The firm’s London-based equity research team send out a detailed note this week, listing the fundamental themes set to impact lenders over the next twelve months.
In short, reflation (via net interest income/trading revenues), restructuring and regulatory clarity should allow for more confident returns on capital.
“Rising inflation, higher rates in the US, steeper European curves, and higher GDP growth (ex UK) are positives for bank stocks,” wrote Magdalena Stoklosa, a managing director at Morgan Stanley and one of the report’s authors.
“All European banks have a cost plan – they are mostly long dated and infrastructure driven harnessing technology across the business.”
Meanwhile as banks continue to restructure and de-risk business models, the house view at Morgan Stanley is that their appeal should broaden.
All in the context of finalisation of Basel III framework, allowing for recalibration of business models and capital plans.
Stoklosa’s team upgraded SocGen to ‘overweight’ and reckon rates, cost restructuring and regulatory clarity could all support the French bank.
UBS has also been given an ‘overweight’ rating and is also set to benefit in a reflation scenario.
In part, that’s due to its higher exposure to USD than European peers, better-than-expected cost management and gearing to equities via investment bank and wealth management.
Standard Chartered appears on the firm's least preferred list.
"Consensus revenue and earnings expectations are too bullish as StanChart is reshaping the business to improve returns, leading to revenue strain from rationing of asset growth, tighter credit standards and exit of low return businesses," analysts added in the note.
Meanwhile, Morgan Stanley reckons Deutsche Boerse and Moscow Exchange should be the biggest direct beneficiaries of higher interest rates. Brokers and European asset managers are also expected to receive a boost.