S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's webinar. My name is Joe Mantone. I lead the news coverage of US Financial Institutions here at S&P Global Market Intelligence, and I am pleased to moderate today's webinar: Market Forces to Watch in 2025 for Global Finance and Beyond. Before we begin, I'd like to note a few reminders. There are engagement tools on your screen. All of them are resizable and movable. So you're welcome to move them around to get the most out of your monitor space, but be sure to use the tools. We want to make this an interactive and engaging session. And to achieve that, we strongly encourage you to submit questions for our speakers. [Operator Instructions] If you're watching this on replay, please reach out to us via the Request Demo link under the Related Content widget. And this widget also includes links to our thought leadership resources such as podcasts and research and other relevant webinars. You'll also be able -- you'll also find our webinar replay portal to access this session and other webinars on demand. This webinar provides closed captioning in English. Please click on the CC icon in the media player to activate that. And last but not least, a survey will appear at the end of this session. It takes less than a minute to complete, but it really does help us understand what you like and what you don't like and what you like us to cover going forward. So please take the time to fill that out. And one last disclaimer, please note that the activities of S&P Global Market Intelligence are independent and separate from S&P Global Ratings. S&P Global Ratings maintains a separation of analytical and commercial activities. So with that, I would like to thank you all for joining us. And now I would like to introduce the speakers for today's panel. First, we have Philip Harrison, he is the Director of Research for Visible Alpha, which is part of S&P Global Market Intelligence. What I really like about the data from Visible Alpha that is -- is that it's extremely granular and forward-looking. It includes estimates from every line item that sell-side analysts use to input into their models. Philip has put together some slides, and they really give us a sense of not only the outlook from analysts, but they show how analysts are adjusting their expectations based on recent market conditions. Up next is someone who certainly understands what goes into financial models, and that is veteran analyst, Saul Martinez, the Head of HSBC's US Financial Research. Saul's background is really interesting because he has built and led teams covering the largest financial institutions in the U.S. and Latin America for multiple Wall Street institutions, and he did just that at HSBC, leading the effort to establish equity research coverage of U.S. financials. Fun fact about Saul is that he is among the few research analysts to land top rankings in the institutional investor surveys for both the U.S. and Latin America. And then also on our panel is Nathan Stovall, who is the Director of Financial Institutions Research for S&P Global Market Intelligence. Nathan has a focus on banks. And what I think is unique about Nathan's research and the content that his team puts out is they look at the industry as a whole. Their content gives us aggregate big-picture view that shows the health of the banking industry. And Nathan also interviews industry insiders and has some fascinating discussions about the financial industry on his podcast called Street Talk. So thank you, Philip, Saul and Nathan, for joining us today. Over the next hour or so, our speakers will dive into the trends that are expected to fuel banking and capital markets for this year and beyond. And then they're going to touch on some sector-specific developments, regional factors and the overall fundamental environment. With that, I'd like to begin with a polling question and get your thoughts on a question that all of a sudden has become a timely one, what is the probability of a recession in 2025? You should see a pop-up on your screen with the following answers: 0 to 15%, 15% to 30%, 30% to 50% or greater than 50%. I'll wait a few seconds so the answers trickle in here. And reminder, if you're watching us on replay, the answers might be different than the live review -- live results here. Okay. And here's the results. Okay. So kind of a little bit in that 15% to 30% range, a little bit in the middle there.

But I think we could kind of use that to kick off our panel and discuss the landscape and how it's expected to impact financial institutions. The first question I would like to present to the speakers is based on current market factors, is it reasonable to expect stronger profitability for global banks in 2025 and beyond? I'd like to start with Paul and then -- I'm sorry, Saul, then go over to Philip, and then Nathan.

