Earnings season for the financial services sector kicks off in significant fashion Friday. For investors in exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), there is plenty to keep an eye on when it comes to fourth-quarter earnings updates.
XLF is coming off one of its best annual performances since the global financial crisis. While the financial services sector, the second-largest sector allocation in the S&P 500, has some doubters after last year’s impressive rally, some market observers believe the sector can keep tracking higher this year.
In addition to XLF, the largest financial services ETF, the SPDR S&P Bank ETF (NYSEArca: KBE) and SPDR S&P Regional Banking ETF (NYSEArca: KRE), among other exchange traded funds dedicated to bank stocks, have been soaring since early November.
“Fitch expects large U.S. banks’ 4Q16 results will be mixed. Large trading banks’ earnings likely benefited from election-related market volatility; however, overall loan growth likely remained muted during the quarter,” said Fitch Ratings in a recent note.
KBE, KRE and friends are benefiting from speculation that the Federal Reserve will boost interest rates multiple times this year. 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.
The Fed is believed to be targeting three rate hikes in 2017 while Fed funds futures data currently imply the U.S. central bank will boost borrowing costs twice this year.
“The Federal Reserve’s decision to increase short-term rates 25bps came late in the quarter, such that net interest margins did not likely benefit. Fitch expects credit trends remained fairly benign during the quarter, particularly as oil prices stabilized,” adds Fitch.
Incoming President is looking to ease the regulatory burdens faced by many of the big name companies in ETFs like XLF.
Trump has said he would “dismantle” financial reform, or the Dodd-Frank financial reforms, that have caused big banks to take on increased capital requirements to obviate another depression event associated with high-risk debt.
“While overall loan growth is expected to be sluggish for the quarter, consumer lending likely came in relatively stronger, mainly driven by credit card and automobile loan growth. According to Federal Reserve figures for large domestic banks, overall loan growth is estimated at 0.5%-0.7% for 4Q16, dampened by election and monetary policy uncertainties,” notes Fitch.
For more information on the banking sector, visit our financial category.