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.
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Italy, the Eurozone’s third-largest economy behind Germany and France, is the seventh-largest country weight in EUFN at about 6.5%, but the country’s NPL problem is seen as potentially problematic for the rest of the region.
“In Italy, problem loans have built up during a long recessionary period and it is only recently that the economy has started to give banks breathing space to start to tackle this legacy,” according to Fitch. “If large NPL securitisations planned by UniCredit, supported by its recent capital increase, and by Banca Monte dei Paschi di Siena as part of its precautionary recapitalisation, are launched successfully in the next month or so, we expect to see other banks taking the securitisation route to reduce NPL stock. But large NPL sales and securitisations are difficult to achieve and none of the large announced transactions has yet been closed.”
Investors can play a possible pullback in in EUFN and European banking names with the new Direxion Daily European Financials Bear 1X Shares (NYSEARCA:EUFS), which debuted in August. EUFS is an inverse though not leveraged ETF.
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