The U.S. reporting season for the financial sector has kicked off, and the initial results for Q4 and guidance for 2025 have been largely positive. This optimism is reflected across both large-cap and small/mid-cap (“SMID-cap”) banks, indicating a robust financial landscape ahead, which would be beneficial for the Hamilton U.S. Mid-Cap Financials ETF (HUM), the Hamilton U.S. Financials YIELD MAXIMIZER™ ETF (FMAX) and the Hamilton Global Financials ETF (HFG).
Strong Performance of Large-Cap Banks
Large-cap banks have completed their reporting, showcasing solid interest income, improving capital markets, and steady credit costs. These factors are expected to sustain their performance well into 2025. Additionally, these banks are benefiting from strong capital levels and the potential for a reduced regulatory burden under the new U.S. administration.
Solid Results from Small/Mid-Cap Banks
SMID-cap banks have also started reporting, with generally solid results and positive guidance for the future. These banks are well-capitalized, having raised capital levels following the failure of Silicon Valley Bank (“SIVB”) in early 2023. This strong capitalization positions them well for future growth and stability.
Potential for Improved Capital Returns and M&A Activity
The strong capital levels of U.S. banks put them in a favourable position to return capital to investors through buybacks or increased dividends. Moreover, with U.S. GDP growth expected to be strong and bank valuations healthy, the potential for mergers and acquisitions (M&A) is higher than it has been in years.
Recovery from Trough Valuations
Financials have recovered significantly from the trough valuations of 2022-2023. The combination of strong U.S. GDP growth and low unemployment has helped financials weather the effects of higher interest rates and the SIVB failure. Large-cap financial stocks are experiencing higher-than-normal valuations, driven by strong growth in highly valued sectors such as payment processing, asset management, and financial exchanges and data. While SMID-cap financials have not benefited as much from these growth segments, their valuations remain materially below their 10-year averages, meaning that their stocks have the potential to benefit both from expected increases in earnings per share (EPS) and a return to long term mean valuations.
Overall, the positive results and guidance from U.S. banks, coupled with strong capital levels and a favourable economic environment, paint a promising picture for the U.S. financial sector in 2025.
Recommended ETFs:
Hamilton U.S. Mid-Cap Financials ETF (HUM)
Hamilton U.S. Financials Yield Maximizer ETF (FMAX)
Hamilton Global Financials ETF (HFG)
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A word on trading liquidity for ETFs …
Hamilton ETFs are highly liquid ETFs that can be purchased and sold easily. ETFs are as liquid as their underlying holdings and the underlying holdings trade millions of shares each day.
How does that work? When ETF investors are buying (or selling) in the market, they may transact with another ETF investor or a market maker for the ETF. At all times, even if daily volume appears low, there is a market maker – typically a large bank-owned investment dealer – willing to fill the other side of the ETF order (at net asset value plus a spread). The market maker then subscribes to create or redeem units in the ETF from the ETF manager (e.g., Hamilton ETFs), who purchases or sells the underlying holdings for the ETF.
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