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Quarter-End Insights

Financial Services: Regulations and Interest Rates Remain in the Spotlight for 2018

We see financial services stocks across the globe as fairly valued today.

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  • We assess the global financial-services sector as fairly valued. It has recently traded at a market-cap-weighted price/fair value estimate ratio of 1.04--a 4% premium to what our analysts believe the sector is worth.
  • The near- to medium-term earnings growth of many financials will be based on how much additional income financial companies generate from higher interest rates compared with increases in funding costs.
  • For asset managers, wealth management firms, and life insurance companies, regulation and competition is leading to business model changes and mergers. Fiduciary regulations are increasing scrutiny on distribution strategies and the scale needed to compete.

Americas Financials Update
By Brett Horn, Eric Compton, Greggory Warren, Jim Sinegal, and Michael Wong

U.S. Asset and Wealth Management Firms: The Department of Labor’s fiduciary rule was dealt a blow in March when the 5th U.S. Circuit Court of Appeals vacated the rule. However, the trend toward increased fiduciary duties continues in the United States, with the SEC and multiple states being expected to roll out their own fiduciary rules. As such, we don't expect many of the changes that advisors, broker-dealers, and asset managers have made to their business models the past couple of years to be reversed.

Six issues will continue to affect the U.S.-based asset managers in the near to medium term:

  1. a weaker regulatory environment for financial-services firms;
  2. distribution channel disruption on the retail-advised side of the business;
  3. continuation of the ongoing shift from active to passive products;
  4. greater focus on relative fund investment performance and fees;
  5. the inevitability of industry consolidation; and
  6. U.S. corporate tax reform.

On the consolidation front, our general take has been that consolidation is inevitable for the industry, with active asset managers, and even some passive managers, needing to add scale to offset a lower fee and profitability environment as the United States and other developed markets are forced to address the ongoing movement of investors into low-cost options.

We expect fund companies that cater to retail customers to consolidate their funds not only internally to increase scale and eliminate underperforming offerings, but externally as well, with midsize to large asset managers pursuing deals that increase the scale and/or product breadth of their operations.

We expect most of the U.S. firms we cover to consolidate internally where it makes sense, increasing the scale of individual funds under the direction of solid active managers that are more likely to provide them with the best chance to keep fee cuts to a minimum while still gaining access to third-party platforms. This can be a double-edged sword, though, as funds tend to underperform the larger they get, so managing that differential will be critical to long-term success.

As for external consolidation, we view most of our U.S.-based asset manager coverage as buyers rather than sellers. However, unlike past rounds of consolidation that involved buying up managers to either fill in product sets or expand distribution reach, we expect future deals to be done more for scale than anything else.

In these type of deals, we envision midtier asset managers (those with $250 billion-$750 billion in AUM) acquiring small to midsize firms (those with $25 billion-$250 billion in AUM), understanding that they could lose assets as they consolidate the acquired company's funds into their own. Although there are plenty of firms out there that fall well below the threshold of a small firm, we don't expect much buying activity of these types of firms for scale. If anything, we could see deals of that size done to fill product holes or as product-enhancement moves.

Given that we're in the earlier innings of this consolidation wave, though, the deals so far have been far more selective than they are likely to be once we get further down the path.

For example, the merger between U.S.-based Janus Capital Group and U.K.-based Henderson Group (announced in October 2016) not only increased the global scale and distribution outreach of the two companies, which is expected to offset some of the pricing pressure and higher costs that we expect in the industry longer term, but filled in some product holes and opened some potential avenues for growth. Our thought at the time was that Janus and Henderson preferred to start the dance early, finding a more desirable partner that could fill in portfolio and distribution gaps, rather than waiting around for the latter innings of the game when consolidation starts to take place just for consolidation's sake.

U.S. Insurers: The property and casualty insurance industry was buffeted by a flurry of natural catastrophes in 2017, with multiple hurricanes and wildfires hitting companies’ bottom lines. Typically, industry pricing firms after large catastrophes, and the early indication is that this will be the case again. However, we expect any increases to be modest, and lower than what we've seen in the past, as the industry remains well-capitalized. In our view, this adds up to an underwriting environment where moaty firms should still be able to use their competitive advantage to generate modest excess returns. We remain concerned about reinsurance lines, however, as we see catastrophe bonds as a growing source of capital, and believe overcapacity could leave pricing inadequate even if prices rise modestly in 2018.