Yes, sure. I'll kick it off, and thank you for having me. I think it is. I think the -- really, there have been 3 debates for bank stocks and the flavor of these debates has changed, the views around these has changed. But it's really been around is the revenue backdrop improving? For commercial banks, that is reflected in the question of whether NII and net interest income is going to inflect after falling for most of the large banks last year. And for the brokers, it really is more about the investment banking landscape and are we going into a positive part of the cycle. The second debate is around credit quality, it's sort of been a bit of an afterthought, but given the concerns around macroeconomic landscape, more recently, it is starting to come up again and then you have questions about policy and regulations. But if you -- I think one of the linchpins of the view that profitability is going to improve is the first question -- the answer to the first question, whether net interest income is going to improve. And I'll pull up a slide here, give me one second. And I think you should be able to see that now. But the view here and part of the optimism and part of the reason I think the base case still is that profitability improves, is that we have positive real rates across the curve. And I think that was one of the drivers of optimism about bank stocks late last year. That really hasn't been the case in the post-crisis environment. And it raises optimism that net interest margins move up, and that drives higher profitability. And I do think there are probably more risks to the baseline economic view currently than a few months ago. But the base case still is we avoid a recession, that we see a Fed funds rate with a 3 handle on it and a positive sloping yield curve. And I think with that backdrop, what is more likely to happen it is that net interest income goes from declining for most of the banks, and this is our coverage universe for the banks. We also cover the investment banks and consumer finance, but these are the money centers and the commercial banks and the super-regional banks that we cover, put aside JPMorgan here. But for the 7 banks we cover, net interest income fell between 1% and 9% in 2024, and we're expecting growth of between 2% to 7% next year and an improving growth trajectory during the course of the year. So -- and there are really 2 drivers to this. One is that you are -- I think you'll see a repricing of balance sheets to higher rates. Remember, a lot of banks received huge inflows of deposits during the pandemic that were invested in fixed rate securities, lent at very low rates. You look at the HTM portfolios here of the big banks, Bank of America, 1.96% in yield. So that is repricing to a much higher interest rate. Residential mortgages, auto loans are repricing higher. And a lot of these banks also have swap positions that locked in fixed rates on -- as a means of hedging floating rate exposure. Those were locked in at low rates. Now they're repricing to higher rates. So basically, you have a higher interest rate environment and your balance sheet is repricing to that higher interest rate environment. And secondly, deposit costs are moving down. That was a big pressure point in 2024 as deposit costs sort of caught up to the higher rate environment. On the way down, we were a little bit concerned that deposit betas wouldn't move as fast as what some were expecting, but they have. And you saw that in the fourth quarter, and I think you see this in the slide that deposit costs really came down by a good amount. Banks have been proactive with deposit costs. So that is -- I think that's positive, and we expect that to continue. So even without much loan growth because that has been subdued, net interest income grows. And why is that important? It's important because if you couple that with some fee growth, you start to -- you get a low to mid-single-digit revenue growth. Banks have been very good about controlling costs. So -- and I think they will continue to do that. And that allows for positive operating leverage of a couple of 100 basis points. You overlay buybacks and we can talk about the regulatory environment and the capital dynamics in a second. But if you overlay that backdrop, what's the financial algorithm? Well, the financial algorithm, mid-single digit, low to mid-single-digit revenue growth, op leverage, buybacks, you point to double-digit EPS growth. And we currently model double-digit EPS growth for all the banks we cover by 2026 and ROEs, ROTCEs move higher. So a commercial supportive rate backdrop is positive. I think that is a little bit different, I would say, than the investment banks because the revenue growth for commercial banks is more programmatic. It's more about the repricing balance sheets. And whereas for Goldman and Morgan Stanley, it is more market sensitive and dependent on market dynamics, a lot of which is outside of their control. I think the other thing I would just highlight here is we do expect credit quality to be broadly stable. I think we can probably talk about that in a bit, but the 2 areas that have been focus areas have been cards and CRE office. For the biggest banks, and again, I cover the largest banks, office CRE is only 1% to 3% of the loan portfolios, and they've really ramped up reserves there by a bit in the last couple of years. In cards, you have seen normalization there, and you are seeing strain on the lower income segments. But even then, if you look at the indicators and all of the major issuers in the U.S. gave monthly indicators through February, a couple of days ago, delinquency rates are actually still improving. So as long as labor markets don't see a material worsening, I think the outlook does seem reasonably good, although we are in watchful of credit dynamics. But so far, you're not seeing a ton of yellow and red flags. We are looking at things like the lower end of the middle market, where you might be more exposed to economic dislocations from tariffs. But again, the yellow and red flags right now are relatively few in number. So I think there is reason to be optimistic. I think that's a base case. Obviously, the economy and a steep worsening in the economy and a change in the rate backdrop would be the risks to that view.

Right. And Saul, you mentioned Goldman and Morgan Stanley being a little bit more market dependent. Are you just talking about sort of the outlook there for M&A and dealmaking?

Yes. Yes, yes, that's right. I think the -- I think a lot of the recovery -- or a lot of the optimism towards Goldman and Morgan Stanley really reflected the view that we are on the cusp of entering sort of a supercycle for investment banking. And I think there are reasons to be optimistic about the investment banking landscape. But the year has started off a little bit slower, right, in terms of M&A and equity issuance. And I think -- and I'm making these points more from the perspective of a stock analyst and from the perspective of looking at it in terms of what was baked into the views and the valuations of these stocks versus what we thought was a reasonable base case environment. And since you did ask the question, Joe, I will -- I'll bring up another slide here. This is -- here we go. We downgraded Goldman, Morgan Stanley to hold ratings in late November. And we got a lot of pushback from folks who were kind of, of the view that, well, we're entering in a supercycle, they're going to materially outperform where the Street is at on investment banking. And we felt like there are a lot of reasons to be positive. Asset prices are higher, there's pressure from limited partners to return capital. So that incentivizes obviously more IPO activity, more M&A activity. The rate backdrop is -- could be more supportive. The regulatory backdrop could be more supportive. But what we sometimes point to is like 2024 was not a bad year. I mean you're not coming from extremely low levels in terms of investment banking fees at least. In fact, for Goldman, MS, JPMorgan, Bank of America 2024, IB fees were actually much higher than the post-crisis average. And our forecast, which I think are pretty consistent with the Street, are still forecasting another call it, 26% to 44% growth over the next few years. So I think the outlook kind of maybe got a little bit ahead of itself. And I still think the base case is good. I still think you could see growth. That said, it really is that there are more risks because it really does depend on the market dynamics, whereas for banks, it's really a lot of it as long as the rates don't collapse, the curve doesn't collapse, it's just about repricing the balance sheet. So that's why we call it more programmatic.

