Standard Life Investments

Through the Lens

Trump and European Banks

  • President Trump's win has helped push up global bond yields, boosting bank stocks
  • The Nordic region is enjoying economic revival
  • Danske Bank is well positioned on three fronts: revenues, costs and strategic alliances

European equities:
political uncertainty masks opportunities

Few expected Donald Trump to win the US presidential election. Even fewer predicted the aftermath, a strong rally in global stock markets. When the unexpected happened, the extent to which investors were wrong‐footed could be observed in the sharp rotation between sectors, away from defensive stocks and into cyclicals.

The previously‐beleaguered financial services sector has performed particularly well following the US election based on two key factors: Trump's proposed dismantling of the Dodd‐Frank financial regulations; and the prospect of increasing interest rates. This was particularly the case for US financials, but those in Europe have also benefited. Investors often treat financials equally during bear and bull markets, even though there is much disparity across the sector. We believe the devil is in the detail and this is where our Focus on Change philosophy comes in.

Bank renaissance

Our process is about looking for individual companies that we believe have the potential to be winners rather than those that simply rise with a sector rally. Change factors we look for in companies are strengthening capital positions, dividend potential and, in the case of banks right now, revenues that should benefit from steeper yield curves. Denmark's Danske Bank, which operates throughout the Nordic region and across Europe, provides an example of our selection process in action. We see potential for positive changes on three fronts: revenues, costs and strategic alliances.

The Nordic economies are not weighed down by the economic struggles of their southern European neighbours. Danske is delivering good profits from its core business and management guidance is that this is sustainable. The growth is skewed towards higher margin markets, meaning profit growth should, in our view, be able to outpace revenues.

Budget controls are on plan. Consensus expectations are pointing to a 2% increase in costs over the year ahead, but we are forecasting them to be flat or lower.

A further boost to revenue growth is expected to come from a preferred provider agreement that Danske has recently signed with the Swedish union, the Confederation of Professional Employees (TCO). This is an exclusive agreement to offer their 1.3 million members discounted mortgages and other products. A similar deal in Norway delivered double‐digit growth ‐ despite not being an exclusive offer. This has the scope to drive faster growth in the Swedish market at a time when volume growth was already ahead of expectations and margins are higher than average.

The bank also has a strong capital base, providing scope for potential share buy backs. Yet the stock currently trades at a valuation discount to other regional banks, such as SEB and Nordea.

Supportive backdrop

While Trump's election victory and Europe's upcoming political events may cloud the picture, we believe there is reason for cautious optimism for European equities. We also see the overall backdrop for Europe as being supportive, with the extension of the European Central Bank's bondbuying programme expected to support the broad recovery that is already underway. An upswing in data is also supportive, with earnings predicted to grow at their fastest rate in five years. In this environment, the strong performance of banks can continue in our view.

The opinions expressed are those of Standard Life Investments as of March 2017 and are subject to change at any time due to changes in market or economic conditions. This information is for reference purposes only and does not constitute an offer to sell, or solicitation of an offer to purchase any security. No recommendation is made, positive or otherwise, regarding individual securities mentioned.