U.S. Banks: With tax cuts being signed into law, good reasons to expect more economic growth, regulatory relief already playing out, and a normalizing rate environment, the near-term outlook for bank performance is positive. Overall, bank stock market values today are much higher than they were a year ago. We think this is warranted to some degree, as we now believe returns for banking will continue to improve and will end up roughly in between precrisis return levels and the returns seen in the last 10 years since the crisis. However, this also means that bargains within the U.S. regional banks are few and far between.

For U.S. banking in general, we believe four key themes will play out in 2018. First, we see higher loan growth in 2018 as uncertainty surrounding tax reform abates and companies are incentivized to invest given increased capital expenditure deductibility during the next five years. Second, we see more room for expense savings as banks continue to automate more functionality, embrace more technological change, and decrease or better optimize branch footprints. Over time, we think this trend favors the largest banks, which have the most scale and the most money to spend on new technology. Scale and technology should only increase in importance, and this should be a major factor in determining the winners and losers within banking over the next decade. Third, we believe regulatory spending likely peaked in 2017, and we expect the explicit regulatory spending burden to be flat to down in 2018, and the burden from holding excess capital on the balance sheet should only decline over the medium term. Finally, we see continued, but measured federal-funds rate hikes in 2018. We also see increasing deposit betas offsetting the benefits of higher asset yields, as banks are forced to begin giving back more of each rate hike to their clients.

We think the Federal Reserve's cautious approach to raising interest rates is the correct one given the state of the economy. In our view, the Federal Reserve is walking a fine line as it attempts to normalize rates. Returning to a "normal" interest-rate environment would give the central bank more ability to fight a recession, and the combination of low unemployment rates and solid economic growth arguably shows the economy is ready for higher rates. However, tightening too quickly--before inflation data proves the need for higher rates--could cut short a long and fragile recovery. We continue to expect a slow and steady normalization, in line with the Fed's commentary.

In March, the Federal Open Market Committee raised its target for the federal-funds rate to 1.5%-1.75%, in the belief that momentum in the economy will continue to push inflation closer to its 2% objective over the months to come. However, the central bank noted that inflation remained below 2% over the past 12 months in spite of job gains and a low unemployment rate, and that forward-looking market inflation expectations remain modest. The Fed also noted that growth in both household spending and business fixed investment has already declined from strong fourth-quarter readings. Thus, we believe the committee is likely to remain cautious as it continues to increase short-term rate targets. Data from the CME Group’s FedWatch indicates that the target federal-funds rate is more than likely to reach 2% by year-end, in line with our medium-term expectations and forecasts.

We think the advantages of a sticky retail deposit base are likely to shine through as rates rise.  Regions Financial (RF) and  M&T Bank (MTB) are particularly well positioned--about 37% of deposits at these banks bear no interest expenses. Unfortunately, each of these banks is more than 25% overvalued, by our estimation. We are finding more value in liability-sensitive card lenders like  Capital One (COF) and  American Express (AXP), and note that these companies could benefit more from continued growth in consumer spending and falling unemployment than the average regional bank.

Asian Financials Update
By Iris Tan, Mari Kumagai, and Michael Wu

China Banks: Chinese banks' H-shares under our coverage are trading at a price/fair value of about 0.92 after a strong rally in 2017 on better investor sentiment given the market's increased expectations for lower financial risks and a stabilizing economy. However, we think the improved macro fundamentals have been largely factored in, and we have a less optimistic long-term view for China's macroeconomy than the market.

Bank of China is currently the only 4-star stock in our coverage. The stock is undervalued, trading at a 0.7 times 2018 price/book ratio with a 5% dividend yield. This level is the lowest among the other big four banks, which are trading at 0.7 to 0.8 times 2018 book value. Having the largest overseas banking exposure with gross profit contribution over 35%, Bank of China benefits from rising interest rates and growing offshore loan demand, helped by a recovery in exports and fast overseas expansion of Chinese enterprises. Additionally, the bank is less affected by ongoing tightened financial regulations given its more diversified geographic mix.

