Could US Bank ETFs Benefit From Brexit?

The operating backdrop of the U.S. banking sector has lately turned favorable despite concerns over the financial health of Deutsche Bank (DB) and Wells Fargo (WFC - Free Report). Bullish earnings, the possibility of a Fed rate hike by the end of this year and chances of an oil output curb deal by the OPEC in November have been instrumental in building up this backdrop.

If we go into the details, most of the big banking companies came up with a beat on both lines in the Q3 reporting cycle. Drivers of the outperformance were a rise in fixed income, currency and commodities trading revenue, higher mortgage banking income and moderate investment banking business.

U.S. banks have significant exposure to the long-beleaguered energy sector. But lately, with the oil price recovery, tension over credit default seems to be diminishing. Several big banks witnessed a reduction in losses arising out of loans to the energy sector, as per an article published in Financial Times. And finally, chances of a rising rate environment with the possibility of a Fed rate hike this year will benefit banking ETFs .

Brexit: The New Boon?

If these were not enough, the decision of British citizens to cut ties with the European Union in June end might make matters more favorable for banking stocks and ETFs. But investors should not forget that as soon as Britain leaves the EU, its importance as a corporate transit to the rest of Europe would be lost, going by an article in CNBC. Many global financial institutions may even want to shift their base from London.

Even an article published in Wall Street Journal indicated that “almost 5,500 U.K. financial firms rely on “passporting rights” to do business across Europe and their loss could pose “significant” risks to those banks, according to the U.K. parliament’s Treasury Select Committee.” In such a backdrop, Goldman Sachs Group believes that there could be high chances of U.S.-based banks getting the share lost by the UK banks.

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