Welcome to Morningstar, I am Holly Black.
With me is Johann Scholtz, he is an equity
analyst at Morningstar in Amsterdam. Hello.
Hi. Good morning, Holly.
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?
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.
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?
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.
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?
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 US, the UK
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.
Johann, thank you so much for your time. For
Morningstar, I am Holly Black.
