Energy Struggles Straining Financial Services ETFs

Seventeen exchange-traded products hit 52-week lows on Tuesday. None were equity-based energy ETFs, nor were any financial services funds.

However, that does not obfuscate the fact that the Select Sector Financial Slct Str SPDR Fd (NYSE:XLF), the largest financial services ETF by assets, is down 10 percent over the past month, putting it in official correction territory.

Nor does it change the fact that the United States Oil Fund LP (ETF) (NYSE:USO) has tumbled 22 percent over that period.

Oil And Financials

Bank stocks and ETFs, particularly regional bank fare, have been stung this year by slumping oil prices and concerns that loans made to exploration and production firms during the U.S. shale boom are seeing rapidly declining quality.

Following the precipitous drop in oil prices last year that has accelerated into the new year, many of the banks reported further loan loss reserve builds. Exposure to oilfield services companies and exploration and production companies were cited as higher risk segments for the banks.

While direct exposure to O&G for the large banks (included in our quarterly comment) is fairly modest, the related provisioning still affected reported results, which have benefited greatly from reserve releases over the past few years, said Fitch Ratings in a recent note.

Interest rate uncertainty and concerns about energy sector loans are among the factors that contributed to slack fourth-quarter earnings from the financial sector and investors' subsequently tepid treatment of ETFs like XLF. Of the 220 U.S. stocks that hit 52-week lows on Tuesday, about 40 were financial services names and several of those are members of XLF's lineup.

Seasonal Trend Coming To Fruition?

That comes against the backdrop of a potentially troubling seasonal trend: XLF is usually one of the worst performing sector SPDRs in the month of February.

Regulatory uncertainty regarding oil prices remains for the banking sector. The next Shared National Credit review, which assesses risk in the largest and most complex credits shared by multiple financial institutions, will likely again focus on O&G exposure as well as leveraged lending.

The review will begin on Feb. 1 utilizing data as of Sept. 30, 2015. The results will likely prompt further downgrades in banks' energy portfolios since the Spring 2016 redeterminations on borrowing bases will likely prove more challenging than the recently completed Fall 2015 process, said Fitch.

Disclosure: Todd Shriber owns shares of XLF.