Yes. That makes sense for sure. Philip, anything you have noticed in the data from an estimated revenue point of view?

Yes. So I can talk to kind of the 2 categories of data that we collected. The first one is just kind of echoing some of the points Saul made around kind of the outlook for net interest income and net interest margins. I'll start with that just to kind of focus on what we're seeing in the numbers themselves. And I basically took the 14 largest U.S. banks that we track by assets, and wanted to see what is the outlook on the margin front. And it pretty much echoes kind of the comments Saul made. We're seeing an expansion in net interest margins in spite of there are lots of predictions for Fed rate cuts. And so that suggests that there's going to be an asset and liability repricing and that the liabilities seem to be kind of repricing maybe faster than the assets and the 2 other measures that we're tracking, cost of funds and earning asset yields. Net-net, the margins are strengthening slightly. When you couple that with kind of the picture for loan growth, again, very tepid, but still 3% or so we're seeing in 2025, and some subtle also deposit growth. And just to kind of highlight on the loan growth side, we are seeing at least for 2025, a reversal in kind of the categories of loans that are growing. We're seeing commercial loans outpacing consumer loans, a reversal of what we saw in 2024. And again, they kind of like kind of level out for 2026 effectively. I wanted to kind of give you a quick picture on what we're seeing for deposits. Again, kind of very tepid growth, 2.5%, 3% deposit growth in aggregate across all these banks for 2025 and 2026. And when you kind of couple that with kind of basically stable credit quality and what we're seeing, not a lot of kind of increases in nonperforming loans relative to total loans. Very, very good picture means that there is a nice profit picture that emerges out of that, out of that kind of collection of data points that you can kind of aggregate together. And that's kind of talking about the kind of diversified banking picture on the large commercial banks. I also prepared some higher-level numbers just on some of the investment banking segments that we're tracking, again, focused on those 5 big large banks. Coming out of a really strong 2024, we are seeing really attractive equities underwriting business. In 2025, double-digit growth effectively. We're seeing a similar picture when it comes to the advisory business. So advisory business is also growing double digits in 2025 and 2026, kind of slowing down. There's definitely a pipeline, a burst of activity that we are expecting to see in the numbers, more tepid growth when it comes to kind of debt underwriting and the trading business itself.

Got you. Yes. And I'm glad you both touched on credit quality there because we had a question come in about credit quality, and it kind of seems like not too much in the way of cause for concern at this point. Nathan, what are some factors that you're watching that you think that could impact credit quality or funding trends?

