The European Central Bank’s results for the Comprehensive Assessment of the financial market, or bank stress-test, is scheduled to be revealed on Sunday. Investors may have to keep watch over weaker areas, such as Greece and Italy related exchange traded funds.
Last week, the Banca Monte dei Paschi di Siena stock briefly crossed into a bear market, and after a weekend press release warned of a potential capital shortfall of up to €1.7 billion, the bank’s shares declined further Monday, reports Paul J. Davies for the Wall Street Journal.
“There are concerns about the stress tests,” a Milan trader said, commenting on the latest fall in the bank’s share price, Reuters reports.
The iShares MSCI Italy Capped ETF (NYSEArca: EWI) includes a 2.3% allocation toward Banca Monte dei Paschi di Siena, along with a heavy 37.0% tilt toward the financial sector. EWI dipped 1.5% over the past week and is down 12.4% over the past month.
Meanwhile, in Greece, observers are concerned about the capital quality in banks. Greek banks rely on deferred tax assets to shore up the unhealthy parts of their capital, which needs to be replaced. The government is seeking to replace these assets with about €11 billion in sovereign loans, but the government can not afford the expense.
The Global X FTSE Greece 20 ETF (NYSEArca: GREK) includes heavy weights in Piraeus 8.0%, Eurobank Ergasias 8.1% and National Bank of Greece 11.0%, which all experienced heavy sell alongside Monte dei Paschi last week. GREK has a 33.3% allocation toward financials. The ETF declined 3.9% over the past week and is down 15.9% over the past month.
Nevertheless, most observers remain optimistic about the stress-test results scheduled for October 26 as member states and the ECB have had a year to prepare.
“I would be very surprised if at this stage the AQR [Asset Qaulity Review] shows the banking sector is in a dismal state,” Teis Knuthsen, chief investment officer at Saxo Bank A/S, said in a Bloomberg report. “Both the ECB and banks have had so much time to prepare for this. Imagine that all the banks are given the green light and told they all look fine. This has not yet been priced into the market.”
A potential positive review would bode well for the Eurozone’s financal sector, along with related ETF, the iShares MSCI Europe Financials ETF (NasdaqGM: EUFN). EUFN, though, includes a 32.5% tilt toward the United Kingdom. The ETF is down 0.7% over the past week and 8.8% lower over the past month. [Tactical Application of Thematic ETFs]
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