Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have been a headwind for financial exchange traded funds (ETFs) recently even though the two banking giants saw their shares rise Monday in active trading.
Citigroup and Bank of America are among the top five holdings in Financial Select Sector SPDR Fund (NYSEArca: XLF), which was flat in morning action. The financial ETF has declined in April with Citi, B. of A. and other big banks reporting quarterly results.
“Since mid-February, banks have given back all relative gains since the October lows,” Deutsche Bank analysts wrote in an April 21 research note. “Many (including us) hoped earnings would be a positive – only to see stocks underperform … versus the market.”
They pointed out banking stocks are 20% below their May 2010 levels “even though banks have more capital, have absorbed huge mortgage hits, and the jobs picture is much better” even if March softened a bit.
Deutsche Bank cited several factors weighing on banks. Revenue is a challenge given the economic landscape, government involvement in the mortgage market, low interest rates and regulatory unknowns.
“The market is tired of regulatory uncertainty,” the analysts remarked. They also pointed to better earnings and revenue growth in other sectors, and mortgage-related hits that are weakening capital at some banks.
Yet large-cap banks may be due for a bounce, Deutsche Bank said. The bullish case includes low investor expectations for the sector, attractive valuations and the chance for additional M&A deals, the analysts said.
Financial Select Sector SPDR Fund
