Banking revenues are in 'record environment' and are only going to get better: Analyst
Devin Ryan, JMP Securities Senior Research Analyst, reacts to better-than-expected bank earnings and shares his outlook for the sector.
Video Transcript
- Let's bring in our first guest for the hour. We've got Devin Ryan, JMP Securities Senior Research Analyst. Devin, good to have you on, on a very busy day today. I'd love to start with Morgan Stanley's results here as Brian just highlighted there. A lot of the headlines you're coming around M&A but also optimism for loan growth. What did you see that you liked in the quarter and how does this set things up for Q4?
DEVIN RYAN: Sure. Thanks for having me. So first of all, you know, the third quarter is typically seasonally slow. And so you know, it can be a quieter quarter for trading and investment banking results. And you're just not seeing that right now. Trading, there wasn't a lot of macro volatility in the market yet trading continues to hang in. And I think that speaks a little bit to some structural changes that are happening in the market and also the fact that some of the largest and best firms like Morgan Stanley are taking market share. So I think that's an important point and a positive takeaway from the quarter.
But then, again, on investment banking, as Brian mentioned, advisory revenues and overall investment banking revenues-- we're kind of in a record environment right now, and I would argue is going to get better. And it's going to get better than people think. You know, the next few quarters you've got really good line of sight into the revenue outlook. M&A announcements in the third quarter were up over 30% year over year, $6.5 trillion annualized volume. If you go back to 2007, that's when you had the record year for M&A. Announcements were like $4.5 trillion. So that gives you some context here that the backdrop is just incredibly constructive, and you make the majority of your revenues when deals closed. So deals are going to close in the fourth quarter, first quarter, second quarter of next year. So that revenue line is going to get better.
If you look at all the SPAC deals that were announced early in 2021, a lot of those are still working through the system. And so that's going to drive a lot of revenues as we think about of kind of heading into year round and beginning of next year. So the point is great third quarter. Fourth quarter is going to be even better, it should be. And then you have some momentum into the beginning of next year where I feel like people have to take numbers up. And this is going to be a better outlook than people appreciate. That's one point.
The other point on loan growth, Morgan Stanley is a little bit of an outlier. They're having terrific success in wealth management. You know, their Wealth Management loans are up over 30% year over year. That grew 5% or 6%. Again, in the third quarter, so seeing really good momentum there. Some of that is idiosyncratic. They've done a number of acquisitions right e-trade and some of the other things that they've done strategically are driving that growth.
But, you know, I think that there's still a lot of runway ahead for Morgan Stanley on the Wealth Management loan balance side. And then your bigger picture of loan growth for the banking industry, we're not as constructive around. The outlook there, I think, it'll still be stop and start. But that's less of a story for Morgan Stanley and Goldman Sachs tomorrow. So looking at Goldman tomorrow, we expect a lot of the same things, think they're going to have a pretty nice upside. We're decently above consensus is. So those are some of the main takeaways, and happy to go into more detail.
- Well I mean, you mentioned Goldman Sachs there. And we're talking about how hot M&A has been and how hot, you know, and IPOs have been this year too. No one's expecting that to let up in Q4. And when you think about what that means for Goldman Sachs obviously, a big beneficiary on both of those fronts. I mean, if the trend so far, as Brian was walking through, the results have been much stronger than people expect. When you look at a name like Goldman Sachs reporting tomorrow, how optimistic are you that not only will it be a beat but significantly to the upside?
DEVIN RYAN: Yeah. So I think tomorrow they're going to be. That's what we're modeling. We're decently ahead of the street consensus. So we've already kind of been there. We've been telling clients that you're going to see better results out of just bank earnings here, and a lot of that is going to come on the capital market side, which I think is playing through.
More importantly, it's not about the third quarter. It's about what's going to happen over the next few quarters. And I think for Goldman Sachs, Morgan Stanley and others, as I just mentioned, you know, they have a better trajectory in the capital markets, particularly in investment banking, in M&A advisory and equity underwriting because there's more line of sight than there normally is because of the way revenues are recognized. And so I think consensus estimates are going to have to move higher.
There's a lot of discussion around normalization. You know, what does that look like? And that's been somewhat of a lid on the stocks. The stocks have done well over the last year. Question is, what is the catalyst from here to drive them higher? One of the catalysts in my opinion, is that estimates have to move higher than the people appreciate. So if numbers go higher, I think the stocks are going to follow as well. So that's starting to get digested in the market. But, I think as the fourth quarter progresses here, people are going to realize that the outlook and investment banking is decently better than most have modelled, particularly in M&A advisory related to SPACs. And also equity capital markets, you know, still terrific IPO calendar and equity capital markets backdrop.
- And Devin, as we look ahead to the next few quarters, the expectation here with the banks is that they are going to be operating in a higher rate environment. There seems to be a lot of expectations coming from investors on the back of that. But, when you break down the big banks, who do you think is likely to benefit in the biggest way?
DEVIN RYAN: Yeah. I think the question is, why are rates going up and where are they going up? So you know, we're having conversations with our clients around inflation, stagflation, you know, what is the environment? I mean, ultimately you want as an investor in financial stocks there to be an environment where rates are going up because the economy is improving, and that would be very bullish for the traditional banking system, all of the large banks we've already spoken about here a little bit.
You were still leaning towards the capital market centric banks because as I mentioned, I think the capital markets construct is better than the consensus realizes at the moment, and that's going to have to get digested more into the stocks. So that will lead to some additional out-performance from here. But, really if rates are going up because the economy is improving and it's not because there's other issues around inflation, that's good news. But that's something that I think the market's trying to the push and pull here and maybe why you haven't seen more out-performance than you would think if the view is rates are going to be moving higher from here.
- Devin Ryan, JMP Securities Senior Research Analyst. Good to have you on today.