Well, I'll start with the second one first on the funding side. Like Saul and Philip said, we do think margins go higher due to simply the remixing of balance sheets as earning assets reprice higher and deposit costs go lower. The question is really how quickly can banks lower deposit costs? We did see them go down considerably in Q4. And the question is, can we continue to cut costs and maintain our deposit balances? Looking at the Fed's H.8 data, it seems like we have done that so far. The question is what kind of deposits are we actually bringing in? Because one thing that's happened over the last few years is that as banks defended the deposit bases, they largely did so with higher rates and higher rate products like high-yield savings accounts and CDs, and that drove a lot of the growth over the last few years, whereas noninterest-bearing deposits shrunk a huge, huge way. So the question is, can we let some of that run off? And we are seeing that in the H.8 data as well. One of the things that we're monitoring is not only just the overall balances, but how quickly are they actually lowering the rates on those products. And we have actually some good weekly data as opposed to just quarterly data, where we actually track the rates that banks are marketing on their CDs. And that's what you're looking at here, and this is for not just banks, but all credit unions with the ideas that banks are competing with them as well for new customer deposits. And we've been monitoring this for some time. And what you're looking at is the number of credit unions in blue and banks in gold marketing 1-year CDs, the most popular product that we've seen out there in the marketplace, over 4%. We drew a line in the sand there with the idea that it seemed to be the rate that banks need to offer to attract new funding. And we looked at that over time to try to see when the deposit competition peak and where is it easing? And then the 2 lines you're seeing corresponding that with that or what percentage of deposits do those credit unions marketing, CDs over 4 collectively hold relative to the credit union space in aggregate. And then same with the banks. And the upshot is this. You see that deposit pricing really peaks at the end of Q2. You don't see it come down that much. We have that early September number there as well, with the idea that we knew the Fed cut was in. You didn't see banks really move until the Fed started cutting, and then that 4% number really fell off a cliff. So we're not seeing those high-rate CDs being marketed that much anymore. And it's just a comp. Overall cost of deposits is around 2.5%. So a 4% CD is expensive and is negative for the margin. So it's good we're not seeing those higher, higher rate ones out there. But one of the things that we have seen, and we do think deposit costs go lower, but again, the question is how quickly can this happen? And the faster it goes, the better it will be for margins is when you look at the same chart and sort of the same measurement against the 3.5% level, you haven't seen as much decline there. So we are slowly lowering rates, but banks are a little bit reticent to really slash. The biggest guys, some of which are in Saul's coverage universe, have been more aggressive here. When you look at the regional and community bank space, they haven't been able to go down quite as much. So it's something that we're really monitoring closely. On the remixing side, something else we're really monitoring closely, not just on the asset side, but how quickly do those portfolios turn over. Because if you put a CD on your books, just going back to this 4% number, while the numbers dropped off a cliff, it didn't happen until late Q3. So you're eating that cooking, so to speak, for about a year. And the question is when it turns over, we're assuming you're going to keep that funding, but have rates legal and materially lower. And one of the things that we've done is we've looked at reg data to see how quickly those CD portfolios will reprice. And that's what you're looking at here. You can see that the vast majority of the book, the top line reprices in a year. So call it midpoint of this year, we'll see the highest cost funding put on much of it turn over. On the credit side, we're looking at a number of things. Certainly, the consumer, the consumer drives the economy here. Consumer stretch, but not really out of gas. We've looked at excess savings accumulated during the pandemic. And those lasted longer than people thought they would, but they've run out. Spending has largely held up, though. Brian Moynihan on CNBC today talk about how spending levels at their consumers are up 6%, whereas they were spending at 4% year-over-year last year. So they're holding up even in the face of uncertainty in the markets and things like tariffs and winning consumer confidence. And it's those lower-income cohorts that have been hurt more. Saul talked to some of that. But CRE is something we continue to watch. And one of the things that we're monitoring is just how many loans are coming due and are needing refinancing. And we have some great data there where you actually look at property records nationwide, in aggregate see how much is coming due. And you can see in '25, it's a huge number, about $900 billion needing to refinance this year. And the issue here is that certainly with things like office, you've got challenges there with cash flows. You've got some properties next to office where you might have some challenges there as well. But they also face a higher debt service because if you just look at the loans that were set to mature, this is last year, we ran this analysis late last year versus those originated in the same year, it's about a 200 basis point spread. So there's a pretty big gap there. And the question is, will they actually find a home in terms of a refinancing need. Banks have extended here, and we think it's going to play out longer than a lot of people think. The other thing is not all CRE is created equal. Not everything is office. You got to look in submarkets, some will perform differently. And if you look at the poster child of war stuff, as Saul mentioned earlier, the big guys who have went against skyscrapers have reserved heavily for them, and they've already taken huge write-downs associated with those credits. So we're not terribly worried about that. We just think it's more in that, call it, normalization camp with maybe some lumpiness in there as well. So watching the consumer, watching the CRE refinancing, but ultimately not seeing major cracks in the armor today.

Yes. All interesting points. So really good thought there on the funding and how the CDs will remain on banks' books for a good while. Also interesting about consumer, the sort of the -- some of the concerns with consumer confidence has brought some volatility to the market. And that's kind of where I want to go with the next question, maybe again, starting with Saul. Has there sort of been a recent inflection point that has altered the confidence level of analysts and impacted the equity landscape, the financials?

I think -- I mean you -- whether -- has it shown up and it's a tough question to answer, but has it shown up in estimates just yet? No. I mean you haven't seen necessarily the changes in the economic landscape, and the market sentiment show up in ratings and forecast for the most part. It's certainly -- it's a tricky thing for an analyst, and I think the reactions can sometimes be a lot quicker for the buy-side than the sell-side because with the buy-side -- with the sell-side, you're not going to change your estimates and your target prices every day. And this is especially tricky right now, the landscape is particularly tricky because it's showing up in -- as you mentioned, Joe, it's showing up in the sentiment indicators, right? It's showing up in asset prices. It's showing up in equity prices. Maybe it's showing up in numbers and things like investment banking activity and stuff. But like you're not seeing it that much in the activity data for the most part, right? Like Brian mentioned 6% growth. I mentioned the February numbers for the credit card issuer still showing pretty good -- actually good credit quality indicators, although you have seen slowdown in loan growth for credit cards, that's substantial although that had been playing out as it is. So I think it's impacting the view, and it's impacting, I think, sell-side analyst assessment of what the downside risks are and maybe what the probability is that we ascribe to a downside case scenario or how analysts may think about things like cost of equity in their valuations and stuff. But it's very early on in terms of trying to gauge what this all means and what this all means for our numbers. So just to give you a sense, when we talk to the companies that we cover, the general response is, yes, our -- some of our clients, especially our commercial clients are concerned about tariffs and that could impact their decisions and to borrow and invest. But we're not seeing it in the activity data. We're not seeing it in an actual behavior at this point. So it's a tough question to answer because it is impacting your view, kind of how you assess the risks associated with how you [ assess ] cost capital and stuff like that. But it's not necessarily -- and I think probably Philip -- it shows up in Philip's numbers, it's not really impacting your base case outlook at this point either. So it's sort of it's so early on in the process of digesting the turmoil in the market dislocations that it's sort of a backdrop where things may start to get reflected in numbers, but they're not really showing up just yet.

