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KBWB: Big Banks Are A Hold For Now

Dec. 04, 2021 12:52 AM ETInvesco KBW Bank ETF (KBWB) ETFBAC, C, JPM, USB, WFC4 Comments


  • The market is starting to come under pressure, and that makes me generally less bullish on the big U.S. banks.
  • Banking is a cyclical sector, and has been performing well as the economy recovers and expectations for rate hikes got more hawkish.
  • However, these expectations are being tested by new COVID-variants, travel restrictions, and sluggish jobs numbers.
  • Bank earnings have been strong, but the boost from a release of credit loss provisions is subsiding. So we will want to monitor the next few quarters of earnings very closely.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
New York City skyline with the Trump Tower in Lower Manhattan, taken from a helicopter flying above rooftops at sunrise


Main Thesis/Background

The purpose of this article is to evaluate the Invesco KBW Bank ETF (NASDAQ:KBWB) as an investment option at its current market price. This is a sector-specific fund, with a focus on bank stocks exclusively. Importantly, it is

Please consider the CEF/ETF Income Lab

This article was written by

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I began my career in financial services in 2008, at the height of the market crash. This experience has shaped my investment strategy - which is focused on diversification, dividends, and growth opportunities. I am a competitive tennis player, and I competed at the Division I level in undergrad. I have a Bachelors and MBA in Finance.

(He is a contributing author for the investing group CEF/ETF Income Laboratory where he specializes in macro analysis. Features of CEF/ETF Income Laboratory include: managed income portfolios (targeting safe and reliable ~8% yields) making use of high-yield opportunities in the CEF and ETF fund space. These are geared toward both active and passive investors of all experience levels. The vast majority of holdings are also monthly-payers, for faster compounding and steady income streams. Other features include 24/7 chat, and trade alerts. Learn more.)

Analyst’s Disclosure: I/we have a beneficial long position in the shares of KBWB, JPM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

Thanks for this steady, thoughtful piece.
I think the earnings revisions chart is for the market as a whole. Is there one for KBWB or some other bank sector collective?
Although it was useful to see the provision releases quantified in billions it would be more useful to see them as a % of something specific to that bank (eg 9 month pre-tax profit?). And indeed it would be much more useful to look out beyond provision releases which do indeed, along with the excessive charges in 2020, make the last couple of years' earnings almost useless in understanding future earnings power. One could do this by looking at:
1) 2022-24 earnings forecasts, indeed along with revisions momentum as mentioned above (this is probably simplest assuming you are time-constrained)
2) pre-provision profitability for the past 9 months, or, best of all,
3) net profit assuming cross-cycle provisioning (ie adjusting provisions to a normalised level for the last quarter or 3 quarters).

I am not privy to analyst research from the big houses, but I would hope they still look at 2) these days, and ideally 3) as well (we certainly used to).

I accept that this doesn't address lumpy investment banking income (mostly an issue for 2-3 of the largest banks).

I also accept that you and others might argue the next couple of months share price performance won't pay a whole lot of attention to longer term earnings power. However, earnings revisions for KBWB MAY have a short term impact, and getting a handle on pre-provision profit could be useful to check if analysts Q4 forecasts look optimistic/pessimistic at this stage.

Please forgive the length of this post, and I fully appreciate it discusses a level of detail beyond what you and most people have time for when managing a multi-sector portfolio.
Dividend Seeker profile picture
This is a very good post. To address a few points - yes the chart was for S&P 500 earnings revisions as a whole. I was simply pointing to that to discuss why I see some momentum waning in the broader market. This will impact the Financials sector from contagion, not necessarily because the banks themselves are seeing earnings revisions.

Also, I don't have exact figures on the credit loss provisions as a percentage of total profit...but the graphic shows the major banks, and the Quarterly profit figures I showed did indicate a regression in earnings - so the two are certainly related, although the actual percentage is not clear. Is it a big deal? I would say no, but it is something to watch to make sure bank's earnings power continues to grow organically in the coming quarters. If it does, that is a bull case and something I view optimistically.
I anticipate December will be a volatile month. There are a number of issues that must be considered. The market gains in 2021, the eventual change in the income and estate tax structure, realignment of institutional portfolios, the increase in interest rates, inflation, the budget deficit, the coronavirus, the political uneasiness on the national and local level, devaluing of the dollar, climate change, fossil fuel de-emphasis, the enforcement of laws, immigration, an adequate work force, productivity gains, the dysfunction of the executive, legislative and judicial branches of government, the lack of a major market correction, foreign laws and markets, elevated stock price levels, speculation in the stock market, etc. There are some buys in the market like V, FDX, UPS, MRK, BMY but for the most part the market is a combination of hold and sell imho. My liquid assets currently exceed 30%.
Dividend Seeker profile picture
I appreciate that perspective, let us hope for the best but plan for market swings!
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