Banks Europe (BNK) : A credible attack?

The Lyxor BNK ETF (Banks Europe) created in 08/2006 in Euro on Euronext and seeks to replicate the STOXX600 Bank Europe Index which is composed of the main European banking stocks. About half of the capitalization quotes in Euro, the other half is made up of English, Swiss and Nordic banks.

The costs of this ETF are 0.3% and the AUM approximately 677M €. Replication is indirect (via a swap) and there is a dividend capitalization policy.

Alternative ETFs: CB5 (Amundi in Euro), EXV1 (Ishares in Euro).

Index & components

The interest of the BNK tracker lies in the fact that it groups together the 48 largest banks in the main European economies, with a great geographical diversity and a good North / South mix (29% UK, 15% Spain , 11% France, 10% Switzerland, 9% Italy), while relying on the strongest and most capitalized securities BNK brings together banks specialized in the retail (Lloyds or Santander for example) but also so-called universal banks like the French banks (BNP, SG and CA), which rely on both an investment bank and a retail model, the activities of the big banks are well represented, and the banks are currently in "transition" mode as the 2008 crisis has left its mark on a number of fronts: following central bank actions and QE programs, banks saw their margins erode because of negative rates, while they could no longer place their deposits at the ECB and are now experiencing a very flat yield curve with long rates remaining at very low levels.

On the other hand, the increased regulatory requirements have forced banks to significantly increase their own funds, which amounts to reducing the leverage and therefore the risks associated with their operations, but mechanically leads to lower ROCEs.

In addition, the banking model is increasingly challenged by more innovative players, the "fintechs" who redefine the customer relationship and the notion of service in the financial world through offers with high technological content, while new approaches disruptive devices such as the blockchain that secures transactions outside any "third party" could in the long run threaten the role of banks as intermediaries in the economies of developed countries.

However, bank valuations already incorporate many of these risks, while a number of them have already embarked on ambitious transformation / digitization plans and should take advantage of ongoing changes. In the same way that the distribution was transformed 20 years ago by the arrival of the actors of the web, without disappearing so far, it is likely that banks will follow the same path of adaptation and modernization without prohibiting acquire knowledge by buying fintechs.

Latest developments

BNK posted a positive performance of + 12.1% in 2017, higher than the STOXX600NR (+ 10.6%) but down -9.1% since the beginning of 2018 (against + 1.8% for the stoxx600NR) because the sector was put under pressure because of the Italian risk, while investors are worried about a budget that would widen the deficit and could cause a new attack on the country's debt  leading to an "Italexit" later on. In addition, the Turkish financial crisis also weighed on the sector because of a significant exposure of Germany and some Italian banks.

Brexit, which now seems to be moving towards a "no deal", is also weighing on the Pound and making UK banks unattractive. However, the ECB has just signaled "vigorous" inflation in the euro zone, which could give the signal for monetary normalization, and a rise in long-term rates, a favorable factor for bank margins. Valuations are historically low, which argues for a rebound in the sector.