As the energy sector is bludgeoned by low oil prices, banks and financial sector exchange traded funds could continue to underperform.
Meanwhile, the broader iShares U.S. Financials ETF (NYSEArca: IYF) decreased 11.2%, Financial Select Sector SPDR (NYSEArca: XLF) dropped 12.2% and Vanguard Financials ETF (NYSEArca: VFH) pulled back 11.5%.
The financial sector has been dragging its feet as banks set aside a larger portion of their coffers for a rainy-day fund ahead of potentially rising energy sector defaults. For instance, J.Pl Morgan Chase & Co. (NYSE: JPM) is building up reserves related to potential energy losses in the first quarter due to the prolonged decline in crude oil prices, reports Emily Glazer for the Wall Street Journal.
J.P. Morgan plans to add $500 million to reserves for oil and gas and an additional $100 million related to metals and mining in the first quarter. The additions come on top of the bank’s $815 million in oil-and-gas reserves and $240 million in metals and mining as of the end of 2015.
The disclosures followed a worsening energy loan outlook. HSBC Holdings (NYSE: HSBC) recently revealed growth in loan-impairment charges in the fourth quarter to $1.65 billion from $1.01 billion year-over-year, with most of the charges related to a struggling energy sector.
Standard Chartered Plc also stated that the depressed commodity market has also weighed on the bank’s revenue, revealing a commodity-related revenue hit of $300 million.
“For the near term, volatility stays and will hinge on what happens in the crude market, whether we like it or not, and will determine the assumption of risk,” Ernie Cecilia, chief investment officer of Bryn Mawr Trust, told Reuters.
J.P. Morgan also warned that if oil prices fall to $25 for 18 months, the bank may need to up reserves by about $1.5 billion.
“I put [that] in the drop-in-the-bucket category,” J.P. Morgan Chairman and Chief Executive James Dimon told the WSJ. “It will have real adverse consequences in other parts, possibly some small banks and regional areas.”
Financial Select Sector SPDR
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.