While U.S. banks saw profitability surge in the third quarter and investors are displaying renewed enthusiasm for these stocks and exchange traded funds ahead of December’s Federal Reserve meeting, European banks remain hamstrung by bad loans.
The iShares MSCI Europe Financials ETF (NYSEArca: EUFN) has tumbled nearly 13% over the past six months. EUFN has some advantages, namely no exposure to Greece and that it is not dedicated Eurozone fund as British and Swiss stocks combine for about 43% of the fund’s weight. Developed international stocks and exchange traded funds are pulling ahead with the Eurozone strengthening on improved earnings and Japan finding support from domestic institutional investors.
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. [Tactical Application of Thematic ETFs]
“The European Banking Authority, the banking regulator of the European Union, said on Tuesday that the region’s banks had one trillion euros, or about $1.06 trillion, in so-called nonperforming loans,” reports the New York Times.
In Italy, regulators are currently working to configure a bad debt company of sorts to help Italian banks deal with a rising non-performing loan problem. Italy is EUFN’s seventh-largest country allocation at a weight of 6.7%.
However, investors should be more cautious with their France and Italy outlook. France and Italy face mounting pressure from high debt, slow growth, unemployment, poor public finances and lack of reforms to remedy the situation, reports Satyajit Das for the Financial Times. France is EUFN’s second-largest country allocation at a weight of 12.3%.
The two countries’ problems are more structural in nature, and the governments have not intervened with any type of meaningful reforms to remedy the situation. For instance, the two are struggling with high wages, inflexible labor markets, high welfare benefits, large public sectors and restrictive trade practices.
“Nonperforming loans – those that are at least 90 days overdue or have been previously identified as unlikely to be repaid – accounted for 5.6 percent of total loans held by European lenders at the end of June, the regulator said in a new report on Tuesday. That was down from 6.1 percent at end of December,” according to the New York Times.
iShares MSCI Europe Financials ETF