Any thoughts -- have you seen any change in viewpoints from investors?

I mean there's more -- I mean, I think -- yes, I mean, I think there's more concern, right? I think like -- I think there's a more cautious sentiment. And I think that shows up very clearly with investment banks. I mentioned the optimism that was out there when it downgraded in late November. Some of the pushbacks were things like, well, the body language, I met with the Head of Investment Banking at x banks, and the body language was amazing. You hear stuff like that. And now that I think that's kind of clearly reversed. And I think it reversed even before the market -- the more recent market correction, I think there's a growing sentiment that at least investment banking activity was coming in lighter. And I think even for the banks, there's more of a concern because banks are a proxy on the economy, right? And if you're more concerned about the economy, that will impact your view of banks, and it's hard for bank stocks to work if we're entering into a recession. So I do think there is more caution and there's more of a willingness to kind of wait on the sidelines by investors. So I do think it is influencing. There are certainly folks who are bullish on the banks. But I think folks are kind of trying to figure out what the different scenarios are and what the probability of a downside scenario is, what a downside scenario can look like and think about positioning under that backdrop. So I do think there has been some cooling of optimism, although the investors that I talked to is pretty two-sided in terms of folks' views. There's certainly still folks who are constructive on banks.

Right. Right. I think it's still early, as you mentioned. All right, Philip, Nathan, anything to add here?

Yes, I can -- I was just kind of live checking our data on just kind of the overall revisions we're seeing for those banks that we're tracking. And they're slightly negative since the beginning of the year, down estimates of loan growth, estimates of kind of deposit growth. Everything is down about 50 basis points after kind of rising for -- since the election with kind of a spot of optimism. So there is definitely a [ cooling off ] that I'm seeing in the estimates for the kind of diversified banks that we're tracking. The picture for investment banks is definitely a bit different, and I know we can talk about it in a bit. But I am seeing still quite a bit of optimism baked into those numbers, but they are stabilizing. And we haven't -- there's a bit of a holding period going on where people aren't really sure what the outlook is like, and so they're kind of holding those estimates a bit steady these days.

Yes. And I would just add to that, that I mean, I agree with that wait-and-see comment. But I want to take a step back and I think so and Philip would agree with this as well is that we're not going back to where we were a year ago, 1.5 years ago when the group was totally panned. And I think that's important. The key fundamentals that we had talked about are -- there's still some real good tailwinds with liquidity pressures completely subside in the second half of the year. It was more of a question about where funding costs go. We already talked something about that. That's a good story. The remixing of balance sheet is a pretty simple story, honestly, unless you saw massive delevering in the economy and loan growth actually cratering and we're not seeing that. And importantly, the worst-case fears related to credit were taken off the table. We're talking about there being a headwind. We're talking about some what ifs, and that's really important. But you had some very draconian views out there of the space, particularly around commercial real estate and the idea that you had some big names calling for hundreds of bank failures, which we never were in that camp. But that was out there. That was out there, and that was very much weighing on the group. And I think it's borne out that, that is not true, that not every piece of CRE paper on bank's books is worth 50 cents on the dollar. And in fact, where we've actually seen banks actually sell some of those credits, the pricing has been pretty good. They've taken a haircut, but it's been in the 90s. So very different. Some other things, too, you continue to talk to banks. They still talk about their loan pipelines being strong. They haven't manifested into stronger growth, but you saw sentiment -- small business sentiment surge after the election, and I sort of put on that holding pattern of wait and see. We still got deregulation at our back, too. We don't know exactly what that looks like yet. We know it will be less focused on the consumer. We know it's likely to be less of an enforcement environment. And you've seen some things like faster deal approvals for smaller bank deals or the new head of the FDIC talking about the importance of innovation and some support for things like industrial loan charters and fintech partnerships that we had not seen for some time. So there's still some of the tailwinds that we thought were there are still in place. It just feels like we're in a bit of a holding pattern right now. And that is another way of saying uncertainty and there's a price for that. It's lower than it was. But it's wait and see, not, oh, we need to back off completely in my mind.

Yes. I think that's an important point. I think the view that, especially for regional banks that they're uninvestable was very prevalent 1.5 years ago. And I don't think that's the case anymore.

Yes. That's right. I kind of forgot about that. But yes, that certainly was what was going on, especially in 2023. And Nathan, you mentioned M&A. Have we seen banks getting more involved in M&A or even capital markets?

