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As Earnings Begin, Are European Banks Poised To Rally?

Aug. 03, 2018 6:29 AM ETXLF, EUFN
Jasper Lawler profile picture
Jasper Lawler


  • European banks are poised to release financial results.
  • Given their recent performance relative to U.S. financials, European banks appear to be undervalued.
  • Since the beginning of 2018, the European banking sector has underperformed its U.S. counterpart by 10%,.

European banks are poised to release financial results and given their recent performance relative to U.S. financials, they appear to be undervalued. The major U.S. financial companies released their results at the beginning of the U.S. earnings season, with most beating on both the top and bottom line.

Since the beginning of 2018, the European banking sector has underperformed its U.S. counterpart by 10%, and over the past three years, the U.S. banking sector has outperformed Europe’s banking sector by more than 33%.

ETFs To Compare The Sectors

In evaluating the performance between the U.S. financials and European financials, exchange traded funds can track specific financials within the banking, brokerage and insurance verticals. The XLF (financial sector spider ETF), tracks a combination of the largest banks, brokers and insurance companies listed on the major U.S. exchanges.

This exchange traded fund is listed on the New York Stock Exchange. The EUFN ETF (iShares MSCI European Financials Sector ETF) is listed on the Nasdaq and tracks the changes of the major European banks, brokerages and insurance companies). To evaluate the performance of Europe vs. the US financials, EUFN is divided by XLF to track the ratio between the two ETFS. (see chart below)

(Source: Trading View)

Relative interest rates making the difference

One of the main reasons the U.S. financial sector is outperforming its European counterpart is interest rate levels. The U.S. is at the tail end of an expansion where interest rates are rising both on the short end of the interest rate curve as well as the long end of the curve. Higher interest rates allow a bank to borrow short and lend at the long end of the curve, capturing the difference.

In Europe, short-term interest rates are still negative, making it very difficult for the banks to make

This article was written by

Jasper Lawler profile picture
Jasper is a 14-year veteran of the financial markets, having worked as a stockbroker on Wall Street and as a market analyst for some of the best-known trading firms in the City of London. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.He is the founder of Trading Writers, a content marketing agency specializing in the financial sector.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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