A report out today from Morgan Stanley forecasting harsh dividend cuts by European banks has left equity income managers largely unfazed as many have already reduced exposure to the sector.
Morgan Stanley predicts European bank dividends will be "very constrained" as the Basel Committee pushes for stringent minimum capital requirements and Barack Obama increases pressure on the sector.
Tightening controls on the world's banks is expected to figure large in discussions at the World Economic Forum, which begins in Davos today.
Meanwhile, the International Monetary Fund recently warned banks will have to raise "substantial additional capital" to avoid another crisis.
Morgan Stanley's European bank analyst Huw van Steenis says dividend expectations on nine banks have been cut, and it forecasts "zero dividends" for 19 more, including Royal Bank of Scotland and Lloyds TSB.
The negative news surrounding the banking sector impacted on shares with RBS down 4.5%, HSBC falling 2.2% and Barclays off 0.8%.
However, equity income managers are taking a sanguine view having held a bearish view on banks for some time.
Matt Hudson, manager of Cazenove's UK Equity Income fund, says in the past UK banks contributed up to 30% of the total market distribution: "UK equity income funds once had large weightings towards them, but that has changed materially.
"Funds have moved into other areas such as pharmaceuticals, which have pretty robust balance sheets and attractive and growing dividend yields."
Chris Murphy, manager of Aviva Investors' UK Equity Income fund, says he is underweight banks: "You can still build well-constructed and diversified portfolios without them, especially if you look down into the mid and small-caps."
Tineke Frikkee, manager of Newton's Higher Income fund, which is very underweight the sector, says with oil over $70 a barrel she prefers exploration companies for safe dividend yields.
She says when UK banks were the market's dominant dividend contributors in 2007 the top 10 income-payers came from just four sectors.
"The top 10 are now spread over eight sectors which from a sector diversification perspective has been pretty good news."
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Posted by: WEL
14 Mar 2010 | 13:10
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