While US-focused financial services exchange traded funds have struggled a bit this year, the iShares MSCI Europe Financials ETF (NYSEARCA:EUFN) is surging. The once downtrodden fund is up more than 18% year-to-date, but there are some issues investors should consider before embracing European banks, particularly if they are arriving late to the EUFN party.
Previously, market observers warned that the ongoing monetary polices and depressed rates would weigh on banks’ bottom line as firms would find it hard to make money with a flat yield curve – banks borrow short-term and lend long-term.
A large number of non-performing loans throughout Europe remains an issue for the region’s banks, including those found in EUFN.
“Eurozone banks are under increasing pressure to reduce high stocks of non-performing loans (NPLs) after Italy’s Veneto Banca and Banca Popolare di Vicenza were put into liquidation this week and Spain’s Banco Popular Espanol was put into resolution this month, Fitch Ratings says. These banks have among the worst NPL/gross loans ratios in Europe,” said Fitch Ratings in a recent note.