Chinese banks' net interest margins have slowly recovered since late 2016 thanks to rising interbank interest rates and average loan pricing. Recovery in net interest margin was weak in 2017 as banks are scaling back their corporate lending on credit quality concerns. We believe this mild recovery will continue in 2018 given intensifying deposit competition and as banks remain cautious about corporate lending.

Large banks with a strong deposit franchise outperformed, as their cheap funding costs enable them to be the largest beneficiaries in the rising interest-rate environment. Meanwhile, smaller banks with heavy reliance on interbank funding and large exposure to shadow bank credits are still suffering because of rising interbank rates and tighter restriction to highly leveraged interbank investments. Looking forward, we expect the regulatory stance will remain tough in 2018 as the regulator emphasizes removing implicit guarantees in China's asset management business. Interest rates are likely to remain at a high level, and banks will face increasing deposit competition pressure.

Fee income growth is more divergent, as some banks with large exposure to the asset management business (bank WMPs and agent sales of other financial products including insurance, mutual funds, and trust products) are seeing a sharp contraction as a result of regulatory tightening in the asset management market. Banks with a large fee income contribution from payment also saw rising threats from financial-technology competitors in the payment field. Fee income from bank card and investment bank-related services saw resilient growth.

The improvement in operating efficiency was suspended in 2016 as a result of revenue contraction. But the improving trend resumed in some banks lately that saw recovering top-line growth. The rapid pace of banking digitalization and network upgrade/repositioning, together with recovering top-line growth in the following quarter should translate to near-term operating efficiency improvement for banks that are well-positioned to take advantage of such trends.

Credit quality has been showing signs of stabilizing, but we expect credit costs will remain at currently high levels as banks accelerated the pace of cleaning up bad debts. Credit quality pressure also diverges among banks, with large banks with prudent operations and credit exposure to lower-risk sectors (government-led infrastructure, retail, and private sectors) seeing less risks as financial deleveraging and supply-side reform are showing some progress.

Hong Kong Banks: There is no change to our view that the Hong Kong banks are overvalued, and the key focus is on net interest margin improvements and the prospect of further loan growth in 2018 as regional economies continue to improve. Contrary to our expectation in December that net interest margin would be lower in the second half of last year, narrow-moat Hang Seng Bank was able to sustain its margin by better managing its balance sheet. We expected competition to pressure margins while interbank rates in Hong Kong declined in the middle of last year. Management noted that competition did pressure lending spreads for corporate and commercial loans, while liquidity in the system remains high. We maintain our view that net interest margins will rise steadily over the next five years as stronger economic conditions underpin the normalization of interest rates globally.

The strong system loan growth of 16% was a key positive, and this was across both corporate loans and loans to individuals. Demand for offshore loans also saw strong growth on higher demand for investments in mainland China and elsewhere in the region. With the Chinese economy continuing to moderate at a controlled paced and global economic conditions strengthening, similar loan growth for fiscal 2018 is expected. As such, we lifted our loan growth forecast to high single digits for fiscal 2018.

Japan Banks: We consider the Japanese bank stocks we cover to be slightly undervalued, trading at a 0.93 price/fair value estimate. Nondomestic investors' sentiments are weak after a larger-than-expected decline in prices during the first quarter on the back of lower expectations for likely adjustments to the yield curve controls. While we had expected another five-year term for Bank of Japan Governor Haruhiko Kuroda, a wider-than-expected yield gap across major markets, reaching near 3%, is adding more volatility to future earning streams in coming quarters. Together with dollar weakness, the cost of dollar funding has surged nearly 2% across the yield curve, which will lead to manageable margin contraction in both lending and investments for all internationally active banks. A continued decline in the investment banking revenue pool also added pressures, as the fee revenue pool has decreased to the five-year low as demand for fixed-income products remains depressed.

Rising rates will first lead to mark-to-market losses on the banks’ large foreign bond holdings. In particular, we alert that Mitsubishi UFJ has higher sensitivity to changes in global benchmark yields in both ways. This means that the group is likely to book a marginal valuation loss up to JPY 20 billion on its JPY 21 trillion foreign bond holding assuming no substantial changes in market environment until the end of March. While this is not good news, the group can also choose to offset this with ample gain on its stock holding and past credit provisioning after the group has already achieved 91% of the full-year guidance for the nine-month period. Our base case assumes tangible equity positions equivalent to its nondomestic peers and slow yet steady margin improvement, as most of the group’s cost-saving initiatives are unlikely to result in tangible cost saving until after fiscal 2019. With an over 30% discount to its tangible book value, the 4-star stock remains undervalued for long-term value investors given the group remains best positioned to benefit from sustainable regional banking growth within Asia.

