European Banks Spark Rising Investor Interest

Summary

Podcast Summary: European Banks Spark Rising Investor Interest

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: European Banks Spark Rising Investor Interest
• Release Date: March 25, 2025

Introduction In the March 25, 2025 episode of Thoughts on the Market, hosted by Morgan Stanley, Bruce Hamilton and Alvaro Serrano delve into the outcomes of the 21st European Financials Conference held in London. With over 550 registered clients and approximately 100 corporates in attendance, the conference offered a wealth of insights into the current state and future prospects of European financial sectors, particularly focusing on European banks.

Conference Overview: "Europe's Moment" The conference theme, "Europe's Moment," encapsulates the resurgence and strengthening position of European banks within the global financial landscape. Alvaro Serrano, Head of European Banks, elucidates the inspiration behind the theme:

"European banks are probably one of the strongest performing sectors globally...post German elections Germany has delivered above expectations on the fiscal package...It's Europe's moment to shine." (00:38)

This theme reflects the optimism surrounding Europe's financial sectors, driven by favorable geopolitical developments and robust fiscal strategies.

German Fiscal Package and Its Impact A significant focus of the conference was Germany's fiscal financial package, which exceeded expectations and provided a substantial boost to investor confidence. Alvaro highlighted how this package positively influenced key financial metrics:

"On NII net interest income, definitely more optimism among banks. The yield curve has steepened more than 50 basis points since the announcement." (01:19)

The steepening yield curve and increased loan growth prospects have fortified management teams' confidence in the medium-term growth outlook, marking a pivotal takeaway from the conference.

Comparison with US Financials under the Trump Administration The discussion transitioned to a comparative analysis of European financials versus their US counterparts amid the Trump administration's regulatory landscape. Alvaro Serrano pointed out the contrast in regulatory approaches:

"Ultimately, deregulation has been a big theme in the US from the new administration...in Europe, we had events from the supervisory arm of the ECB and...there's unlikely to be deregulation on the capital front." (02:02)

He further discussed the European Commission's initiatives, such as the Capital Markets Union (now rebranded as the Savings and Investment Union), emphasizing reforms aimed at enhancing savings products and securitization markets. These measures are anticipated to increase the velocity of banks' balance sheets and profitability, fostering a more optimistic medium-term outlook.

Capital Markets Recovery Cycle Bruce Hamilton addressed the state of the capital markets recovery cycle, highlighting the mixed signals emanating from different segments of the financial sector:

"The messages from the companies were mixed. On the one hand, the more transactional driven models...were relatively upbeat...volume momentum has been strong through the first quarter of this year." (03:11)

While transactional-driven models such as investment platforms reported strong performance and confidence in secular growth drivers like data growth and software solutions, firms focused on deal activities, including M&A, exhibited a more cautious stance. The slower start to the year, influenced by tariff uncertainties and widening bid-ask spreads, has tempered optimism in this segment, suggesting a pause rather than a halt in the anticipated multi-year recovery cycle.

Private Markets Amid Sluggish Activity Private markets remain a cornerstone of investor interest despite a sluggish start to the capital markets year. Bruce elaborated on investor sentiments:

"Investors still had private markets, the private market subsector as the most popular of the diversified financial subsectors...the long-term looks pretty encouraging." (04:34)

The resilience of private markets is attributed to long-term growth drivers, including increasing allocations from wealth. While there are concerns about potential downturns due to worsening credit conditions, the overall outlook remains positive, supporting sustained structural growth in the sector.

AI in the Financial Sector The integration of Artificial Intelligence (AI) within the financial sector was a recurrent theme throughout the conference. Alvaro Serrano emphasized the transformative potential of AI:

"AI and broader digitization efforts in mass market models like the banks are a key tool to improve efficiency...it's a race to embrace, I would say, because it's a key competitive advantage." (05:29)

AI is pivotal in enhancing user experiences, cost efficiency, and loan underwriting processes. The consensus is clear: adopting AI is essential for maintaining competitiveness, and lagging in this technological race could result in significant disadvantages.

Conclusion The Thoughts on the Market episode provided a comprehensive overview of the current dynamics within European financial sectors, underscored by robust performance, strategic fiscal measures, and technological advancements. The optimism surrounding European banks is well-founded, given the favorable fiscal policies and proactive adoption of AI. While certain segments like deal-driven firms exhibit caution amid a mixed capital markets cycle, the overarching narrative points towards sustained growth and resilience in the European financial landscape.

Timestamp Reference

• 00:38 Alvaro Serrano on "Europe's Moment"
• 01:19 Alvaro Serrano on German Fiscal Package Impact
• 02:02 Alvaro Serrano on US vs. European Financials
• 03:11 Bruce Hamilton on Capital Markets Recovery Cycle
• 04:34 Bruce Hamilton on Private Markets
• 05:29 Alvaro Serrano on AI in Financial Sector

Note: Timestamps correspond to the original podcast transcript timings.

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 25, 3pm here in London. We were both at the conference here in London where we had more than 550 registered clients and roughly 100 corporates in attendance. Alvaro, once again you are 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 defence 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 US 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 emerged 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 P and L 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 of management teams on the medium 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 US financials under the Trump administration. How, if at all, are European financials better positioned than their US counterparts?

[Alvaro Serrano]

Ultimately, deregulation has been a big theme in the US from the new administration. We've seen tangible sort of measures like the delay in implementation of Basel endgame and some steps 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 and A. So the 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 ask 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 investors still had private markets, the private market subsector as the most popular of the diversified financial subsectors, which I think you could take to Reid 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 long 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 is 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, Alvare, thanks for taking the time to talk.

[Alvaro Serrano]

Great speaking with you, Bruce, and thanks for listening.

[Bruce Hamilton]

If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

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