Energy Loan Woes Weigh on Financial ETFs

While a rising interest rate environment will help banks’ margins, financial sector exchange traded funds may continue to be pressured by losses on loans to beleaguered energy companies.

The financial sector is beginning to turnaround with the Financial Select Sector SPDR (NYSEArca: XLF) up 11.5%, iShares U.S. Financials ETF (NYSEArca: IYF) up 11.2% and Vanguard Financials ETF (NYSEArca: VFH) up 11.6% over the past three months.

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However, financial investors should keep expectations grounded. Wells Fargo (NYSE: WFC) has told investors to brace for more losses on loans to energy companies, reports Jon Marino for CNBC.

Consequently, the bank will continue to raise its reserves to offset those losses, diminishing cash available to be deployed elsewhere. Wells Fargo also anticipate further reserves may be required to offset additional losses.

“We built our reserve in the first quarter” correlated with rising stress in the energy sector, Chief Financial Officer John Shrewsberry said.


Almost 70% of the bank’s energy-sector borrowers experienced a drop in lines of credit, Shrewsberry said. Analysts have also expressed concern over energy lending portfolios.