Financial ETFs Still Not In the Clear

NEW YORK (TheStreet) -- As a whole, the financial sector fares better than it did a year ago. However, despite stellar quarterly earnings reports by some financial services giants like Goldman Sachs(GS) and JPMorgan Chase(JPM), the sector is still not in the clear.

Most recently, the nation's largest life-insurer Met Life(MET) disappointed Wall Street, as it reported a book value short of what was expected. Many suggest that this was driven by the impact that financial derivatives have on balance sheets and the fact that these financial derivatives, which many blame for the recent financial crisis, are still prevalent in the financial sector.

To put a further strain on the sector, quarterly earnings by Bank of America(BAC) and Morgan Stanley(MS) both failed to deliver. Bank of America blamed its quarterly losses on the rising defaults in credit card debt and mortgage loans as well as its obligation to pay back borrowed money from the federal government and taxpayers. As for Morgan Stanley, the company took a hit as it tightened its credit spreads, which increased liabilities, as it continues to face struggles caused by the credit crisis.

Additionally, bank lending, which is generally a huge money-maker, will likely continue to remain tight. Although most large banks are willing to lend, it all comes down to assessing risk and most lenders are reluctant to extend out a loan to a company who is in the red.

To put a further strain on the lending front, business demand for loans is likely to remain weak. Two driving forces behind obtaining business loans are capital spending and inventories, both of which are expected to rebound, but at a gradual pace.