Near-term market headwinds do not alter our investment thesis: Larger banks are better positioned to benefit from the industry shift in favor of digital banking. The banks we cover are already scaling back unprofitable lending as recovery in net interest margin, tracking around 1%, remains weak after hitting a bottom around August 2017. Meanwhile, smaller banks with larger physical infrastructure remain pressured, as the price of financial services will continue to fall and available access to alternative banking platforms tends to be more restricted. 

Altogether, we expect that the banks we cover are likely to see bumpy performance metrics in the coming fourth quarter. This includes investment banks where we are yet to identify a sustainable earning’s catalyst to offset a weak trading environment for fixed income. Although more precautionary saving from low risk appetite continues to elevate deposit growth unsustainably high around 6.7% year on year, better corporate earnings can still support systemic loan growth tracking around 2.3% for the time being. We remain concerned that low asset efficiency will remain low with the average return on assets tracking below 1%, as investment opportunities for banks are limited with 10-year Japanese government bond rates being trapped under 10 basis points.

Singapore Banks: The Singapore banks remain fairly valued, with Oversea-Chinese Banking the only bank trading slightly below our fair value. All three banks posted resilient fourth-quarter results to wrap up a good fiscal 2017. With the three banks holding excess general allowance and the SFRS 9 accounting change implemented on Jan. 1, the focus was the bank's position in exercising the general allowance and any potential capital management initiatives. DBS Group took the lead at the end of the third quarter by writing down the rest of its oil and gas exposure, offset by the excess general allowance and did not hit the bank's profit. With the Basel Committee finalizing post-crisis reforms at the end of last year and minimal impact expected on the bank's strong capital position, the bank announced a special dividend and raised its dividend payout. In the fourth quarter, United Overseas Bank OCBC followed suit by applying the excess general on their remaining oil and gas nonperforming assets with the former also paying a smaller, special dividend. However, the market expected a higher special dividend while management noted a preference for a sustainable ordinary than a large one-off special dividend. The market also reacted negatively to OCBC's results given the lack of a special dividend. On the contrary, we believe the bank's tighter capital position means a special dividend was unlikely. In our view, the bank has a long history of conservatism and a focus on maintaining a prudent capital position has always been a priority. Its share price recovered quickly after the results.

With the three banks’ oil and gas nonperforming assets written down, the focus is again on growth as global growth appears more sustainable. We left our net interest margins assumptions unchanged as we continue to expect steady increases in net interest margin as U.S. interest rates normalize in the medium term. Despite interbank rates softening in late January and February in both Singapore and Hong Kong, we noted at the time of the results that it is more likely the improvement will be sustained this year given the more buoyant economic conditions. This was reflected in a recovery in March with averages for the first quarter tracking above the same period last year. We expect this to translate into higher interest margin for the three banks, with DBS the largest beneficiary of the rising interest-rate environment given its large deposit base, a larger proportion of lower-cost current and savings deposits, and a greater exposure to both Singapore and Hong Kong.

Fee income growth was again a highlight in the latest results, with recent acquisitions supporting fee income growth for both DBS Group and OCBC. The wealth management segment for both banks has strengthened, and scale for the two private wealth operations are comparable to the larger Swiss/U.S. banks in the region. We expect wealth management income to be supportive of noninterest income growth, providing a more diversified income base for the banks. We also note that wealth management income is more stable than other income such as trading and investment banking.

