In short
Podcast Notes: Thoughts on the Market - Europe’s Banks Navigate Uncertainty
Episode Overview
- Podcast Title: Thoughts on the Market
- Episode Title: Europe’s Banks Navigate Uncertainty
- Date: March 19, 2023
- Location: Morgan Stanley’s European Financials Conference
- Speakers: Alvaro Serrano (Head of European Banks), Giulia Aurora Miotto (European Equity Research Banks Analyst)
Key Themes Discussed
- Geopolitics
- Significant focus on the Middle East and its impacts on the banking sector.
- Banks expressed resilience despite potential challenges such as:
- Weaker loan growth.
- Delayed investment decisions.
- Possible fee impacts due to market uncertainty.
- Positive indicators:
- Increased savings rates during stressful periods.
- Potential for better deposit growth.
- Private Credit
- Investors showed concerns regarding private credit risks.
- Banks involved in private credit highlighted:
- Seniority in lending to borrowers.
- High levels of collateralization (hundreds to thousands of loans).
- Established partnerships with reputable sponsors.
- Overall sentiment from banks was reassuring regarding private credit stability.
- Artificial Intelligence (AI)
- AI emerged as a crucial topic, with increased focus compared to the previous year.
- Banks are perceived as net beneficiaries of AI, especially from an operational perspective:
- Estimate of a 9 percentage point improvement in cost-income ratios over the next three years due to operational efficiencies.
- Recognized challenges:
- Increased competition in deposit and fee products.
- Uncertainty regarding employment impacts due to heightened productivity.
- Positive demographic insights, noting that over 20% of the European workforce is set to retire in the next decade, indicating potential opportunities.
- Regulatory Developments
- Discussion on the Savings and Investment Union project led by Maria-Luís Albuquerque, European Commissioner:
- Aimed at deepening European capital markets and mobilizing savings for productive investments.
- Investor skepticism was noted, with many in a "wait and see" mode.
- Expectations for progress on key regulatory packages, such as securitization and market integration, anticipated soon (by May).
Key Takeaways
- Resilience of European Banks:
- The outlook for earnings appears resilient amidst geopolitical uncertainties.
- Banks are preparing for potential stress scenarios, emphasizing pre-provision profits.
- Concerns in Private Credit:
- Despite investor worries, banks currently maintain a strong position in private credit through strategic practices.
- AI as a Game Changer:
- The integration of AI is expected to drive operational efficiencies and improve financial metrics, though concerns about competition and employment remain.
- Monitoring Regulatory Changes:
- The ongoing developments in regulatory frameworks will be crucial for European competitiveness in the financial sector.
Conclusion The episode provides a comprehensive overview of the current state and outlook of Europe's banking sector amidst uncertainty due to geopolitical tensions, private credit risks, and the transformative potential of AI. The insights shared by the speakers underline both the challenges and opportunities that lie ahead for financial institutions in Europe.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOKey Topics at the Conference
0:45 to 1:46
Discussion on the main themes of the conference: geopolitics, private credit, and AI.
“And of course, fees could also be affected as a result.”
Private Credit Insights
1:46 to 3:00
Insights from banks on their involvement in private credit and reassuring messages to investors.
“Yes, private credit was definitely another area of big focus and worrying from investors.”
AI's Impact on Banking
3:00 to 4:06
Exploration of how AI is viewed as a net benefit for banks and its implications for competition and productivity.
“I think the known unknown is employment, consequences of improved productivity further down the line.”
Regulatory Discussions
4:06 to 4:18
Discussion on the Savings and Investment Union project and its implications for European capital markets.
“And to our audience, thanks for listening.”
Transcript
Automatic transcript. May contain errors.0:00Alvaro Serrano:Welcome to Thoughts on the Market. I'm Alvaro Serrano, Head of European Banks.
0:04Giulia Aurora Miotto:And I'm Giulia Aurora Miotto, European Equity Research Banks Analyst.
0:08Alvaro Serrano:Today we're at our annual European Financials Conference. It's Thursday, March 19th at 1.30pm, London. We're at a 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.
0:46Alvaro Serrano: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 provisions if the situation persists in an IFRS 9 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.
1:24Alvaro Serrano: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 multiple de-rating if the stress continues in what otherwise looks like a pre-resilient earnings picture. Julia, what did you learn on private credit?
1:46Giulia 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 BDC. 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?
2:24Alvaro 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 seeing 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 % 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 improved productivity further down the line.
3:06Alvaro Serrano:But the message in Europe is relatively reassuring considering that over 20 % of the workforce in Europe is expected to retire the next 10 years. So overall seen as net beneficiaries. There was also discussions around regulation. Julia?
3:21Giulia Aurora Miotto:Yes, we had Maria-Louise 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 a 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 sceptical 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.
4:00Giulia Aurora Miotto:So we think this is a key area to monitor over the coming months from a European competitiveness standpoint.
4:05Alvaro 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 whenever you listen and share the podcast with friends and a colleague today.
From the publisher
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.