Tremendous hope starting this year. I was at a handful of conferences earlier this year where I haven't seen as much enthusiasm for bank M&A and capital raising that I've seen in a long time. And lots of investors, particularly the bank dedicated group, begging to invest and support new capital issuance. Saul talked a little bit about this earlier, the idea of sort of 2 sides and generalists that come back in the space and now maybe they're a little bit maybe not falling on the sidelines, but hearing some of that. We have seen a handful of capital raises come through, particularly late last year, earlier this year. But there was big hopes for M&A, and I think I've put this in the holding pattern as well. Why? Pent-up demand, '23 and '24 were really slow years for bank M&A activity. '20, middle of the pandemic was well. So in the last 5 years, if you thought about it, maybe you hadn't hit your window. Still, it's a consolidating industry. There's still success in issues. There's still some broken balance sheets out there, but not necessarily from a credit standpoint, but where a deal can kind of help that. And the accounting marks that are required, that buyers must take aren't quite as punitive as those portfolios continue to season. Friendly regulatory environment that I mentioned earlier. But uncertainty is not good for yields. And right now, there's a lot of things in the air, not only from the economic backdrop, but just what does the policy environment look like. So I put it, again, more in a holding pattern. And the other thing we continue to hear, too, I mean it's been 4 months, but the idea that it takes a while for deals to be negotiated. If conversations -- if the election was a game changer, that's when conversations start. It takes a few months to manifest. And if we get a 5%, 10% correction like we had, maybe that's where it gums up the process a little bit. So I think it's too early to blow the whistle and say that is it going to come to fruition, but it hasn't quite met the hopes that we would have had coming out of the gate in '25.

Yes. What you hear from -- yes, what you hear and looking -- I'm sorry to interject here, but I think the notion that banks are sold and not bought, is relevant. And when you hear from some of the bigger banks is that they feel like there's still an expectation that prices are still elevated and that the expectations of sellers is still too high, especially given the uncertainty that is out there. So it is early days, though, I would say that. And the regulatory environment is changing. It is interesting to me that I get the question, I think the misguided one from folks, are you surprised that regulations haven't changed? We haven't seen more deregulation. Well, we're 7 weeks into the administration and folks aren't even in their seats just yet. So these changes take a while to sort of manifest themselves and to not only take place, but also to have an impact on things like capital strategies and how banks think about how they allocate capital.

Yes. So we certainly -- as Nathan pointed out, we've certainly seen a signal from the administration that fintech relationships with banks will be more welcome going forward.

I can echo kind of the visualization that kind of shows a little bit of what the data is saying from the advisory picture. And this is kind of looking at the investment bank's kind of revenue stream on that. And you can kind of see -- we saw the biggest revisions in our data in this one segment for this part of the business. But since the beginning of the year, they very much stabilized. You can see that straight line on the right-hand side. And the top and bottom are kind of the 2025 and 2026 numbers, you can kind of see that there has been definitely a wait-and-see effect on analyst estimates. There's been very little change after that initial burst of optimism, where we've seen a similar picture in the equity capital markets as well. So definitely very, very large initial revisions that are very positive about kind of what was going to happen in the environment. And then since the last few months, very much a stable -- much more stable picture and kind of very little movement in those estimates.

So the step up there, that was post election, you think?

That was kind of like new results coming through as well. So it's kind of beginning of the year, new information from banks, kind of closing out kind of the information gap. And so part of it is it's the last 6 months. So the election is going to be about 1/3 of the way into the right, so we start seeing some of the jumps around that time.

Okay. Great. All right. Well...

One thing I'll just mention here because I talked about the investment banking landscape and the risk of views and Philip was talking about outlook, one thing I would mention is that while volatility is bad for investment banking, it is good for sales and trading revenues. So if you look at the overall revenue, the impact of the volatility may not be negative. It may actually end up being positive. And there was an article on Bloomberg yesterday suggesting that sales and trading, especially equity is going to be very strong for certain banks. JPMorgan was mentioned in 1Q. So you can argue that at least from a total revenue standpoint for Goldman or Morgan Stanley and some of the money centers, that sales and trading offsets it. And sales and trading is a much bigger revenue stream than IB. I think from an analyst standpoint, though, and from a market participant standpoint, you do have to be careful here because I don't think the market rewards sales and trading revenues to the same degree as investment banking. It is a balance sheet-heavy business. It is very volatile. And a lot of the strength, and we had a very strong trading environment in the second half of last year, a lot of that, if it's derived from exceptional market environment as opposed to sort of sustainable and durable gains, that will generally mean a lower multiple stream for that source of revenues. But it is -- when you look at how this filters into EPS and revenue in the short term, it may not be negative is my point just because of the market, the sales and trading offsets in those businesses, that in the short term at least will benefit from volatility.

