The article below is from our BRIEFINGS newsletter of 21 October 2021
After most of the large banks reported their quarterly earnings last week, we sat down with Goldman Sachs Research’s Richard Ramsden, Business Unit Leader of the Financials Group, to discuss the implications for markets.
The latest earnings results from the nation’s biggest banks were relatively strong. What are your key takeaways?
Richard Ramsden: First, the markets have been very focused on loan growth as an indicator of economic growth, and this was the first quarter this year where we saw both corporate and consumer loan growth stabilize and pick up on an underlying basis. We estimate that corporate loan growth grew about 2% on a quarter-to-quarter basis while consumer loan growth grew by 2.5% to 3%, driven by strength in auto lending and credit card spending. Moreover, the outlook for loan growth and credit card spending was also constructive heading into next year. Second, we saw considerable strength in banks' capital markets businesses, both in trading and primary activity. We had been expecting strong activity, but the magnitude of results were better than expected. Essentially, investors are viewing banks’ third-quarter activity as a reflection of how much the pool of capital has grown since the third quarter 2019. We estimate that capital markets revenue industrywide could normalize at levels that are 15% to 20% higher than 2019 levels, due to stronger equity capital markets and M&A activity. We also saw pristine credit quality from the banks—the best in 30 years, in fact—and the outlook is benign given that consumers and corporates are in strong financial shape.
So how sustainable do you—and investors—think capital markets activity will be going forward?
Richard Ramsden: Most analyst models—including ours—are building in a 10% to 15% fade in activity as we head into 2022. Having said that, what’s clear is that M&A activity is likely to remain elevated. Keep in mind that around 50% of M&A fees this year have been driven by financial sponsors which, because of the amount of dry powder they hold, signal that activity is likely to continue. Clearly the pie has grown relative to where we were in 2019 because markets are bigger. But increasingly that pie is concentrated among fewer players with more pricing power at the margin. So while we’re likely to see a drop-off in activity, I think the market is too pessimistic on the speed and magnitude of that drop-off.
In your conversations with management teams, how are they responding to post-pandemic concerns around supply chain disruptions, inflation and wages?
Richard Ramsden: Banks agree that supply chain disruptions are impacting companies across industries and geographies, but there is some divergence of views in how long those disruptions will persist. For example, some of the regional banks—which are more exposed to the auto industry and other manufacturing sectors—expect the supply chain issues will persist for longer. Overall, the supply chain delays are hampering companies’ abilities to rebuild inventories, leading to weaker loan demands. That said, most companies expect the supply chain issues should be resolved by the middle of next year, which should also boost loan growth as companies look to fund growth in working capital. On the inflation side, most banks have already increased average wages for their tellers and some entry level workers due to the shortage in labor markets. While most banks believe some inflation issues, especially in labor markets, will persist, they are optimistic about the speed at which these issues will be resolved.