BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us. Today, we are pleased to have a conversation with Larry Fink, Chairman and CEO of BlackRock; and Christian Sewing of Deutsche Bank, which will be moderated by Jörg Eigendorf, Global Head of Communications and Corporate Social Responsibility for Deutsche Bank. I would like to turn the presentation over to Jörg. Go ahead, gentlemen.

Thank you, John. A warm welcome from Frankfurt, from the headquarter of Deutsche Bank, and thanks, John, for introducing already our speakers today to our first transatlantic keynote session, a virtual keynote session. And a warm welcome definitely to Larry Fink, the Founder, CEO and Chairman of BlackRock, the biggest money manager in the world.

And Larry, let's start immediately with you. You are -- how are you doing in your home office, will you be sad to leave it? Or will you be happy to get back to the office hopefully soon?

Well, first of all, I want to thank Deutsche and Christian for allowing me to be participating in this. Thanks, Jörg. Well, for somebody who in most of his professional career who has traveled 2 weeks a month, staying in one location has been always a -- is something that I kind of dreaded and never thought that I would even be functional in doing that. And it turns out, it's not as bad as I feared. I do go to 2 of my locations to get a little diversity in my -- in what I do. So it's worked out fabulously well. It's worked out fabulously well for BlackRock as an organization, with 99% of our employees working remotely. In parts of the world now, we are starting to reboot and bringing some employees back. But for me, personally, it has been a, I wouldn't call it a joy, I do have much joy visiting clients in their own offices, in their own homes, but all things considered, it's been a remarkable successful journey.

We will get back to that, Larry, later on. Let's start with big politics. The major world governments have been adding unprecedented monetary and fiscal support to fight the economic impact of the crisis. What do you believe are the effects in the short run, but not only in the short run, what will be the long-term effects?

Well, I think the power and the fortitude by regulators, central bankers, policymakers, secretaries of treasury, finance ministers throughout the world, they understood the impact in society by closing it down, and the ability to provide the amount of fiscal and monetary support has been extraordinary. We've never seen anything like this in our lifetimes. And I think even with the -- so much of the monetary policy by the Federal Reserve and specifically, much of it has been announced, but some of it has not been implemented. And yet, markets have rebounded, credit spreads are back to pretty close to where they were in early March. And so we've seen a remarkable return to normality of some sort. This is on the back of tremendous purchases by the Central Bank. And obviously, the long-term impact is going to be -- it could be significant. There could be a period of time where these large extended deficits, in which central banks resolve all their asset purchases, could put some pressure in the markets in the future. But I don't think that's even an issue today. The issue today is rebooting our economies, making our economies strong again and importantly, allowing companies to have access to capital. And probably the most resounding successes even -- is a company like Boeing, where, just 8 weeks ago, Boeing was under severe issues. The stock broke $100 a share. It was above $300. And just 3 weeks ago, Boeing was able to raise $25 billion in the capital markets. And to me, that's a great success. And that was not government money, that was private money. And so the combination of just the fiscal and monetary support by governments has unlocked quite a bit of the capital markets, and we're now seeing large companies having access to capital. And so I would say in the short run, one can say it's been remarkably successful. The question is, and we don't have these answers yet, is going to be the disease curve. Right now, we are moving -- or we are seeing governments moving from compassion to pragmatism. And the question is, are we going to see a second wave or a third wave as we open up our economies, and we have to see what does that mean. And then the question is, if there is a second wave, if it requires more at home or remote working and also a greater impact in small and medium businesses and other things, does it require then another fiscal stimulus. In my opinion, we will need to see, in the United States, one more fiscal stimulus. I do believe jobs are going to be slower in coming back than other people believe. And as a result of that, I do believe we need another fiscal stimulus sometime in the future, but we have time to determine that, and that, in my mind, that's going to have to be in the form of infrastructure. And I believe infrastructure will be the key component in job creation going forward, in helping the economy to be really strong and have the entire world rebuild its economic growth.

I'm turning here to, in Frankfurt, Christian. You've been also very close in 2008 to the crisis, and the macroeconomic situation then was a completely different one. The money market dried out. Nonetheless, and the response now has been much more decisive, nonetheless, you are a little bit bearish. You've been -- you have repeatedly said that the markets are too optimistic right now, rallying like they rallied in the last couple of weeks. Why are you the bear in the market right now?

