We Still Like These European Banks
Morningstar analyst Johann Scholtz looks at the outlook for European banks and why it may take longer than expected for the real impact of Covid-19 to be felt
Holly Black: Welcome to Morningstar, I am Holly Black. With me is Johann Scholtz, he is an equity analyst at Morningstar in Amsterdam. Hello.
Johann Scholtz: Hi. Good morning, Holly.
Black: So, Johann, you've been having a major look into the current outlook for the European banking sector. How are these companies faring at this point in the year with the Covid crisis?
Scholtz: Sure. Sure, yeah, so we've done a major piece because European banks have been sold-off quite aggressively since the beginning of the year – while banks, in general, I should say.
In terms of the results up until now, it's really too early to say. You know, I think what complicates matters is that we've seen extensive support from government across Europe. So, I think that's kind of postponed the development of people defaulting on their loans, so you know I think with the second quarter results coming up now all eyes are definitely going to be on loan loss provisions.
Black: So, I think, one reason that a lot of investors choose to back banks is because they are known for paying very reliable dividends, and that's obviously changed in the current environment, there have been a lot of cuts. What is the outlook for dividends from here do you think?
Scholtz: Yeah, so officially, we won't see dividends for the European – Continental European banks are not allowed to pay dividends until the last quarter of this year. I don't anticipate, and that's the 2019 dividend.
Black: So, I think one thing we've seen this year is even in these out of favor sectors that have been sold-off, there are winners and losers. Should we talk about couple of the stocks that you do still like?
Scholtz: Sure. So, there is two names I think that I definitely want to highlight; Credit Suisse and Santander.
Credit Suisse we've been positive on for quite some time. What we like about Credit Suisse is I think the investment case – the general investment case remains intact. We anticipate that wealth – global wealth of ultra-high net worth individuals will continue to grow ahead of nominal GDP. So, it is a bit of a secure growth story, which is something that you don't really often find in the banking sector. Then we also believe that Credit Suisse exposure to loan losses are going to be less than the traditional retail banks, Credit Suisse is pretty much a wealth manager and an investment bank. So, it's not that exposed to traditional banking loans. So, we anticipate that credit losses are going to be less of an issue for Credit Suisse. And yeah, I think, the valuation is just looking very attractive.
Santander; you know I think Santander's such a diverse business – actually the biggest portion of its business is Brazil, it's got a big operation in Mexico, the U.S., the U.K. and then obviously in its own market in Spain. And you know what we've seen historically is that Santander has actually delivered some of the most consistent earnings in Europe over the past two decades or so. And that's really a function of this diversity you know. So, if one area of the business struggles another one offsets that downside. So, you know, I think that diversity of Santander is not really fully – and it's also a very profitable bank. And that combination of more stable earnings, higher profitability than the typical European bank we don't feel is captured in its current valuation.
Black: Johann, thank you so much for your time. For Morningstar, I am Holly Black.
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