Australian Financials Update
By David Ellis

The modest slowdown in credit growth in Australia to around 5% is more than offset by solid economic fundamentals as global and domestic economic conditions improve. At current prices,  Westpac Banking WBC:AU() and  Commonwealth Bank of Australia CBA:AU() are most undervalued, trading 14% and 9%, respectively, below our valuations.  National Australia Bank NAB:AU() and  Australia and New Zealand Banking Group ANZ:AU() are trading 5% below our valuations. We are comfortable with our modest earnings forecasts, with EPS expected to grow an average of 2.7% per year to fiscal 2022, and near-term catalysts to drive share prices materially higher are difficult to find. As always, there are plenty of risks to earnings and stock prices for the major banks, not the least being regulatory, economic conditions in Australia, the Royal Commission, the long-running fear of an economic correction in China, and of course Australia’s housing markets. Risk surrounding residential interest-only loan expiries is overdone, and we expect the major banks to comfortably digest the transition during the next few years. Global tightening of liquidity could raise Australian bank wholesale funding costs if conditions persist. In these circumstances, bank net interest margins could contract if variable borrowing rates are not increased for Australian corporate, commercial and housing borrowers.

Political and regulatory risk is increasing, with Australia’s federal opposition Labor Party proposing to reduce the attractiveness of Australia’s generous dividend franking system. Labor’s proposal to remove cash tax refunds for shareholders where imputation credits exceed assessed tax would not be good for retail bank shareholders who are overweight Australian banks. Labor’s policies aimed at reducing the tax concessions for negative gearing and capital gains tax around investment housing are not bank-friendly. Add in the risk of a further increase to the recently introduced 0.06% major bank deposit levy, and a change in government would not be good for Australian banks. The next federal election is due before early November 2019.

Despite the political and regulatory risk, we expect modest underlying growth in risk-weighted assets, improved productivity, and benign credit quality with sustainable fully franked dividends delivering attractive dividend yields. We do not consider the Australian major banks “value traps” with shareholders set to benefit from modest dividend growth, share buybacks and even special dividends. We forecast average annual dividend growth of 2% to fiscal 2022, with payouts forecast to decline to 71% in fiscal 2022 from 76% in fiscal 2017. Major bank forward price/earnings ratios have contracted to an average around 12 times from 13 times five months ago and are now broadly in line with longer-term averages. Returns on equity are expected to average above 14% during the next five years, with Commonwealth Bank to stand out at around 16%. Political uncertainty is not helping business confidence, while weak wages growth is a drag on consumption and the Reserve Bank of Australia, or RBA’s, inflation target. Meanwhile, businesses continue to underinvest in growth initiatives, external shocks such as Brexit, the U.S. political environment, U.S. trade wars, and tension with North Korea could detract. Sudden shifts in China could have “first-order” impacts on the Australia economy, the financial system, and by extension the Australian major banks. The most damaging negative risk to bank earnings is the potential for an exogenous shock triggering a global downturn that drags the Australian economy into recession, but this is not our base case.

European Financials Update
By Derya Guzel and Henry Heathfield

European Banks: With their full-year results now out of the way, banks are focusing on their 2018 budgets and releasing their first-quarter numbers in Europe. For many parts of Europe, the themes for 2018 have hardly changed compared with 2017. For 2018, U.K. banks within our coverage are hopeful on the U.K. economy despite the ongoing Brexit. The consensus view is that GDP growth will be at similar levels to that in 2017, which in our view should be supportive of banking assets and balance sheet growth.  Lloyds Banking Group LLOY() expects the U.K. economy to maintain its resilient stance and overall macroeconomic outlook to benefit from GDP growth. Along with unemployment at an all-time low, the bank expects continued stable consumption. On the other hand, low growth in pay (which remains below inflation) will continue to pressure household finances.

As of the start of 2018, IFRS 9 is now in full operation for European banks. In July 2017, EBA guided that the common equity Tier 1 ratios are expected to decrease by up to 45 basis points on average, driven by the increase in the impairment charges. While banks have been emphasizing that the impact on capital ratios will somehow be lower than that guided by EBA, they have been reiterating their guidance on the topic with their full-year results. Management of Svenska Handelsbanken SHB A:SE() guided that the impact from adopting IFRS 9 in first-quarter 2018 is limited and is not expected to affect the bank’s capital ratios, whereas in the U.K., Lloyds’ management team guided that while the initial impact of IFRS 9 will be around 30 basis points, it will be phased in over the next five years. The bank added that the full impact of the new regulation on annual capital generation will amount to 170-200 basis points.

