Industry Updates

Financial sector ETF trading soars on banking contagion fears

Follows UBS's acquisition of Credit Suisse on Sunday

Tom Eckett

Credit Suisse 3

Trading volumes on financial ETFs have surged in March as investors either view the banking crisis as an attractive opportunity or at risk of further contagion.

According to data from Bloomberg Intelligence, financial ETFs listed in Europe have traded €7.5bn so far this month, the most since February 2022 when Russia invaded Ukraine and above the historical monthly average of €4.2bn with a third of the month to spare, as at 20 March.

The uptick in volumes comes amid a banking sector in crisis following the collapse of Silvergate, Silicon Valley Bank and Signature Bank in the US and UBS’s acquisition of Swiss rival Credit Suisse for $3.25bn as rapidly rising interest rates sent shockwaves through the sector.

Credit Suisse initially needed a loan of up to $54bn from the Swiss National Bank (SNB) last week, however, this did little to halt pressures on the lender’s liquidity.

The Swiss bank’s shares are down 97% from all-time highs before the SNP and FINMA brokered a deal for UBS to acquire its rival for CHF0.76 a share with a promise from the regulator to support with a loan of $107.8bn if required.

Bank ETFs are among the worst performing ETFs over the past month with the iShares S&P US Banks UCITS ETF (BNKS) leading the way, down 29%, as at 20 March, while the Xtrackers MSCI USA Banks UCITS ETF (XUFB) dropped 22.3%.

European exposure has also suffered with the Invesco Euro Stoxx Optimised Banks UCITS ETF (S7XP) and the Lyxor EURO STOXX Banks UCITS ETF (BNKE) have fallen 17.2% and 16.9%, respectively.

Just two weeks ago, markets were pricing in the possibility of the Federal Reserve hiking interest rates to 6%, however, this has now fallen to 4% by the end of the year, according to the CME FedWatch Tool, driven by concerns around the possibility of contagion risk.

“The problems at Silicon Valley Bank have certainly spread faster and further than we, and most commentators, were expecting,” Rupert Thompson, chief economist at Kingswood, said. “Worries could well continue for some time yet.”

“The takeover of Credit Suisse has unexpectedly led to total losses for some of its bondholders, which may concern investors in similar instruments at other banks. This all comes against the background of central banks tightening policy aggressively in a belated attempt to push the inflation genie back into the bottle.”

In response to growing concerns, investors pulled $104m from the Lyxor STOXX Europe 600 Banks UCITS ETF (BNK) and $49m from Invesco’s S7XP, as at 17 March, according to data from ETFLogic.

At the other end of the spectrum, however, some investors have eyed the crisis as a buying opportunity with BNKS capturing $92m inflows over the same period.

“The banking sector is fundamentally in much better shape than back in the Global Financial Crisis and authorities seem to be taking the necessary action to prevent further marked contagion,” Thompson added.

“We have been emphasising for a while that equities are set to remain volatile and could retrace a further part of their rebound, before recovering again further out. The latest events only make this all the more likely and only serve to highlight the merits of a well-diversified portfolio.”

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