Industry Updates

Bank ETFs rally as contagion risks subside

UBS's acquisition of Credit Suisse has calmed markets

Tom Eckett

a black animal on a map

Bank ETFs have appeared to shake off contagion risk concerns following UBS’s acquisition of Credit Suisse over the weekend in a deal worth $3.25bn.

Initial market jitters about the uncertainty around the deal sent bank ETFs tumbling as much as 4% in early Monday trading.

However, this was the extent of the damage with bank ETFs finishing in the green before continuing their run on 21 March.

Highlighting this, the Invesco Euro Stoxx Optimised Banks UCITS ETF (S7XP) was up 6.3% on Tuesday while the iShares US Banks UCITS ETF (BNKS) and the Lyxor STOXX Europe 600 Banks UCITS ETF (BNK) soared 4.5% and 3.5%, respectively.

Across broader financial sector ETFs, it was a similar story with the iShares MSCI Europe Financials Sector UCITS ETF (ESIF) jumping 4.8% on Tuesday while the SPDR MSCI World Financials UCITS ETF (WFIN) was up 2.8%.

“Markets put in another broadly positive performance over the last 24 hours, which makes it the first time since SVB’s collapse that we have had two decent sessions in a row,” Jim Reid, head of global fundamental credit strategy at Deutsche Bank, said.

“We will have to see if this is maintained, and there have certainly been false dawns before, but yesterday saw several milestones that added to the optimistic mood. Among others, bank stocks experienced their best performance so far this year.”

The initial shock came after the collapse of Silicon Valley Bank in the US before Credit Suisse was forced to borrow $54bn from the Swiss National Bank (SNB) last week.

This did little to calm a run on the Swiss lender which led to the SNB and Swiss regulator FINMA brokering a deal between UBS and Credit Suisse over the weekend.

The question now is whether there is scope for further upside performance. US bank ETFs, in particular, are coming off their lowest levels since 2020 following the global pandemic. BNKS, for example, was down as much as 29% over the past month before this week’s rally.

Attention now turns to the Federal Open Market Committee (FOMC) meeting later today where the Federal Reserve is expected to either hike interest rates by 25 basis points (bps) or keep rates at the same level.

Just two weeks ago, markets were pricing in a 56% chance of a 50bps rate increase following hawkish comments from Fed chair Jerome Powell, however, the collapse of SVB and UBS’s emergency acquisition of its Swiss rival has dramatically changed the outlook.

“Powell will have to walk a fine balance,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said. “We expect the Fed to hike rates by 25bps, keep quantitative tightening unchanged and remove the forward guidance of ‘ongoing rate increases’.”