Finally, at Nordea Bank’s NDA SEK:SE() annual general meeting in March, shareholders reached an agreement on moving its headquarters from Stockholm to Helsinki in the banking union area, due to the heavy regulatory burden imposed by the Swedish FSA. As a result, we believe Europe’s Single Supervisory Mechanism, or SSM, has now proved itself to be a widely respected supervisor. As we have emphasized previously, we view Nordea moving its headquarters as neutral to fair value, and so we maintain our narrow moat and stable moat trend ratings, while we believe lower regulatory costs will be a long-term positive for the firm’s P&L. The move of headquarters will only affect around 50 employees, and there will be no move of physical headquarters; thus, any impact on operational cost should be negligible.

European Insurance: European insurers are still broadly overvalued, with our coverage trading at about a 1.03 times price/fair value estimate ratio. We continue to believe the main theme within the European insurance sector is the increasing importance of asset management divisions within these businesses.

European insurance companies, or European life insurance companies more specifically, have been repositioning their asset management businesses and offerings to something more in line with the unit-linked business that is generally becoming much more prominent versus traditional business that carries capital and interest guarantees. As we noted in previous updates, there has been significant activity within this space, in tie-ups with larger asset management businesses. We believe this is largely the result of businesses looking to build expertise in the other side of their modern life insurance offerings.

In line with incoming regulations, what we are also seeing is a renewed focus on distribution. The combination of an efficient distribution strategy and well-positioned and performing asset management business unit can provide a life insurer, in particular, with a competitive position. For example, we saw  Aviva (AV.:GB) deploy this strategy very effectively with its adoption of platform technology for accumulation products and the revival of Aviva investors. This, we believe, can create a captive scenario where policyholders can be channeled into proprietary funds, and policyholders are naturally more attracted to the proprietary funds, via direct or through advisers. This is because of the more suitable product offering, and the underlying performance, including limitations on volatility and drawdown.

In the first quarter, specifically what we have seen has largely pertained to corporate activity at  AXA CS:FR() and  Prudential PRU:GB(). We think AXA generally has blindsided the market with its takeover of XL Group, which looks to be positioning the business for a Zurich Insurance style structure, versus what we thought would be more like an Allianz following. We have reservations about this new direction of AXA, and have had some skepticism over the AXA CEO in previous research.

But more in line with what we have been talking about on asset management, Prudential announced the separation of the UK Life business combined with its European asset management arm from its United States and Asian businesses. These latter two units have been jewels in Prudential’s crown, whereas U.K. and Europe have been struggling. The U.K. market is becoming a predominantly defined contribution market and M&G, Prudential’s asset management arm, has been struggling in terms of performance and attracting investors. We think this move will not only have capital and regulatory benefits, but likely enable the business to focus on what the U.K. and European market need more specifically, which at the moment appears to be unit-linked and volatility-controlled funds.

Top Picks

 American International Group (AIG)
Star Rating: 4 Stars
Economic Moat: None
Fair Value Estimate: $76
Fair Value Uncertainty: Medium 
5-Star Price: $53.20

We believe previous management's focus on growth and lack of discipline is the root cause of AIG's poor historical performance, and now the company has set a course in the opposite direction. When AIG announced that it would be taking a $5.6 billion reserve development charge in the fourth quarter of 2016, the market's confidence in management dimmed and the stock now trades at a significant discount to book value. CEO Peter Hancock departed in light of this disappointment.

We see Brian Duperreault as a strong choice to replace Hancock, as his extensive background in commercial property-casualty lines contrasts with Hancock's lack of experience on the underwriting side and inspires confidence that Duperreault can solve the one issue that Hancock failed to make progress on.

Given the potential for improvement, we think the market valuation is overly skeptical and this creates an opportunity, especially as the recent reinsurance deal with  Berkshire Hathaway (BRK.B) largely mitigates reserve development risk going forward.

We think a valuation close to book value is appropriate, as our view is that AIG will improve returns to a level on par with our estimate of the cost of equity within the next two years. In essence, we assume AIG is able to bring results in line with other no-moat insurers, a fairly low bar to clear.

