Live from Morgan Stanley’s European Financials
Conference, our Head of European Banks Alvaro Serrano and
European Equity Research Banks Analyst Giulia Aurora Miotto
discuss how geopolitics, private credit risk and AI are
testing how resilient banks really are.
Read more insights from Morgan Stanley.
----- Transcript -----
Alvaro Serrano: Welcome to Thoughts on the
Market. I'm Alvaro Serrano, Head of European Banks.
Giulia Aurora Miotto: And I'm Giulia Aurora
Miotto, European Equity Research Banks Analyst.
Alvaro Serrano: Today we're at our annual
European Financials Conference.
It's Thursday, March 19th at 1:30pm, London.
We're at our European Financials conference. Attendance is up
almost at record levels, a great deal of engagement with both
investors and companies – with three main topics dominating the
debate: geopolitics, private credit, and AI.
I think, on the Middle East, clearly a lot of focus during the
whole three days. I think the message from banks has been about
the resilience of the business model, acknowledging the loan
growth could be weaker. Some of the investment decisions could be
delayed, given the uncertainty. And of course, fees could also be
affected as a result.
On the flip side, there's an acknowledgement that during stress,
savings rates go up. Deposit growth could be better, and with a
steeper curve that could be better monetized.
So, the message from the banks is about the resilience of the
pre-provision profit outlook. Some banks have been talking about
top-up of provisions if the situation persists in a IFRS9 world.
But we do believe the overall outlook for earnings is of a
resilient picture.
However, we acknowledge the positioning of the sector is much
richer than it was this time last year. The positioning; that
means if stress continues, we could see the multiple suffering.
And that, to be honest, is what we see the biggest channel of
contagion to the sector is – is multiple de-rating if the stress
continues, in what otherwise looks like a pretty resilient
earnings picture.
Giulia, what did you learn on private credit?
Giulia Aurora Miotto: Yes, private credit
was definitely another area of big focus and worrying from
investors. From a bank's perspective, all the banks that are
involved in private credit highlighted a couple of things. First
of all, they tend to be senior when they lend to B2Cs. Secondly,
they are over collateralized by hundreds, if not thousands of
loans. And then thirdly, most investment banks have been doing
this for a decade or more, and they tend to partner only with
prime sponsors.
So overall, the message was actually rather reassuring.
Alvaro, AI was the other big topic at the conference. What did
you learn there?
Alvaro Serrano: It's even a bigger topic
than last year. And obviously some of the volatility we've seen
year-to-date contributed to that. I think overall the banks are
seen as net beneficiaries of AI from an operational perspective.
There's an acknowledgement that in an AI world, competition might
increase, deposit competition has come up. Some fee products has
also come up.
But you have banks guiding to 9 percentage points improvement in
cost income ratio in the next three years. So, the operational
savings from productivity are seeing them more than offsetting
any potential increase in competition. I think the known-unknown
is employment; consequences of the improved productivity further
down the line.
But the message in Europe is relatively reassuring considering
that over 20 percent of the workforce in Europe is expected to
retire [in] the next 10 years. So, overall, seen as net
beneficiaries.
There's also discussions around regulation Giulia…
Giulia Aurora Miotto: Yes, we had Maria
Luís Albuquerque, European Commissioner in charge of the Savings
and Investment Union project. This was one of the most attended
sessions. And we heard on one side definitely determination to
deliver on the project of the savings and investment union and
deepen European capital markets. And mobilize savings towards
more productive investments.
On the other side, investors were rather skeptical and are really
in wait and see mode. Some banks highlighted that they expect the
progress on some of the key packages like securitization or
market integration package as soon as May. So, we think this is a
key area to monitor over the coming months – from a European
competitiveness standpoint,
Alvaro Serrano: I think that's a
great place to wrap it up. And to our audience, thanks for
listening. If you enjoy listening to Thoughts on the Market, do
let us know wherever you listen and share the podcast with
friends and a colleague today.
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