Yes. That definitely -- it's a good point. On the advisory revenue, a big driver to M&A is interest rates, and that brings us to our next polling question. How many rate cuts do you anticipate the Fed making in 2025: 0, 1 to 2, 3 to 4, more than 5? So audience, if you can please make your selection there. We did have a question come in asking about probability for a recession. That was our first question. And just to remind everybody, the audience had -- the most popular answer there was a 15% to 30% chance of a recession happening this year. For rate cuts, okay, so 1 to 2 rate cuts this year is by far and away the most popular choice there. So thinking about monetary policy is also -- is very important and so is regulation. I know we touched on regulation a bit already, but I kind of wanted to dive in a little bit deeper there. What are some of the regulatory implications that could affect banks or larger banks and other capital markets players in 2025? I'll throw it to the panel if anybody wants to kind of weigh in on that.

I mean I'll jump -- I'll start first. I mean there -- I think the most -- perhaps the most impactful are the -- especially for the larger banks are -- relate to the capital regime. And the Basel endgame specifically is a major part of this and a major part of, I think, a big part of the optimism that folks had about banks. And it's -- but I think it is -- but I mentioned in the context of just capital rules more broadly because you do have proposals to make the stress tests, which do drive the minimum CET1 ratios of the big banks, make those tests more transparent, less volatile. There's discussion about the G-SIB surcharge calculation being modified, SLR being modified. But the Basel endgame proposal for July '23, that's still out there. It's estimated to increase the CET1 -- minimum CET1 ratios for the big banks by 20%. That's not going to happen, right? And I think how this plays out is important. Miki Bowman was nominated to the -- for the Fed Vice Chair. Once she gets in her seat, Jon Gould at the OCC, I think Travis Hill is the acting head of the FDIC, they start working on a re-proposal. And I think the most likely outcome is that something is more capital neutral or close to it relative to existing rules. So that's a positive. And I think it could have differing impacts on banks, but it does mean that the big banks have substantial excess capital positions and can buy back stock, increase their buybacks, and we actually do have that in our numbers. The timing is uncertain. I think all the stuff plays out over a long period of time. But -- and the rule will go into effect for a year after the final rule is out. So you're really looking, I think, probably 2026 for a final rule in probably -- for implementation in 2027. But I think the Basel endgame and the whole host of rules around capital and practices around capital are probably some of the most substantial things. But other things like the supervisory intensity matters, tone at the top matters, fintech partnerships and that will change, consumer protections. All that stuff is relevant, but I think the most impactful thing in terms of like looking at numbers and the outlook is probably how the capital regime changes.

I'll pile on a little bit there...

Talk about wait-and-see Basel endgame.

I'll pile on a little bit there and I totally agree with everything Saul just said and go back to a point he made, too, of this sort of takes time to show up in the blocking and tackling in terms of down at the examination level, less stringent regulation. And I think that will show up. We've already seen some -- just a few other things, rescinding the merger policy around the $50 billion asset mark and the $100 billion mark. You could see even further easing there, the proposal around broker deposits, scrapping that right out of the gate that would have been negative for the industry. But as Saul alluded to earlier, all the points you made, I think, were spot on, and it just takes a while for that to come into play. And it's almost unreasonable to expect that it would be here today, but it's a tailwind later in the year.

Yes. I was going to add that the diminished capital requirements, it is working its way through the P&L. I'm seeing much higher ROEs for the banks that we're tracking profitability, strong profitability, somewhat stable, maybe diminished capital requirements, much higher ROEs across the board. That's kind of a positive for any bank investor. You definitely are seeing a substantial change in the ROE picture for many banks.

Great. Well, thank you, everyone, for that. We're kind of getting near the end of the hour. So I wanted to reach out to the audience and ask if you would like to learn more about the solutions that we can deliver. We could offer more on the insights and data that have been fueling analysis that we've heard here today. Please take the time to answer this question here. Give it a minute, and then we could move over to Q&A now. We've had a number of questions come in, and I think we've hit on a good amount of them. One question that we had, I think it might be good for Nathan, around deposit gathering. I mean you talked about funding going down and banks trying -- funding costs going down and banks trying to retain deposits. Do you have any -- have you heard of any thoughts about some best practices to try to retain deposits without having to pay up too much for banks?

I think it's some of the things we've seen historically and -- but not everybody has necessarily done it. A lot of folks kind of went back to the well to -- marketing with rate because they either had to or felt they needed to in the aftermath, the liquidity crunch in '23. But can you offer other products and services and some of that roped in to your deposit strategy, whether it's treasury cash management products? If you look at the banks with the least rate-sensitive deposit bases over this past cycle, that's something that they do in spades, provide their borrowers and depositors with technology software solutions that help them run their businesses or whether it's the ones I mentioned or things like payroll processing, effectively being their outsourced financial partner in a lot of ways. And if you do that, then you tend to not have to lead as much with rate. The other one we've seen, and we actually ranked institutions across the country earlier this year based on their deposit bases, that was a consistent theme. One of the others is those who have developed niches, where it's either really focused on their local market, but really specialty business lines where they really focus on it and they know exactly the products and services that their customers need and really kind of outcompete. And that specialty line being really focused on it or purpose driven in some cases, again, allowed them to be less rate sensitive and allowed to bring in deposits. So it's not just based on rate. You can always bring in funding if you're the highest rate payer out there. But if you can offer other services to your customers you already need, then you're not going to be as rate sensitive.

