The results from last week’s referendum in Britain, in which the country voted to exit the European Union (EU), sparked a huge sell-off in equities. Among the worst hit were European banks.
Even before the Brexit vote, European banks had been struggling due to the prevailing negative rate environment in the euro zone. And with Brexit, the outlook for European banks has worsened. Remember that unlike their counterparts in the U.S., European banks have much weaker balance sheet.
The referendum results mean that the European Central Bank (ECB) is expected to continue with its negative interest rate policy. Negative rates hurt banks’ net interest margin. Banks have already faced years of ultra-low interest rates in the wake of the financial crisis.
The First Asset Hamilton Capital European Bank (ETF) (TSX: FHB) has already fallen more than 36% this year. In the wake of the Brexit issue, there could be further downside in FHB. FHB primarily invests in equity securities of European banks. The fund’s top holdings include BNP Paribas SA, Societe Generale SA, Erste Bank Group AG, Intesa Sanpaolo SpA and Commerzbank AG. Britain’s Lloyds Banking Group Plc is also one of the fund’s top holdings.
