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 25th, 3pm, here in London.
We were both at the conference here in London where we had more than 550 registered clients and roughly a hundred corporates in attendance. Alvaro, once again, you were 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 defense 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 U.S. 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 emerge 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 PNL 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 from management teams on the median 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 U.S. financials under the Trump administration. How, if at all, are European financials better positioned than their U.S. counterparts?
Alvaro Serrano: Ultimately deregulation has been a big theme in the U.S. from the new administration. We've seen tangible sort of measures like the delay in implementation of Basel endgame; and some steps in 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&A – sort of 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 our 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, you know, investors still had private markets, the private market sub-sector, as the most popular of the diverse vote financial sub-sectors. Which I think you could take to read 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 longer-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's 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 Alvaro. Thanks for taking the time to talk.
Alvaro Serrano: Great. Speaking with you, Bruce.
Bruce Hamilton: And thanks for listening. 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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