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European Financial ETF in Focus on Deutsche Bank Woes

Shares of Deutsche Bank DB have been on a downhill ride this week with prices plunging to the levels of the mid-1980s. Skepticism over the health of this German bank and its ability to pay huge potential fines caused this massacre.

As per a German weekly news magazine, the country’s government rejected any aid to help Deutsche Bank which has been slammed with “a $14 billion fine in the U.S. for mis-selling mortgage-backed bonds before the financial crisis of 2008.”

Shares in Germany’s biggest bank nosedived over 7% on September 26 despite attempts by its senior executives to convince investors that the bank would not require any kind of government aid. If this controversy was not enough, in June, IMF had indicated that “Deutsche Bank's global links make it biggest potential risk.”

Also, in June, the capital plans of the U.S. unit of this European bank were rejected due to qualitative concerns under the U.S. Fed's Comprehensive Capital Analysis and Review (CCAR) 2016. Shares have slumped over 50% so far this year (as of September 27, 2016).

European Financial World to be in Trouble?

This Deutsche Bank-related confusion and its contagion are likely to have an adverse impact on the European financial ETF iShares MSCI Europe Financials (EUFN). In any case, the European financial market has become edgy post Brexit (see all financial ETFs here).

This is because, as soon as Britain cuts the cord with the EU, its importance as a corporate transit to the rest of Europe would be lost, going by an article in CNBC. Many global institutions may even want to shift their base from London to the German capital Frankfurt – another hot spot in the European Union (read: UK Votes for Brexit: ETFs Winners & Losers).

Plus, Eurozone is yet to get back to prior glory. Its credit growth is still weak despite the ongoing QE measure of the ECB. Loans to households in the region grew 1.8% year over year in August 2016, maintaining the same clip as in the prior two months. Plus, negative interest rates prevailing in the region are hurting the banks’ net interest rate margin.

Not only Deutsche Bank, “Credit Suisse CS has plummeted more than 40%, while UBS UBS has fallen 31%. Royal Bank of Scotland RBS has fallen 48% and Barclays BCS has slumped more than 33%” this year, as per the source.

Investors should note that rising banks’ borrowing costs, higher chances of credit default especially from the energy sector and global growth issues leading to reduced capital market activity and lower loan growth keep stirring speculation over a global banking sector meltdown occasionally. All in all, concerns are brewing up in the European financial sector and the related stocks and ETFs (read: What is Bothering Global ETFs?)

Thus, along with EUFN, ETFs like iShares Global Financials ETF IXG and SPDR S&P International Financial Sector ETF IPF) should also be closely watched in the coming days if such banking issues crop up (read: Clinton Apparently Won First Debate: ETFs in Focus).

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CREDIT SUISSE (CS): Free Stock Analysis Report
UBS GROUP AG (UBS): Free Stock Analysis Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
ROYAL BK SC-ADR (RBS): Free Stock Analysis Report
ISHARS-MS EU FN (EUFN): ETF Research Reports
SPDR-SP I FINL (IPF): ETF Research Reports
ISHARS-GLB FINL (IXG): ETF Research Reports
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