Well, first of all, a big thanks to Larry, that you joined us on this panel. It's a big honor for Deutsche Bank. So thanks a lot, Larry, for doing this. I wouldn't call myself a bear. That's not what I said. I'm just -- I completely agree with Larry on this remarkable recovery, which, by the way, I have not expected at the beginning of April. I also agree that it's unprecedented. If I see the action by central banks, by governments, what has been put in place across all the countries, I think it was right on spot, it was right on time, and it helped to see that market recovery, which we see. I'm only saying that people should not be carried away that this is -- that what is now happening and that we see a kind of a steady development going forward, I'm absolutely sure that the secondary and tertiary effects of that pandemic will also have certain impacts in the third or in the fourth quarter on the fundamental economy and it will be that, in certain industries, we will see further dips and that there is -- that there are longer-term impacts on corporates and also, in this regard, then on markets, which we haven't yet fully factored in because it's a pandemic which we all haven't yet experienced. The consumer behavior completely changed. And in this regard, I'm just warning that this recovery, which we have seen for the last 6 weeks, is not something which we should assume as being a normal thing and that there is no volatility going forward. I'm sure we will see the one or the other dip going forward. People need to have a stable balance sheet for that. People need to be prepared for that from a risk management point of view. And hence, I'm simply warning that the recovery, which would be exactly what would be done on those things, which Larry said, is not something which we should just simply take as a given and that there is no volatility going forward.

And you, Larry, also agree that the third -- the second and the third round effects might be surprising to all of us?

I don't know. What do you mean by the second or third round effects? I mean are you talking about the second, third wave of the virus?

Exactly. Not only the virus, but also bankruptcies or problems on that side.

Well, I think Christian said it very clearly that the monetary policy has really allowed large corporations to have access to capital, and that is -- and through that, the large corporations, if they have suppliers, are able to help them provide loans to their suppliers. And that has been a positive thing. Depending on the disease curve and as you said, a second or third wave, if that's the case, we're going to have further problems in small and medium businesses. And that's -- if we see the credit -- if we see the disease curve continuing before we find some types of therapies to reduce the impact on a human body from the disease or an actual -- some type of inoculation and vaccination, until we have that, if we had a second or third wave, and it's significant enough that we have to, once again, close parts of our economies, then the impact in the small and medium businesses is going to be significant. And then conceivably, and I'm not suggesting this, but if that was the case and it was significant enough, then it could turn from not just a crisis from a disease, but it could also translate into a severe credit crisis, too. Right now, it's not. Balance sheets are pretty strong. But there's evidence of higher delinquencies and defaults in small and medium businesses already. And we'll see how that plays out. It was evident by some of the, in the first quarter, banks reserving in the United States for larger loan loss. So depending on how quickly we can find therapies to minimize the impact of the disease, so if there was a second or a third wave that the impact on society is reduced and/or a vaccination of some sort, it can have a very negative impact on the economies. Right now, the capital markets are assuming that we're reopening many of our economies, and that's going to restimulate the economies faster. The market is assuming that we're not going to see a severe -- a second wave or a third wave right now. And the market is assuming that we're going to have therapeutics that were going to minimize the disease curve. And so -- and then you have governments throughout the world pushing more pragmatism and less compassion, and to me, that's going to be the big issue going forward. Can democracies continue to flourish if we become more pragmatic? And we do have a second wave or a third wave, and what does that mean for those segments of the economy that are impacted. So we don't have enough information yet, but I would agree with Christian, the markets are assuming a lot of good news at this moment.

Christian, markets also depend on monetary injections. What do you think will be the effects? Will they be rather inflationary? Or will they be deflationary because of the economic downturn?

Very hard to say, actually. And I think we -- you could kind of talk into both directions. It's kind of an extreme picture. We may see higher prices in a few sectors of the economy because of supply chain disruptions. But on the other hand, the decline in global demand for goods and services is also so significant that the risk of disinflation and deflation are potentially, at this point in time, even higher than the risk of inflation. Now on the other hand, if you look how much money has been injected, if you look at the long-term debt of governments and countries, over time, that could turn around. But again, that may sound negative. I think governments and central banks have done exactly the right thing because everything else or anything else they would have done would have been far more disadvantageous for the economy. They did the right thing. Now we have to deal, so to say, with the longer-term impacts. But I think that we are prepared for that. And hence, I think the most important was the initial reaction, which has been shown, which was the right one, and then we have to take it from there.

Larry, the one thing is the global monetary system, the financial markets, the other thing is a trend in globalization. Do you still see it intact with some bumps here and there? Or do we see a paradigm shift to a greater era of nationalism and protectionism?

