Mainland European financial firms hold possible opportunities for income investors as interest rates rise across the continent for the first time in over a decade, according to Tom Dorner and Stuart Brown, investment directors at Edinburgh-based investment firm Abrdn.
The fund managers said European financials now provide “an interesting opportunity and may offer compelling dividend yield and dividend growth.”
They said financial firms are the largest dividend payers in the European market, paying out more than a quarter of dividends.
Against a backdrop of rising interest rates, the Abrdn managers argued that it’s time to be more positive than conventional wisdom would suggest.
They said capital positions at European financials have strengthened considerably and the attitude towards capital return has improved, particularly relative to M&A.
Dorner and Brown wrote: “European financials have the potential to offer both compelling income opportunities whilst also playing an important part in the transition to a more sustainable economy.
“Financials are the largest dividend payers in the market, accounting for over a quarter of dividends. For a long time, there has been caution towards the sector and with good reason.
“Low interest rates have been a headwind and there is always fear of regulatory intervention, such as the cancellation of dividend payments during the height of the Covid crisis.
“Now, against a backdrop of rising interest rates, we think it’s time to be more positive than conventional wisdom would suggest. Indeed, capital positions have strengthened considerably and the attitude towards capital return has improved (particularly relative to M&A).
“European financials in particular now provide an interesting opportunity and may offer compelling dividend yield and dividend growth.
“For example, the market is not giving credit to global insurer Axa for the shift in the business towards higher quality P&C (property & casualty) earnings and the strength of the balance sheet.
“Historically, the low interest rate environment has driven consistent downgrades to sector expectations. At the same time lending growth has been relatively sluggish and the threat of disruption from Fintech players has become more apparent.
“For many years after the GFC (great financial crisis), the banking sector also faced regulatory creep on capital requirements that meant that income investors were often disappointed.
“More recently however, confidence in the dividend-paying capacity of European banks has improved notably.
“The Covid crisis put a stop to capital returns, but in some cases, this has proved to be a deferral rather than cancellation.
“The ECB announcement to lift the dividend ban, in September 2021, is positive for income investors. Some banks will be catching up on previously skipped dividends.
“The pan-Nordic bank, Nordea for example, is likely to return significant capital to shareholders and recent updates point to share gains in most of its markets, so dividends should be sustainable.
“Perhaps most notably, Financials have an important contribution to make in the move towards a more sustainable economy.
“Banks are crucial for providing responsible access to finance to support economic growth.
“Insurers have for many years been at the cutting edge of climate-change research and provide the risk / volatility transfer that allows investment in developed and emerging markets.
“Diversified financials, like exchanges, have a crucial role to play in providing better and more consistent ESG data that will allow clients to make more informed investment decisions.
“Asset managers are rapidly including ESG considerations and helping capital to be allocated in a more sustainable way.”