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Bank ETFs Could be Plagued by Downgrades

This article was originally published on ETFTrends.com.

The SPDR S&P Bank ETF (KBE) and rival exchange traded funds focusing on bank stocks are disappointing investors this year even as the Federal Reserve has boosted interest rates three times. KBE entered Wednesday with a year-to-date decline of almost 16%.

Analysts see more downside and potentially more downgrades ahead for bank stocks as economic growth slows. KBW cut its rating on bank stocks to Market Weight from Overweight.

“It also lowered banks' earnings estimates for 2019 and 2020 and said it expected other analysts to do the same. KBW's move follows a similar one by independent research firm CFRA last week,” according to CNBC.

The 2018 performances of KBE and rival financial services ETFs are undoubtedly disappointing for investors that bet the sector would rally against the backdrop of rising interest rates. The Federal Reserve has boosted borrowing costs three times, moves many market observers believed would lift the fortunes of the rate-sensitive financial sector.

Slowing Growth

Some market observers warned that banks may even be cutting back on lending as bankers are becoming more concerned over the late-cycle U.S. economy. Indicators such as credit-card charge-off rates have increased, though the rate leveled off over the summer.

“Banks have been punished over investor fears that the U.S. economy is nearing the end of a long boom,” reports CNBC. “Worries began earlier this year as the yield curve – the difference between rates on short term and long-term U.S. bonds – flattened, indicating bank profits could be crimped (banks borrow on the short end and lend at the long end).”

Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.

“Further Federal Reserve rate hikes, coming as soon as this month, are seen as hurting bank profits because borrowers may have a harder time repaying debts,” reports CNBC.

For more information on the banking sector, visit our financial category.

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