Once again, the Federal Reserve opted to leave interest rates on hold following the conclusion of its most recent meeting Wednesday, citing concerns about Brexit, among other factors.
Obviously, no interest rate hikes do not favor financial services stocks and exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF).
However, some analysts are bullish on big bank stocks. One the primary catalysts that previously lured investors to bank ETFs, that being speculation of higher interest rates, is largely off the table.
With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.
[related_stories]The market expectations for another interest-rate increase by the U.S. Federal Reserve have been pushed back, diminishing the outlook for banks’ lending margins.
Long-term interest rates are back near historic lows, depressing investments in financial instruments like mortgage-backed securities. Meanwhile, trading, underwriting and merger activity may remain muted in a post-Brexit environment.
“There’s upside to be realized. A sustained rally relies on visibility into an extended business cycle (positive U.S. and global GDP growth) and with that, manageable credit cost increases and improved capital-markets prospects. We’re late in the cycle; there will be volatility. We put the upside at 15%-20% for our recommended names, JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and Goldman Sachs Group (GS),” said Credit Suisse in a note posted by Barron’s.
Related: Financial Sector ETFs Maintain Momentum
U.S. banks are still on more solid footing than their international counterparts. In the U.S., the financial firms have stronger capital positions than their European peers, we have also mostly moved past the regulatory malaise, and there is room for further efficiency and returning capital to shareholders.
Moreover, valuations have dropped considerably as banks trade roughly at book value, which may make the sector a cheaper bet compared to other areas.
XLF and rival ETFs have been under pressure following the Brexit outcome, but there are other factors at play, including the Federal Reserve’s refusal to raise interest rates to this point in 2016.
Related: Financial Sector ETFs Plunge on Brexit Contagion
“Generally speaking, our banks reported earnings that exceeded expectations. The upside relative to consensus has averaged 3%, with only Wells Fargo simply in line with forecasts. All in, second-quarter earnings per share are tracking up 12% quarter-to-quarter evidencing the sequential improvement in capital markets related revenue and a 2% quarter-to-quarter reduction in credit costs,” adds Credit Suisse.
Financial Select Sector SPDR
