situation where interest rates are negative, there is no indication it would happen. Instead, it was seen as a test to see how it would impact the stock market and economy.

All of this focus on possible negative interest rates and the impact of oil exposure on the banking sector and big banks has, in my view, reached insidious levels.

I was reading somewhere that the exposure to the oil patch for U.S. banks was at a mere three percent of the total loan exposure. That’s simply not enough to make oil exposure a valid fear for the big banks.

Take a look at the chart of the S&P Bank Index, which has seen the banking sector get slammed in connection with the S&P 500 index.

s and p bank index chart 1

Chart courtesy of www.StockCharts.com

Financial Chaos Means Opportunity

Those with an appetite for risk should be salivating, given the bear market in the banking sector.

Bank shares could likely drift lower as interest rates trade at historical lows around the world, but easing into the weakness with timely additions would be interesting.

With proper portfolio diversification, investors could look at the big and regional banks at current and additional selling.

You have the obvious bank names, but for a more diversified approach, take a look at the various exchange-traded funds (ETFs).

In the big banks segment, a widely traded ETF is the Select Sector Financial Slct Str SPRD Fd (NYSEArca:XLF), an ETF that comprises all of the big banks. The ETF is down 20% from its 52-week high and for those seeking a chaos opportunity, an investment like this ETF could pan out longer-term.

xlf financials select sector SPDR nyse chart 2

Chart courtesy of www.StockCharts.com

Alternatively, for a regional bank focus, investors could look at an ETF like the SPDR KBW Regional Banking (ETF) (NYSEArca:KRE), which tracks the S&P Regional Banks Select Industry Index. This ETF is down 28% from its 52-week high.

kre spdr kbw regional banking index chart 3

Chart courtesy of www.StockCharts.com

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