December 6, 2023

Investment Banking

Let Your Investment Banking Do The Walking

‘The quarter itself was good,’ analyst says

JMP Securities Senior Research Analyst Devin Ryan joins Yahoo Finance Live to discuss investment bank earnings, investor sentiment, banking turmoil, and the outlook for Apple’s high-yield savings account.

Video Transcript

Buying the dip in banking. Earnings for investment banks are continuing to roll out, reflecting a downturn in sentiment, but the gloom might present a good opportunity as long as investors watch the deposit bases and valuations of their potential investments. Here with more, Devin Ryan, senior research analyst at JMP Securities, a Citizens company. Devin, I know you cover Goldman. You have a $460 price target on Goldman. What were your major takeaways from today’s results?

Hey good morning. So it was a good quarter. I think the headline was a little bit noisy. It looked like, at first blush, they missed on revenues. In reality, there was just some noise related to selling some of their Marcus loans. So the revenue picture was actually a little bit better than we had modeled on the core revenue drivers like trading and investment banking. And then there’s also some expense noise. So it was about $0.80 of some one-time expense items.

And so when you normalize all that, the quarter itself was good. I think what’s more important, and I think why the stock is starting to probably get a little bit of a bounce here, is coming off of the call, they talked about starting to see some green shoots forming again in investment banking. They said their trading clients remain very engaged and very active, so that means that second quarter is starting on a pretty good note for trading. And then they’re actually starting to see some market share opportunities as a result of all the banking stress. For example, Credit Suisse in private banking– there’s going to be some opportunities to potentially come out of that transaction for Goldman Sachs as well.

And so I think that that’s the bigger takeaway here, that the go-forward is arguably a little bit better than we thought heading into results. And so I think the markets are trying to figure out with all the noise from the headline this morning.

Well, let’s talk about some of those opportunities. So Goldman CEO David Solomon talking about those high-net-wealth businesses, a business client, perhaps, taking that from UBS, Credit Suisse. So how significant is the marking turmoil that happened for Goldman?

So just to take a step back, Goldman has navigated a lot of crises over its history. And through those crises, it takes market share, whether that’s in trading or investment banking or now, increasingly, in asset and wealth management. And so on the private banking side, it’s probably not the primary driver, but it’s all incremental.

When you have firms consolidate, generally, customers want to have more than one relationship. And so if they were working with both firms before, and then those firms get together, then they’re going to look for another counterparty as an addition. And so that’s where Goldman can step in Europe and private banking. But also, there will likely be some investment banking market share up for grabs and trading.

And then just bigger picture, if we’re going into an environment where the financial system is going to be maybe tighter with capital, Goldman is very well capitalized. And they’re already starting to lean in in terms of committing capital clients. I think we’re seeing that a little bit in some of their financing lines. We’ll see that in trading, most likely, out of them in the next couple of quarters. And so those are a couple of the obvious opportunities. But they navigate these moments really well, and that’s one of the reasons that we like them.

You mentioned noise in the headlines, and this is with respect to Goldman as it’s been pulling back from consumer lending, selling about $1 billion of its Marcus loans, as you had mentioned. So how significant is that?

So it gets a lot of attention, but it’s not that significant to results. We’re talking about single digits of contribution to revenues. And actually, the business has been losing money. So when you exit that, that actually kind of helps from a profitability perspective, and it helps free up capital. And so it’s been, in some areas, a little bit of a distraction relative to how much it’s driving in the business.

They’re going to stay in consumer. There’s areas of consumer where it makes sense, and they spoke about those on the call. But this broader consumer strategy, particularly in an environment where investors don’t have a lot of appetite for companies to lose money, I do think it makes sense to pare back some of that grander vision. That’s what they’re going to do here, and I think it makes sense.

And it’s in a partnership with the Apple Card holders. We just heard about that announcement yesterday as well about launching high-yield savings accounts for Apple. So do you think that that’s an area of importance going forward?

Yeah, absolutely. I think it’s more about the partnership angle. So Goldman has partnerships with a lot of marquee brands. And I think the interesting question would be, what else comes on the other side of that, and what else will they do with Apple? And I think they’re going to continue to launch products.

And that product, in and of itself, I think, will be a good product. I’d argue that there’s other products in the market where there’s a yield that’s competitive with that. And so I wouldn’t expect there to be a huge flood of deposits into that platform. So in terms of the ability to move the needle, I think it’s more of a longer-term play.

But I think that Goldman is now taking the tact where if they can do it on their own, and profitably, they’re going to do that. But if there’s partners to work with where they can share some of the expense and also get access to customers in a new way, that can also make a lot of sense for them. And so they’ll kind of take both routes. And Apple is a great partner to have. They’re a huge household brand with a huge customer base.

Some of the commentary also heard on the call from David Solomon is basically that the worst of the crisis is over. Do you think that that’s the case? I mean, is the banking crisis over?

So the data that we’re tracking right now is positive. So in terms of what we’re tracking out of the Fed with the HH data around deposits, even in recent weeks, that has been stabilizing. And then getting to bank earnings here, you’re seeing, I think, at least some stability. And the stocks– today’s a little bit of a choppy day, but more broadly, have been reacting favorably.

Our view heading into earnings was that the large banks would likely do better than the smaller banks. So we still have a ways to go here to get on the other side of all of bank earnings, but we have been seeing some more comforting data. And then just more broadly, the view into the customer base– the consumer, while it may be slowing a bit, is still hanging in there. And more broadly, the companies are still seeing relatively healthy credit trends across their franchises. I think that’s a positive data point. So we do feel better today than we did three weeks ago.

Devin Ryan, senior research analyst at JMP Securities, a Citizens company, thanks so much for joining us.