After a decade of decline following the 2008 financial crisis, U.S. banks are once again expanding their physical footprint, with 94 net new branches added in 2023, marking the first annual increase since 2012, as quoted in a Yahoo Finance article.

New York and Virginia saw the most branch closures, while Connecticut and Washington experienced the most openings. Major banks like Wells Fargo, PNC, US Bancorp and Truist led in branch closures. But PNC this year announced it will be opening 100 new branches by 2028, in order to close the bank’s less profitable branches and expand in high-growth markets.

Notably, Financial ETFs like iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, Invesco KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH have performed well so far this year, but have recorded a dip past week as June rate cut possibility is dim now (as of Apr 10, 2024) (read: Should You Buy Bank ETFs Before Earnings Releases?).

What Led to This Expansion?

Industry Shift: Banks are turning to brick-and-mortar locations to attract new wealth management and small-business customers. Notably, personal interactions are crucial in these areas for business building, according to the above-mentioned article.

Regulatory Constraints: Large banks, constrained from making acquisitions due to regulatory concerns, are opting for domestic expansion by opening new branches.

JP Morgan’s Significant Growth: JPMorgan Chase, the largest bank in the United States, played a pivotal role, opening a net of 110 branches in 2023 and planning to build an additional 500 branches over the next three years.

Strategic Vision: PNC and JPMorgan look to strengthen convenience and expand their reach by strategically opening new branches in key cities. JPMorgan CEO Jamie Dimon highlighted the importance of physical branches for wealth management, noting the significant increase in daily footfalls.

Navigating Turmoil

Despite industry turmoil, including bank seizures and widespread panic in the regional banking space, the reversal in branch closures occurred in 2023. Notably, in early 2023, central banks around the world began raising interest rates. The hike in interest rates led to a regional banking crisis in the United States and the collapse of a systemic bank in Europe.

A Steepening of the Yield Curve in the Cards?

The Fed is likely to cut interest rates this year, which should lower short-term rates. On the other hand, upbeat economic activities should boost long-term treasury yields. This should result in a steepening of the yield curve, which is great for banking stocks’ operation as it boosts net interest margin.

Cheaper Valuation of Bank ETFs

Most bank ETFs have a cheaper valuation than the S&P 500. Invesco KBW Bank ETF KBWB, SPDR S&P Bank ETF KBE and First Trust Nasdaq Bank ETF FTXO have a P/E of 9.38X, 6.85X and 9.49X, respectively, versus SPDR S&P 500 ETF Trust’s SPY P/E of 17.86X. This indicates that the bank ETFs are undervalued with better growth prospects. Investors can play these bank ETFs with a long-term view.

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SPDR S&P 500 ETF (SPY): ETF Research Reports

Financial Select Sector SPDR ETF (XLF): ETF Research Reports

SPDR S&P Bank ETF (KBE): ETF Research Reports

Invesco KBW Bank ETF (KBWB): ETF Research Reports

iShares U.S. Financial Services ETF (IYG): ETF Research Reports

Vanguard Financials ETF (VFH): ETF Research Reports

iShares U.S. Financials ETF (IYF): ETF Research Reports

First Trust NASDAQ Bank ETF (FTXO): ETF Research Reports

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