Although it has rallied off its post-Brexit lows, the iShares MSCI Europe Financials ETF (NYSEArca: EUFN) is still down more than 16% year-to-date. Now, some market observers see more problems looming for European banks.

Market observers have 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. However, European growth is picking up, which could trigger greater demand for loans.

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EUFN has some advantages, namely no exposure to Greece and that it is not dedicated Eurozone fund as British and Swiss stocks combine for over 40% of the fund’s weight. However, Italy is acting as a drag on the ETF. In Italy, regulators are currently working to configure a bad debt company of sorts to help Italian banks deal with a rising non-performing loan problem.

Italian banks have been under pressure to sell assets to support their troubled balance sheets. Italy’s fragile banking sector, the largest sector allocation in EWI, is in focus as global market participants fret about Brexit’s impact on Italy’s banks. The Italian government has been under pressure to calm concerns over its ailing banking system, which underperformed in the European Central Bank’s 2014 financial stress test and is holding €360 billion, or $410.5 billion, in bad loans.


Last year, reforms to Italy’s banking sector were seen as a potential driver of improved equity market performance. Specifically, the reforms would turn these types of banks into possible takeover targets almost instantly. For instance, the new rules could be a catalyst for a potential merger between UBI Banca and Banca Monte dei Paschi di Siena.