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Ratings Risk For Global Bank ETF ‘IXG’

This article was originally published on ETFTrends.com.

The broader iShares Global Financials ETF (IXG) , which includes global financial companies, is up more than 8% this year, but there are some potential ratings risks looming for select global banks.

IXG is a global exchange traded fund so it contains hefty exposure to domestic banks, but some European markets could pressure the ratings outlook for banks in markets outside the U.S.

“The number of bank ratings on Negative Outlook has increased since the middle of last year,” said Fitch Ratings in a recent note. “The share of Negative Outlooks globally rose to 13% at end-2018 from 10% at end-1H18, following sovereign-driven Outlook revisions in Italy and Latin America, while the share of Positive Outlooks decreased slightly to 7% (end-1H18: 8%).”

Emerging markets banks could potentially be ratings trouble spots.

“Emerging Markets Americas had the highest proportion of Negative Outlooks at end-2018 (29%), with banks in Argentina and Mexico accounting for half of these,” according to Fitch.

Regarding IXG, the ETF is a mostly developed markets fund with scant emerging markets exposure, the bulk of which is confined to a 3.88% weight to China.

Related: 10 Bank ETFs Investors Can Bank On

Another Problem Area

Italy, the Eurozone's third-largest economy, remains a banking hot spot as banks there contend with non-performing loans (NPLs). There are also increasing concerns that Italy is inching toward a recession. Increased uncertainty regarding government efforts to enhance Italy’s fiscal status is weighing on the minds of some investors.

“Our revision of Italy's Outlook to Negative in August led to Negative Outlooks on the ratings of five Italian banks rated in line with or above the sovereign. A reduction in the sovereign rating would most likely lead to downgrades of these banks, and other Italian bank ratings could also come under pressure if refinancing conditions become more difficult or if banks' asset quality weakens significantly,” according to Fitch.

Italian officials expect that the new government will implement policies to bolster the economy with prudent fiscal measures. Additionally, he added that the coalition’s radical budget plans would be introduced gradually, reassuring investors that the government will not cross European Union’s fiscal rules.

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