HONG KONG, June 17, 2015—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, hasenhanced the Morningstar Economic Moat Rating for banks with the addition of a banking system stability score. In the June 2015 Financial Services Observer—“Where the Wide Moats Are: An Analysis of Banking Systems Lends Clarity to Our Bank Moat Methodology,” Morningstar equity analysts evaluate the strengths and weaknesses of banking systems in 22 countries and theirdirect effect on the economic moats, or sustainable competitive advantages, of banks operating in those countries. As a result of the research, Morningstar upgraded eight banks to wide moat status.

Morningstar’s global equity analyst team analyzed the stability of each country’s banking system by assessing factors in four areas: economic, political, competitive, and regulatory. Morningstar then gave each country’s banking system a rating of Very Good, Good, Fair, or Poor. The ratings are as follows:

·         Very Good: Australia, Canada, and Switzerland

·         Good: Belgium, Chile, Hong Kong, Singapore, and Sweden

·         Fair: China, Colombia, Denmark, France, Germany, Japan, Mexico, the Netherlands,Spain, the United Kingdom, and the United States

·         Poor: Brazil, India, and Italy

Stephen Ellis, Morningstar’s director of equity research for banking and financial services, said, “We examine the strength of banks’ traditional financial intermediary businesses—chiefly retail and commercial banking—and of non-intermediary business, like investment banking and wealth management, which can impact a bank’s moat. We also introduce a rigorous analysis of the banking systems in which banks operate, which is critical to our confidence in the sustainability of a bank’s excess returns and evaluating the likelihood of value-destroying events.”

Morningstar’s new banking system stability scores were part of Morningstar’s broader effort to expand upon its existing framework for evaluating the strength and trends of economic moats for the banks it covers around the world. Morningstar Economic Moat Ratings indicatethe sustainability of a company’s competitive advantages, and Morningstar® Moat Trend™ Ratingshows whether the sources of competitive advantages are growing stronger or weaker. Morningstar evaluates multiple potential sources of economic moat across seven common business lines and assigns Economic Moat Ratings as Wide, Narrow, or None.

As a result, Morningstar analysts upgraded eight Economic Moat Ratings from Narrow to Wide: Banco De Chile, Banco Santander Chile, Bank of Nova Scotia, Royal Bank of Canada,SvenskaHandelsbanken, Toronto-Dominion Bank,U.S. Bancorp, and Wells Fargo. In addition, 10 other banks saw an upgrade or downgrade to their Economic Moat or Moat Trend ratings.

Additional key findings of Morningstar’sFinancial Services Observerreport include:

·         Banks with Wide Economic Moat Ratings are associated primarily with high-quality banking systems. The higher quality and more stable a system a bank operates in, the lower the hurdle needed for the bank to earn a Wide Economic Moat Rating. The eight banks that now have a Wide Economic Moat Rating are generally domiciled within banking systems that Morningstar analysts rate as high quality, such as Canada, Chile, and Sweden.

·         A strong economy doesn’t necessarily translate to a high-quality banking system. For example, China, Germany, and the United States are considered to be dominant economies but their highly competitive environments and regulatory issues lead to Fair banking system ratings.

·         Diversification doesn’t necessarily add to a bank’s moat, and frequently detracts from it. While most large banks operate as universal banks—banks that participate in a number of banking businesses, generally including retail, commercial, and investment banking—they tend to be less moaty than their stand-alone retail and commercial operations. In many cases, these bank's non-core business are either less inherently moaty than retail and commercial banking—for example, life insurance—orwhere the bank has fewer competitive advantage, such as investment banking.

An excerpt of theJune 2015Financial Services Observer is available here.A video summarizing the findings is available here.

The Morningstar Observerseries is available to clients of Morningstar^® Institutional Equity Research Services^SM; in Morningstar Direct^SM, its global investment analysis platform for institutional investors; and in Morningstar Select, the company’s institutional equity research portal. More information about Morningstar equity research is available at http://global.morningstar.com/EquityResearch.  

Morningstar’s Observer series features in-depth sector research reports that harness Morningstar’s focus on a long-term investment horizon and economic moats—or sustainable competitive advantages—to analyze complex investment trends across sectors. The company publishes the Observer series regularly throughout the year, focusing on various topics across sectors, including basic materials, consumer, energy, financial services, healthcare, industrials, technology, and utilities.

Morningstar launched its equity research coverage in 1998 and has about 120 global equity and corporate credit analysts who provide qualitative analyst coverage of approximately 1,400 companies.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 15 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had more than $179 billion in assets under advisement and management as of March 31, 2015. The company has operations in 27 countries.

Morningstar Economic Moat Ratings are subjective in nature, subject to change, and should not be used as the sole basis for investment decisions. The references to the above-mentioned financial institutions should not be considered a solicitation by Morningstar to buy securities. 

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