Private credit concerns addressed

Live from Morgan Stanley’s European Financials Conference, our Head of European Banks Alvaro Serrano and European Equity Research Banks Analyst Giulia Aurora Miotto discuss how geopolitics, private credit risk and AI are testing how resilient banks really are.

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Alvaro Serrano: Welcome to Thoughts on the Market. I'm Alvaro Serrano, Head of European Banks.

Giulia Aurora Miotto: And I'm Giulia Aurora Miotto, European Equity Research Banks Analyst.

Alvaro Serrano: Today we're at our annual European Financials Conference.

It's Thursday, March 19th at 1:30pm, London.

We're at our European Financials conference. Attendance is up almost at record levels, a great deal of engagement with both investors and companies – with three main topics dominating the debate: geopolitics, private credit, and AI. 

I think, on the Middle East, clearly a lot of focus during the whole three days. I think the message from banks has been about the resilience of the business model, acknowledging the loan growth could be weaker. Some of the investment decisions could be delayed, given the uncertainty. And of course, fees could also be affected as a result. 

On the flip side, there's an acknowledgement that during stress, savings rates go up. Deposit growth could be better, and with a steeper curve that could be better monetized. 

So, the message from the banks is about the resilience of the pre-provision profit outlook. Some banks have been talking about top-up of provisions if the situation persists in a IFRS9 world. But we do believe the overall outlook for earnings is of a resilient picture. 

However, we acknowledge the positioning of the sector is much richer than it was this time last year. The positioning; that means if stress continues, we could see the multiple suffering. And that, to be honest, is what we see the biggest channel of contagion to the sector is – is multiple de-rating if the stress continues, in what otherwise looks like a pretty resilient earnings picture. 

Giulia, what did you learn on private credit? 

Giulia Aurora Miotto: Yes, private credit was definitely another area of big focus and worrying from investors. From a bank's perspective, all the banks that are involved in private credit highlighted a couple of things. First of all, they tend to be senior when they lend to B2Cs. Secondly, they are over collateralized by hundreds, if not thousands of loans. And then thirdly, most investment banks have been doing this for a decade or more, and they tend to partner only with prime sponsors. 

So overall, the message was actually rather reassuring. 

Alvaro, AI was the other big topic at the conference. What did you learn there? 

Alvaro Serrano: It's even a bigger topic than last year. And obviously some of the volatility we've seen year-to-date contributed to that. I think overall the banks are seen as net beneficiaries of AI from an operational perspective. There's an acknowledgement that in an AI world, competition might increase, deposit competition has come up. Some fee products has also come up. 

But you have banks guiding to 9 percentage points improvement in cost income ratio in the next three years. So, the operational savings from productivity are seeing them more than offsetting any potential increase in competition. I think the known-unknown is employment; consequences of the improved productivity further down the line. 

But the message in Europe is relatively reassuring considering that over 20 percent of the workforce in Europe is expected to retire [in] the next 10 years. So, overall, seen as net beneficiaries.

There's also discussions around regulation Giulia… 

Giulia Aurora Miotto: Yes, we had Maria Luís Albuquerque, European Commissioner in charge of the Savings and Investment Union project. This was one of the most attended sessions. And we heard on one side definitely determination to deliver on the project of the savings and investment union and deepen European capital markets. And mobilize savings towards more productive investments. 

On the other side, investors were rather skeptical and are really in wait and see mode. Some banks highlighted that they expect the progress on some of the key packages like securitization or market integration package as soon as May. So, we think this is a key area to monitor over the coming months – from a European competitiveness standpoint, 

Alvaro Serrano:  I think that's a great place to wrap it up. And to our audience, thanks for listening. If you enjoy listening to Thoughts on the Market, do let us know wherever you listen and share the podcast with friends and a colleague today.