Morgan Stanley Sees Key Opportunities In European Banks

A recent Morgan Stanley report indicates that analysts believe that there is opportunity for selective investors in the European banking sector. The report centers around dividends as the bellwether for health among banks. Morgan Stanley sees the potential for a handful of European banks to boost dividend payments by 2016, while other banks are at risk of making dividend cuts.

The Good News

Analysts believe that the results of the asset quality review (AQR), as well as the UK stress test in mid-December will be a positive catalyst for many banks. According to the report, these results will likely build confidence among investors and clear the path for banks to pay higher dividends moving forward.

A fear of deflation in European markets is another justification for Morgan Stanley’s prediction of dividend hikes: “Flatter yield curves for longer, as the ECB infuses more credit easing measures into the system, should mean that banks can pay steady, secure dividends, and see a meaningful re-rating, as dividends signal more confidence on capital.”

The Bad News

Despite the small pockets of opportunity in the sector, analysts believe that the majority of European banks have a challenging road ahead.

The regulatory environment in Europe is extremely dynamic right now, and many banks remain tied up in litigation. Analysts estimate $50 billion in litigation costs coming for these banks.

In addition, low growth and economic austerity measures will also continue to weigh heavily on European banks in upcoming years.

The Picks

Included in Morgan Stanley’s “Most Preferred” list are U.S.-listed stocks UBS AG UBS, Lloyds Banking Group Plc LYG and ING Groep NV ING. HSBC Holdings Plc HSBC made the “Least Preferred” list.