There seems to be no respite from banking worries in a Europe trying to avert yet another economic debacle. Italy is back in recession, France is almost stagnant and Germany is losing momentum. In fact, concerns about Europe’s banking sector have taken a front seat in many investors’ minds following the crisis surrounding Portugal’s banking giant Banco Espírito Santo (BES).
Though the central bank has come out with a recovery plan for Portugal’s banking crisis, concerns have cropped up again regarding the European Central Bank’s (ECB) region-wide stress test in November.
As per the rescue plan, the central bank will be splitting BES into a “good bank” and a “bad bank”. The ‘good bank’ would receive a bailout of €4.9 billion from the bank resolution fund.
Asset Review and Stress Test
The ECB has decided to incorporate the results from its ongoing review of the health of bank assets, known as Asset Quality Review, into the stress test results to perform a more comprehensive assessment. The announcement is the latest move by the bank to create a combined system before it officially becomes the supervisor of all Euro zone banks in early November.
All 28 members of the Euro zone will undergo the stress test to assess how they would perform during an economic downturn. While a red signal will imply non-compliance with norms and will require banks to redo their work, ‘amber’ implies that lenders will have to either comply with authorities or provide proper justification supporting the outcome.
Previous stress tests by bank regulators have been criticized as being incomplete and ineffectual in predicting crises. However, the ECB believes that its new comprehensive assessment is expected to provide a more accurate view of a bank’s balance sheet conditions.
The ECB’s region-wide stress test has sent jitters across the market, and there are worries that the weaker European banks might need additional capital post the stress test in November (read: Beyond Russia: How are Eastern Europe ETFs Performing?).
Worries about the Portugal banking system and fresh banking concerns have caused mid-sized Euro banks to be the worst performers in the past one month, while large cap banks have also underperformed the broader markets. The impact was felt in the European ETF space as well with almost all the funds having delivered negative returns in the past one month.
Below we have highlighted three ETFs that have borne most of the brunt of European banking woes. Investors should clearly avoid these ETFs if they continue to bleed further.
Global X FTSE Portugal 20 ETF (NYSEARCA:PGAL)
PGAL which was one of the best performing funds in the European space till the end of April is now the worst performer in the space for the past one month and even in the year-to-date frame. The fund has lost 10% in the past one week and is down 15% in the past one month.
The fund tracks the Global X FTSE Portugal 20 Index and holds a small basket of 20 stocks. The fund is heavily exposed to its top holding Energias De Portugal, which forms one-fifth of the total fund assets, followed by a 15% allocation to Galp Energia. Sector-wise, the fund is heavily weighted towards the Utilities (28.6%) and Financials (18%) sectors.