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Will Portuguese Banco Espirito Santo Doom European Financial Stocks?

NEW YORK (TheStreet) -- European financial stocks fell below important price levels last week as worries over the health of Portugal's Banco Espirito Santo brought fear into global markets.

Below is a chart of Global X FTSE Portugal 20 ETF (PGAL) and iShares MSCI Europe Financials (EUFN). The two indices have correlated closely since 2011, when the eurozone's debt crisis spread from small peripheral countries across the continent, pulling down every major stock index in Europe along the way.

The MSCI Europe Financials Index is comprised of HSBC Holdings (HSBC), Banco Santander (SAN), Lloyds Banking (LYG), BNP Paribas (BNPQY) and UBS (UBS) among others.

PGAL Chart

PGAL data by YCharts

Shares of European banks rebounded sharply Monday in New York, but price action on many of the charts in the European Financial Index still looks broken.

Banco Espirito Santo renewed fears over potential bank failures and the contagion risk that could come along with it last week after announcing that Espirito Santo International, the conglomerate that holds a stake in the bank, had delayed coupon payments relating to some short-term debt securities.

Banco Espirito Santo's stock subsequently dropped more than 17% before trading in its shares was suspended on July 10.

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The news built off of troubling developments revealed in May when the bank disclosed that an audit ordered by Bank of Portugal into Espirito Santo International had found Espirito Santo International was in a "serious financial condition" and had uncovered accounting irregularities.

Although we may not be on the brink of another financial crisis in Europe, continued weakness in the region, set off by Thursday's spike lower, could lead investors to continue to sell foreign financial assets out of fear.

As the International Monetary Fund stated last Thursday, "Portuguese banks have weathered the euro-zone crisis well, but pockets of vulnerability remain."

HSBC Chart

HSBC data by YCharts

At the time of publication, the author had no position in any of the funds mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates LLOYDS BANKING GROUP PLC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LLOYDS BANKING GROUP PLC (LYG) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, LYG's share price has jumped by 27.95%, exceeding the performance of the broader market during that same time frame. Although LYG had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • The gross profit margin for LLOYDS BANKING GROUP PLC is rather high; currently it is at 62.62%. It has increased significantly from the same period last year. Despite the strong results of the gross profit margin, LYG's net profit margin of 16.80% significantly trails the industry average.
  • LLOYDS BANKING GROUP PLC's earnings per share declined by 23.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, LLOYDS BANKING GROUP PLC continued to lose money by earning -$0.08 versus -$0.13 in the prior year. This year, the market expects an improvement in earnings ($0.55 versus -$0.08).
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Commercial Banks industry and the overall market, LLOYDS BANKING GROUP PLC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Commercial Banks industry average. The net income has decreased by 17.4% when compared to the same quarter one year ago, dropping from $2,316.93 million to $1,914.29 million.

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