Weak Quarter Knocks Expectations for Bank ETFs

Includes: BAC, C, IVV, JPM, KBE, WFC, XLF
by: Tom Lydon

By John Spence

Bank exchange traded funds have moved lower following quarterly results from the big lenders and could continue to underperform the market, analysts say.

Financial ETFs have been weak after earnings from large banks such as Bank of America (NYSE:BAC), Citigroup (NYSE:C), J.P. Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC). The stocks dominate sector funds such as the SPDR KBW Bank ETF (NYSEARCA:KBE) and Financial Select Sector SPDR Fund (NYSEARCA:XLF).

“Although investor expectations were seemingly low heading into the quarter, the majority of large regionals sold off particularly hard after releasing numbers as the likelihood for more tepid near-term growth and unsustainably low credit provisions dampened investor enthusiasm this quarter,” said Sterne Agee analysts in a quarterly earnings wrap.

“While the sector is beginning to see relief on expenses and elevated environmental costs, revenue growth will likely remain challenging over the next few quarters as regulatory reform begins to take hold, loan growth remains elusive, and excess liquidity continues to pressure margins,” they wrote.

The bank ETF is in negative territory so far this year, while the iShares S&P 500 (NYSEARCA:IVV) is up more than 8%.

“Given the weak growth prospects, at least near-term, bank stocks are likely to underperform coming out of the quarter,” Sterne Agee said.

Yet some Wall Street analysts have hope that large lenders like Citigroup can turn things around.

“While investor expectations have been further scaled back, the slow economic recovery and persistent uncertainty surrounding financial reform and required capital levels have clearly weakened investor appetites for bank stocks,” Sterne Agee noted.

“While underlying credit quality will continue to improve, the pace of improvement will likely slow for many banks as the early success resolving problem construction loans and card portfolios will likely become more muted by ongoing stress in both residential consumer and commercial real estate,” the analysts wrote. “At the same time, lackluster loan growth, declining margins, weak fee income and regulatory reform suggest pre-provision profits will be lackluster at best for some time to come.”