Makes sense. All right. We did have one question come in that was kind of broad, and I thought it might be best for Philip. What sectors are most likely to perform well in 2025? And what sectors are most concerning?

Absolutely. That's a really great question. And we looked at kind of large-cap U.S. stocks, roughly the S&P 500 and wanted to compare what their estimates look like today versus kind of 6 months ago. And what we found kind of across the board was generally negative revisions with 2 kind of small pockets of optimism, financials and utilities, some top line positive revisions there. And on the negative side, definitely materials and energy. And that was essentially repeated when we looked at kind of bottom line numbers and magnified even more negative revisions for materials and energy from a profit perspective. So a lot of pessimism there. Banks and utilities, slightly positive. So generally negative across the board, but the only pockets of optimism right now are banks and utilities.

That's certainly interesting there. Thank you for that perspective. We had a question come in around private equity and M&A. And I think, Saul, this could be a good one for you. A big bank, a big U.S. bank commented recently that M&A in 2024 will depend on private equity's appetite. How are you thinking about that as a driver to M&A?

Yes. I think look, I think, it's a driver. It's -- the -- look, I don't have the exact number, but sponsor-related M&A is at fairly low levels as a proportion of transactions. I think in 2021, it was something like 40%. Now maybe 2021 is an abnormally elevated year. But we are -- you have seen a situation where financial sponsor, sponsor-backed deals have been below historical levels. And it goes back to the point I made earlier that there is greater -- one of the reasons for optimism around investment banking, IPO and M&A is that LPs, there's pressure on financial sponsors to return more capital to LPs, and that obviously incentivizes more M&A activity. So I think if you do get a rebound in M&A, it is fair to say that financial buyers or financial sponsors will be an important part of that. That said, I don't think -- like if you look at strategic versus financial sponsor-backed deals, strategic deal, there are reasons for strategic deals to also to be optimistic there. We've spoken about the regulatory backdrop potentially being more favorable. The debt markets are still open. And if we do get greater certainty in the macro backdrop and there is price discovery which, again, is important for all deals, buyer, you have to have a clearing price. And that, I think, has been an impediment to doing deals. But if you do get that, then you will see more M&A activity. But it is -- I think it is fair to say that sponsor-backed deals are in a backdrop where M&A really -- where the base case plays out and advisory grows, financial sponsor-backed deals growing disproportionately is a fair assumption to have.

Yes, have been. So I can see that for sure. We also had a question about bank consolidation. I know we touched on this a bit, Nathan. But one thing that we've had some news coverage on is there seems to be a viewpoint that banks can do multiple deals more quickly now than in the past. I kind of wanted to get your thoughts on that and consolidation as a whole.

Yes. I mean that's an important marker. If you look at pace activity, the biggest guys probably wouldn't be afforded that. Most of them wouldn't be able to do deals over the last few years anyway. But if you look at a lot of regional bank space over a long time line, you had active acquirers who would put 2 deals up a year and the closing time line would kind of go through. And over the last few years, there was this belief that they wouldn't be allowed to do that. So it had a little bit of a chilling effect not only because you can't just announce as many in a given year, but you're more hesitant to pick your target or partner up because you know once you've got your deal out there, you're locked up for a while. And we've already seen a handful of active acquirers come out and do smaller kind of bolt-on transactions that more closely mirror 5, 10 years ago in my mind. So I think there is a belief that, that's going to be able to come through. And I alluded to earlier, you've seen regulatory approval exceed what they thought what's going to happen when they announced the transaction in a handful of deals. And that fosters more activity. And you could even have almost -- I don't know if the right word is a FOMO element, but a little bit of that, that if suddenly that starts to pick up, you could have, as Saul said earlier, your banks sold not bought, you're going to have more sellers be willing to raise their hand going for their preferred partner. So I do think that, that is a real thing. We haven't seen that come out in spades yet, but I do think it is something we could see in '25 for sure.

Sure. Makes sense. Okay. We're just about at the end here, and I know we did cover a lot today. So if anyone has any follow-up questions, please use the Q&A widget and we can get back to you. If you're watching this on replay and you want to be contacted or you have any questions, please reach out to us via the Request Demo link under the Related Content widget there. And then for those of you who want to review anything that we covered today, this session has been recorded, and you will receive a replay link to access it on demand at your convenience. When we close out this webinar, the viewers will be routed to a survey, and we'd love to hear your feedback. So please take a few moments to complete that. Before we go, if you'd like to learn more about the Visible Alpha or Market Intelligence data used in this webinar, click on the Related Content widget to learn more. If you want to learn more from Saul and learn about the access to HSBC's global research, please email [email protected]. So with that, all I thought to say is thank you to Saul, Philip and Nathan for chatting with us, and thank you all for taking the time to attend the session today. We look forward to you joining us again soon. Thank you very much.

Thanks, everybody.

Thank you.