Banking stocks have been outperforming the broader market of late, as the FOMC meeting minutes suggested that a June rate hike was a possibility. Many Fed officials have also warned about higher rates coming sooner than the market anticipates. Their main agreement is the economic growth has been picking up and labor market has been tightening and eventually wages will pick up and that combined with rising oil prices will result in higher inflation. Inflation has been running below Fed’s target of 2%.Before the release of the minutes the market saw about 6% probability of a rate hike, which increased to 38% after the realease.

Higher interest rate benefit banks’ profitability as their net interest margin--the spread between their borrowing rates and lending rates--rises. Regional banks in particular have been doing well since interest rate spread is their main source of earnings.

On the other hand, bigger banks still face a lot of challenges. After strict regulatory norms imposed on big banks, they have been finding it difficult to generate profits in their investment banking and trading businesses. Rising market volatility has also impacted many of their traditional trading businesses.
In the following short video, we have discussed SPDR S&P Regional Banking ETF (KRE - ETF report) and PowerShares KBW Regional Banking Portfolio (KBWR - ETF report) .

Video Length: 00:05:11