European bank ETFs get regulatory boost amid post-Brexit recovery

Aug 3rd, 2016 | By | Category: ETF and Index News

European bank exchange-traded funds have been given a boost in the wake of Brexit as regulators reveal they are unlikely to ask banks to create separately capitalised subsidiaries in the UK after it leaves the European Union.

Brexit is worst scenario for European markets, says ETF provider WisdomTree

UK regulators have told at least one major EU bank it will not be required to set up a separate branch

According to unnamed sources, the Financial Times has reported that UK regulators have told at least one major EU bank it will not be required to set up a separate branch.

The news is likely to be a welcome relief to the likes of Commerzbank, Deutsche Bank, Société Générale and BNP Paribas, who carry out UK business through European branches. Global management and consulting firm Boston Consulting Group had previously warned that European banks might have to set aside as much as €40bn of capital into those new UK subsidiaries, the newspaper added.

Banking ETFs saw their value fall around 14% in the four days after the referendum on 23 June in sterling terms. The Amundi ETF MSCI Europe Banks UCITS ETF (LSE: CB5) fell 14% between 23 and 27 June. In euro terms, banking ETFs fell harder. The Paris-listed Lyxor UCITS ETF Euro STOXX Banks (PARIS EN: BNKE) fell a whopping 23% in four days.

In both currencies, however, European banking ETFs have climbed throughout July. The London-listed db X-trackers STOXX Europe 600 Banks UCITS ETF (LSE: XS7R) has climbed 11% since 23 June, while the Amundi ETF MSCI Europe Banks UCITS ETF (LSE: CB5) has rebounded 15%.

But over one year, all eight European-wide financial sector ETFs from SPDR, Amundi, iShares, Source, Lyxor and db X-trackers have fallen a significant amount. Bank ETFs fell to their lowest point this year in mid-February as a result of choppy markets after the New Year and investors remaining risk-averse. But these funds regained ground in the spring and the largest loss since February was straight after Brexit in June, when $2tn in value was wiped off global capital markets within 24 hours of the referendum result.

The £215m London-listed SPDR MSCI Europe Financials UCITS ETF (LSE: FNCL) is one of the top performing euro-based ETFs –  and has taken the smallest hit – in the financial sector. It has dropped a little more than half as much as the German-listed Source EURO STOXX Optimised Banks UCITS ETF (XETRA: X7PS) and the Lyxor UCITS ETF EURO STOXX Banks (XETRA: BNKE), which have tanked more than 40% in euro terms.

The better-performing MSCI Financials Index tracks 103 stocks and HSBC is the top holding with around 8% of the exposure. The lesser-performing EURO STOXX Optimised Banks index is not so well diversified. It tracks 24 banks and insurers across countries like Spain, France and Italy.

The cheapest ETF in the financial sector is the Amundi ETF MSCI Europe Banks UCITS ETF (CB5), which costs 0.25% per year. It is down -23% over the last year in sterling terms.

Although European financials made progress in July, related ETFs are not out of the dark yet. In its report, Boston Consulting Group said Brexit will likely “affect both the short-term revenue outlook, through market shocks and loss of business confidence, and the long-term revenue outlook through disruptive business transformation.”

The Financial Times wrote that if the UK triggers Article 50 and leaves the EU, any banks which operate in the single market will “almost certainly” have to reapply to regulators to maintain business activity in the UK.

With uncertainty ahead, ETF investors would do well to consider global financials, which are more diversified and have taken less of a hit over the last year. The MSCI World Financials Index is down between -11% and -12% in USD and euro terms, respectively.

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