Interest rate concerns are evident following recent commentary from some big-name bank executives. Additionally, analysts have been reining in second-quarter earnings estimates for large banks, based in large part on declining net interest margins. XLF and other financial services ETFs have been lagging the broader market this year, but XLF is higher by 7.1%.
“However, 2Q17 results had notable challenges, some of which could act as headwinds in the future. Yield curve flattening presented a challenge to more robust net interest margin growth for some banks and could affect future earnings growth. Continued Fed rate hikes could also pressure low retail deposit betas that have been reported thus far. Notably, many of the earnings calls featured discussion about how wholesale depositors would behave in the future with further monetary tightening, which may lead to further deposit outflows,” according to Fitch.
Although the Fed has raised interest rates twice this year with another rate hike likely coming before the end of 2017, there are concerns about the central bank’s dovish tone and its impact on ETFs such as XLF. It is expected the Fed will boost borrowing costs one more time before the end of this year and that as many as three rate hikes could be on tap for 2018.
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