 Invesco (IVZ)
Star Rating: 4 Stars
Economic Moat: Narrow
Fair Value Estimate: $42
Fair Value Uncertainty: Medium 
5-Star Price: $29.40

Narrow-moat Invesco has impressed us with its transformation, reshaping itself into a much tighter organization capable of not only generating profitability and cash flows on par with the higher-quality names in our asset manager coverage, but enabling it to overcome any hurdles that might be thrown in its way. The firm closed 2017 with $937.6 billion in assets under management, up 15.3% year over year. Organic growth of 1.7% during 2017 was in line with our forecast of 1%-3% annual organic growth and marked the ninth straight year of positive organic growth for the firm (something that cannot be said for most of the other U.S.-based asset managers we cover). More important, when looked at over the past five years, Invesco's organic growth rate of 1.8% on average has had one of the lowest standard deviations (1.6%) relative to peers, with only  BlackRock (BLK) and  T. Rowe Price (TROW) posting lower standard deviations (1.5% and 1.4%, respectively). The best time to buy the asset managers tends to be when the market is selling off (or has sold off), which characterizes the beginning of 2018, with Invesco's shares trading off more than 15% from their late January highs, we continue to view this as an attractive entry point for investors.

Nordea Bank NDA SEK:SE
Star Rating: 4 Stars
Economic Moat: Narrow
Fair Value Estimate: SEK 121
Fair Value Uncertainty: Medium 
5-Star Price: SEK 84.70

We see Nordea’s geographical business diversity--mainly comprising what we view as the steady Nordic economies--as a plus for its stable net income generation, and it’s the main factor differentiating the firm from its peers. Nordea’s share price has been under pressure, which we believe is mainly due to news on moving its headquarters from Sweden to Finland. With the move to Finland, Nordea now will be under the supervision of Europe’s Single Supervisory Mechanism, or SSM, which has proved itself to be a widely respected supervisor. As we have emphasized previously, we view Nordea moving its headquarters as neutral to fair value, and so we maintain our narrow moat and stable moat trend ratings; however, we believe lower regulatory costs burden will be a long-term positive for the firm’s P&L. The move of its headquarters will only affect around 50 employees, and there will be no move of physical headquarters; thus, any impact on operational cost should be negligible. Having said that, now that the headquarters move has been finalized, we believe share price pressure should stabilize also.

Quarter-End Insights

Stock Market Outlook: Stocks Look Slightly Overvalued Today
4- and 5-star stocks are harder to come by in today's market, but a few values are still out there.

Credit Market Insights: A Decidedly Negative Quarter for Fixed-Income Markets
Rising rates and widening credit spreads took their tool in the first quarter of 2018.

Basic Materials: Still Overvalued Despite Protective Tariffs
Our bearish view on the mining and metals sector means the basic materials coverage universe trades at a market-cap-weighted 30% premium to our fair value estimates.

Communication Services: The Most Undervalued Sector We Cover
We see value in several firms as consumers migrate away from traditional TV bundles and Europe invests in fiber and 4G.

Consumer Cyclical: Confidence, Demographics Support Consumption Gains
E-commerce market share gains present challenges for some, but trends continue to support healthy profitability for many companies.

Consumer Defensive: Looking to M&A, Online Sales for Growth
We see a few values for long-term investors amid intense competition.

Energy: Looming U.S. Shale Supply Should Temper Optimism
Huge output decline boosts near-term fundamentals, but lofty prices likely to trigger dangerous shale growth later.

Healthcare: Values Among Drug, Biotech, and Supply Chain Firms
Innovation, consolidation, and a mixed regulatory picture for healthcare stocks in the first- quarter.

Industrials: Healthy Demand, But Few Values
Among a mostly fairly valued industrials sector, some good values remain.

Real Estate: Rising Rates Won’t Derail Strong Fundamentals
REITs have focused on strengthening their portfolios, deleveraging, and capital recycling in the face of higher bond yields and new construction.

Technology: Shift to Cloud Computing Most Important Story
The sector looks modestly overvalued as a whole, but there are some attractive firms in enterprise software and IT services.

Utilities: Under Pressure in Early 2018
Utilities sell-off presents opportunities for long-term investors.

Venture Capital Outlook: Despite Slow Volume, Liquidity Prospects Remain
We expect ample opportunity in the VC-backed IPO market as alternative liquidity routes gain popularity.

Private Equity Outlook: Carveouts on the Rise as Fundraising Slows
As dealmakers look to innovate their origination process, we anticipate a continued rise in take-privates and corporate divestitures.

Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.