The U.S. regional banking sector is defying expectations, with several banks posting better-than-expected financial results for the third quarter, according to JPMorgan Chase analyst Anthony Elian. This positive trend has alleviated fears that permeated the air ahead of the earnings season. The underlying ecosystem appears poised for potential sustained growth, driven by strong net interest income (NII) and loan growth.
As the first week of the Q3 earnings season passed, seven regional banks covered by JPMorgan revealed their results, with five exceeding analysts’ bottom-line expectations. This positive performance can be attributed to “stronger-than-expected net interest margins (NIM) and net interest income (NII),” as mentioned by Benzinga’s Piero Cingari.
Furthermore, several key metrics for U.S. banks paint a positive picture for the broader economy. According to Cingari, “Average deposits increased at a 7% annualized rate, while average loans grew by 2% annually. On a period-end basis, deposits rose at an even stronger 11% annualized pace, and loans increased by 3% annually. Importantly, NII expanded at a robust 12% annualized rate.”
However, it’s not all rosy. Some banks reported a rise in non-performing assets (NPA), driven by headwinds associated with office loans. However, the sector has significantly improved from the lows experienced during last year’s regional banking crisis.
Experts also highlight the sector’s current trading below historical valuations, presenting a potential opportunity for investors.
The DPST ETF: A Leveraged Play on Regional Banks
For bold investors seeking exposure to the long side of the regional banking narrative, Direxion offers the Direxion Daily Regional Banks Bull 3X Shares (DPST), a leveraged exchange-traded fund (ETF). This risky but compelling fund aims to deliver daily investment results equivalent to 300% of the S&P Regional Banks Select Industry Index performance.
The primary appeal of DPST lies in its convenient leverage format. While traders can utilize options for leveraged transactions, these strategies can be complex. With DPST, investors can simply buy individual units like regular stocks. Moreover, the ETF encompasses a diverse range of individual banks, including Regions Financial Corp (RF) and M&T Bank Corp (MTB).
Important Considerations for DPST
It’s crucial to understand that DPST is highly volatile, and holding leveraged ETFs for periods longer than a day can result in gradual value erosion due to the daily compounding of volatility. Therefore, investors should exercise caution and consider their risk tolerance carefully before investing in DPST.
DPST Chart: A Positive Outlook
Despite a rocky start this year, DPST has gained almost 70% in the past six months, finding its footing in the latter half of 2023. The 3X ETF surged over 8% in late-afternoon trading on Monday, driven by the Dow Jones and improved sentiment towards the economy. Since mid-June, DPST has been forming a series of higher lows, further reinforcing the net-positive fundamental outlook. However, traders should monitor volume levels, which have generally been declining since July.
While the regional banking sector appears to be on a positive trajectory, investors should remain mindful of the inherent risks and volatility associated with leveraged ETFs like DPST. The performance of the sector and the broader economy will ultimately determine the trajectory of this risky but potentially rewarding investment opportunity.
