Welcome to Morningstar. I'm Holly Black with
me is Niklas Kammer. He is an equity analyst
at Morningstar in Amsterdam. Hello.
Hi, Holly.
So, Niklas, you've been doing a real big,
deep dive into the banking sector in light
of the coronavirus pandemic. I suppose the
main question is, are the banks safe?
Yeah, we think overall European banks, are
in a much better shape than in 2008. In our
stress test, we try to figure out what needs
to happen before things start to break. And
the overall outcome is that European banks
are well prepared for this pandemic. We also
found that investors should look for three
characteristics in determining a bank’s
safety. So, number one, high common equity
tier one surplus; number two, high probability
for loan losses, and third, less reliance
on net interest income.
Okay, so I think one of the biggest concerns
for investors over the past few months, particularly
in the UK is that banks have been cutting
their dividend. They were told they had to
by the regulator. And do you think we can
expect to see dividend payments come back
anytime soon?
Yes, this is obviously an important question
for many investors looking for a stable income
flow, investing in banks, and we think we
have to provide some context why regulators
demanded banks to suspend dividends. And first
and foremost, banks are seen as part of the
solution rather than the cause of the problem.
So, there's a stark contrast compared to 2008.
And we believe many investors are strongly
anchored to the financial crisis over a decade
ago, as it's still fresh in everyone's mind.
Banks are crucial and that they provide credit
and liquidity to the economy, which is desperately
needed in times like these. As a result of
capital requirements however, banks have to
set aside capital for each loan they hand
out. Fearing that banks may become constrained
in their ability to extend this needed credit,
when capital is distributed by dividends instead,
regulators took the decision to suspend dividends.
So why does this nuance and why banks are
not paying dividends matter from an investor's
point of view, it gives support to our view
that banks are well capitalised to weather
this pandemic and that they should get through
it without the need to raise capital, or in
the worst case close the doors altogether.
So, while we think that 2019 dividends, which
have not been distributed yet, and 2020 dividends
are likely to be cancelled fully. We think
banks should be able to resume cash distributions
in late 2021.
Okay, so we've just finished the second quarter
of the year. So, we're going to start seeing
those earnings results from that period. What
are your expectations for the UK banks that
you look at?
Yes, for all European banks and banks globally
really, but obviously also for the UK banks
there is one large overarching theme, which
is loan loss provisioning. At the beginning
of the coronavirus pandemic, it was clear
that we would only start to see material impacts
on loan losses starting in the second quarter.
Loan schemes to small and medium sized enterprise
and furlough work schemes will undoubtedly
have soften the impact on the economy, which
probably will reduce or even postpone credit
defaults. So, it is possible that we will
not get complete picture around -- of loan
losses to come yet -- just yet.
More bank specific we expect Barclays to likely
show another good quarter stemming from its
trading business, benefiting from the market
volatility we have seen in the recent months.
Although we would keep an eye out for their
credit card exposure in the U.S. RBS just
recently announced its restructuring plan
including a significant downscaling of its
investment bank, as well as cost saving initiatives.
Obviously, RBS did not envision a global pandemic
when the plan was hatched. So, we will be
looking out for updates and any progress they
were able to make to date. And lastly, for
Lloyds, we are interested to hear management's
view on its positioning for what appears to
be a prolonged low interest rate environment.
Lloyds’ business is most exposed to low
interest rates given its large mortgage book
as well as larger retail deposit funding base,
which typically we view as a strength, but
it can squeeze margins when interest rates
are low.
Niklas, thank you so much for your time. For
Morningstar, I'm Holly Black.
