Our European Heads of Diversified Financials and Banks Research
Bruce Hamilton and Alvaro Serrano discuss the biggest themes and
debates from the recent Morgan Stanley European Financials
Conference.
Read more insights from Morgan Stanley.
----- Transcript -----
Bruce Hamilton: Welcome to Thoughts on the
Market. I'm Bruce Hamilton, Head of European Diversified
Financials.
Alvaro Serrano: And I'm Alvaro Serrano,
Head of European Banks.
Bruce Hamilton: Today we'll discuss our key
takeaways from Morgan Stanley's 21st European Financials
Conference last week.
It's Tuesday, March 25th, 3pm, here in London.
We were both at the conference here in London where we had more
than 550 registered clients and roughly a hundred corporates in
attendance. Alvaro, once again, you were the conference chair,
and I wondered if you could first talk about the title of the
conference this year – Europe's moment. What inspired this and
was it a clear theme at the conference?
Alvaro Serrano: European banks are probably
one of the strongest performing sectors globally. That has been
on the back of expectations and prospects of a Ukraine peace
deal, expectations of high defense spending, and we were going to
German elections. I think it's fair to say that post German
elections, Germany has delivered above expectations on the fiscal
package. And the announcement was a big boost, at a time where
U.S. growth is starting to be questioned. I think it's turning
the investment flows into Europe. It's Europe's moment to shine,
and hence the title.
Bruce Hamilton: And what were some of the
other sort of key themes and debates that emerge from company
presentations and panels at the conference?
Alvaro Serrano: The German fiscal/financial
package definitely dominated the debate. But it was how it fed
through the PNL that was the more tangible discussion. First of
all, on NII – Net Interest Income – definitely more optimism
among banks. The yield curve has steepened more than 50 basis
points since the announcement together with increased prospects
of loan growth. Accelerated loan growth is definitely improving
the confidence from management teams on the median term growth
outlook. I think that was the biggest takeaway for me.
Bruce Hamilton: Got it. And our North
American colleagues have been tracking the risks and
opportunities for U.S. financials under the Trump administration.
How, if at all, are European financials better positioned than
their U.S. counterparts?
Alvaro Serrano: Ultimately deregulation has
been a big theme in the U.S. from the new administration. We've
seen tangible sort of measures like the delay in implementation
of Basel endgame; and some steps in around consumer legislation –
so that we haven't seen [in] Europe.
We had events from the supervisory arm of the ECB. And I
think the overall message is that there's unlikely to be
deregulation on the capital front.
What grabbed a lot of the headlines, a lot of the debate was the
proposal from the European Commission on Capital Markets Union
now rebranded Savings and Investment Union. There's been measures
and proposals around savings products, around a reform
of the securitization market, which have pretty positive
implications. Medium term, it should increase the velocity of the
bank's balance sheets, and ultimately the profitability. So, more
optimistic on the medium-term outlook.
Bruce, I wanted to turn it over to you. The capital markets
recovery cycle was a very big topic of discussion, especially
given the rising investor concerns lately. What did you learn at
the conference?
Bruce Hamilton: So, yeah, you're right. I
mean, obviously the capital markets cycle is pretty key for the
performance of the diversified financial sector – as was clear
from investor polling. I would say the messages from the
companies were mixed. On the one hand, the more transactional
driven models – so, some of the exchanges that the investment
platforms – were relatively upbeat, across asset
classes. Volume, momentum has been strong through the first
quarter of this year. And so that was encouraging.
And looking further out – the confidence around some of these
secular growth drivers, across the business model. So, data
growth, software solutions growth, post-trade opportunities,
expanding fixed income offerings were all clear from the
exchanges.
On the other hand, the business models that are more geared to
sort of deal activity, to M&A – sort of private
market firms. Clearly there, the messaging was more mixed, given
the slower start to the year in the light of tariff uncertainty,
which has driven a widening in bid our spread. So certainly
there, the messaging was a little bit more downbeat. Though in
the context of a still-improving sort of multi-year recovery
cycle anticipated in capital markets. So, a pause rather than a
cancellation of that improvement.
Alvaro Serrano: And what about private
markets? Especially in light of the sluggish capital markets
activity since the start of the year?
Bruce Hamilton: Well encouragingly, I
think, you know, investors still had private markets, the private
market sub-sector, as the most popular of the diverse vote
financial sub-sectors. Which I think you could take to read as
meaning that the pullback in shares has
already captured some of the concerns around a slower start
to the year in terms of capital markets activity.
The view of most investors remains that some of the longer-term
growth drivers, including increasing allocations
from wealth, remain pretty supportive for the
longer-term structural growth in the sector. So, I think, some
clearly worry that a worsening in credit conditions could still
cause share price moves down. But I think generally, we still
feel the longer term looks pretty encouraging.
Finally, Alvaro, any significant updates on the use of AI within
the financial sector?
Alvaro Serrano: It definitely came up
pretty much in every session because ultimately AI and broader
digitization efforts in mass market models like the banks are –
is a key tool to improve efficiency. It came up as a key
lever to improve user experience and at the same time improve
cost efficiency. And when it comes to underwriting loans, it's
also a very important tool, although asset quality's
not a key theme at the moment.
It’s a race to embrace, I would say, because it's a key
competitive advantage. And if you're not, you fall behind.
Bruce Hamilton: Great Alvaro. Thanks for
taking the time to talk.
Alvaro Serrano: Great speaking with you,
Bruce.
Bruce Hamilton: And thanks for listening.
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