Well, there's a growing dichotomy. Every business leader, I speak to whether they're a business leader from the United States or Europe or Asia, they're still focused on globalization. And I write in my CEO letters about corporations and their corporate purpose. What I think this rising nationalism is doing for every company is making sure every company is focused on how can they improve their society where they're working. And so to me, this is even more incumbent that every company proves, in every country they work, in every society they work, that they prove their purpose. And so just like Deutsche Bank has to prove they're a U.S. company in the United States, BlackRock has to prove every day that we're a German company in Germany. And I do believe that is going to be the overwhelming issue related to corporations. Now let's be clear, during election airing times, you're going to have rising nationalism, rising populism. You're seeing that all throughout the world right now, more and more populism and nationalism. And so because of that, it doesn't mean less globalization, it just means proving your corporate purpose in every community you work in. And I believe that's going to be the bar for every corporation and everybody, making sure you prove that you deserve the license to operate in each and every one of those countries you operate. And for those companies who can show that they have strong corporate purpose in every country and every community, globalization for those companies are going to be intact. If you are not paying taxes in a community where you're doing a lot of business, or you're not providing the right social connection in the community where you work, you're going to lose that license to operate. And so I believe the bar is higher now for every company to show their corporate purpose in every community. And through that higher nationalism and protectionism, it doesn't mean globalization is over, it just means we have to work harder to prove in every community we work that we are doing our job for that community.

Christian, we are a global bank, operating in 60 countries. Do you feel already what Larry is talking about?

Yes. And I'm very glad how Larry is describing the situation. Sometimes, you feel a little bit like the lonely shouter in these days, but I think that globalization will still be the trend also for the next 50 to 100 years. I'm always arguing it, even from a different side, look at the young people, look how they communicate. If I look at my children, they communicate globally with their phones, with digitization. Digitization is not on a national side, digitization is on a global issue. And hence, I simply don't believe that it is the end of globalization, but I do believe that you have to make sure that when you are operating a global company, that you clearly understand the local markets, that you are, as we always say it, and Larry just put it, but it's not a repetition because we said it now for 3 years, we want to be in the middle of the society in each and every market where we are. That was the reason why Deutsche Bank last year did the transformation away from a more product-like organization to a client-centric organization because we can only be successful in the different markets if we understand the markets, if we put the client into the center of our dealings, and that means we need to improve our local standing. Overall, this world will only function, and in my view, will also only grow long term, if globalization remains key. But with the habit and the understanding and also the preferences of young people, as they want to be global, I have no doubt that this trend will remain over the next years.

Larry, what does this paradigm shift mean for the business model of a global asset manager, and you are the largest worldwide?

I don't -- well, BlackRock, when we founded the company 32 years ago, we found it on the principles of clients. And so that remains to be our principles, and it will carry us, hopefully, in many generations in front of us. But there is no question there's just greater need to show why you are operating in a specific country. And the most important thing that I've witnessed now in these last 11 weeks during the remote home leaves and -- is that clients, regulators, politicians are hungry for information. There's a loss of connectivity. And more and more people are looking for an organization that can assist them. So it's not just being local, and it's not just being an organization that is purposeful in those communities, it's about -- and then especially for asset managers now and for BlackRock, we need to prove that we can provide uniqueness to every relationship, that we can provide unique information, that we are consistently serving the clients and helping them understand how to navigate the volatility that we've seen in the marketplaces, navigate what is -- where should they be thinking of putting their money. Should they be derisking? Should they be rerisking? In what asset category? In what class? And then probably the most important thing that we need to be continuing to focus on as an asset manager is have more and more of our clients focusing on the long term. I mean imagine all the derisking that occurred in March, those people who derisked, who did not put their money back into the marketplace, walked away from a 35% up and down marketplace, and it cost them a lot of money. And so the key for all of us is making sure that we're consistent with our clients, we're helping our clients navigate this, but most importantly, helping our clients navigate in the long term. But for us right now, at BlackRock, is making sure in every community where we're operating, that we are providing some unique information for them to help them move forward.

Larry, you have been following now and you've been -- you said at the beginning, you've been traveling a lot -- you traveled a lot -- usually, you're traveling a lot. Now you've been following the world from the U.S. Has your view on Europe changed in the last couple of months? Because it seems that the European countries -- some of the European countries went through this corona crisis quite well. Others had big trouble. What is your view now on Europe?