Welcome to the Morningstar sector review. I'm Holly Black. With me is Niklas Kammer.
He is equity analyst at Morningstar in Amsterdam. Hello.
Hi, Holly. So, you cover the banking sector. UK banks
have been reporting over the past couple of weeks. Who have been the winners and losers
in the most recent earnings season? Yeah, looking at the last quarter, Barclays
was the clear winner. Barclays had a good quarter in the investment bank, which surprised
us and the market as well. It was a positive surprise mainly because other European investment
banks are currently struggling in that environment, especially competing with global US investment
banks. Lloyd's and RBS, on the other hand, are more geared towards the UK macroeconomic
environment. And there are really two overriding factors that drive performance there. Number
one, ring-fencing regulations in the U.K., which came into force forced UK banks to redeploy
excess liquidity into the market, depressing mortgage margins. And then, secondly, credit
demand from corporates remains low due to the prolonged uncertainty around Brexit. And
then, lastly, PPI provisions were a big factor for all three banks.
I think PPI is a key thing we think of around the UK banks at the moment. Now, the deadline
on that has passed but banks are obviously still processing claims. So, I mean, how big
a weight has that been on profitability in recent years?
It has been quite substantial. There are some differences between the banks, but for example,
Lloyd's, Lloyd's in cumulative over the whole time span of this PPI saga has put aside about
£22 billion to cover these claims. Those three banks in total together had to put aside
about £39 billion. And just to put this into perspective, this covers about 40% of their
total market capitalisation collectively. So, I think banks for investors have historically
been a good income investment. They've been reliable dividend payers. Is that still the
case? I mean, how safe are those dividends now?
Yes, that's a good question. Just today we published an overview of our European banking
coverage, just focused on dividend safety. And especially, we're focusing on relative
dividends safety. And we build this piece basically around two main questions. Number
one, if you're an investor and you already own bank shares for the dividends, how safe
is the dividend? So, how safe is it for you to continue to expect this income stream in
the future? And we think that the UK banks score pretty well here. And it's mainly due
to they're good capitalisation, and especially, the good profitability in the case of Lloyd's
and their earnings growth outlook due to, for example, PPI falling away.
And then on the second dimension we looked at, if you're an investor looking to step
onto this train, and you want to pick up a bank for its yield, then, out of the UK banks,
we would highlight Lloyd's. Lloyd's is the only moaty bank in our UK banking coverage
due to its strong retail deposit franchise, and we think the bank is likely to resume
its share repurchase program next year. And then, lastly, I would like to stress that
even though as you alluded to in the question that dividends for banks have historically
been viewed as rather safe, that banks are typically more leveraged than nonfinancial
businesses, are cyclical businesses and are more prone to liquidity crisis. So, there
is some caution there to be had by investors, and we would tell investors to look beyond
just a pure juicy dividend yield. Niklas, thank you so much for your time.
Thank you very much. And thanks for joining us.