Our analysts Betsy Graseck, Manan Gosalia and Ryan Kenny discuss
the major discussions they expect to highlight Morgan Stanley’s
upcoming U.S. Financials conference.
Read more insights from Morgan Stanley.
----- Transcript -----
Betsy Graseck: Welcome to Thoughts on the
Market. I'm Betsy Graseck, Morgan Stanley's U.S. Large Cap Bank
Analyst and Morgan Stanley's Global Head of Banks and Diversified
Finance Research.
Today we take a look at the key debates in the U.S. financials
industry.
It’s Monday, June 9th at 10:30am in New York.
Tomorrow Morgan Stanley kicks off its annual U.S. Financials
Conference right here in New York City. We wanted to give you a
glimpse into some of the most significant themes that we expect
will be addressed at the conference. And so, I'm here with two of
my colleagues, Manan Gosalia, U.S. Midcap Banks Analyst, and Ryan
Kenny, U.S. Midcaps Advisor Analyst.
Investors are grappling with navigating economic uncertainty from
new tariff policies, inflation concerns, and immigration
challenges – all of which impacts financial growth and credit
quality. On the positive side, they are also looking closely at
regulatory shifts under the Trump administration, which could
ease banking rules for the first time since the Great Financial
Crisis.
Let's hear what our experts are expecting. Manan, ahead of the
conference, what key themes do you expect mid-cap banks will
highlight?
Manan Gosalia: So, there are three key themes
that we've been focused on for the mid-cap banks: loan growth,
net interest margins, and capital. So, first on loan growth. Loan
growth for the regional banks has been fairly tepid at about 2 to
3 percent year-on-year, and the tone from bank management teams
has been fairly mixed in the April earning season that followed
the tariff announcements on April 2nd.
Some banks were starting to see the uncertainty weigh on
corporate decision making and borrowing activity, while others
were only seeing a slow down in some parts of their portfolio,
with a pickup in other parts. Now that we've had two months to
digest the announcements and several more positive developments
on tariff negotiations, we expect that the tone from bank
management teams will be more positive. Now, we don't expect them
to say growth is accelerating, but we do expect that they will
say loan growth is holding up with strong pipelines.
On the second topic, net interest margins, we expect to hear that
there is still room for margin expansion as we go through this
year. And that's coming in two places, particularly as bank term
deposits continue to reprice lower. And then the back book of
fixed rate loans and securities, essentially assets that were put
on the books four to five years ago when rates were a lot lower,
are now rolling over at today's higher rates.
Betsy Graseck: So, is the long end of the curve
going up a good thing?
Manan Gosalia: Yes, for net interest margins.
But on the flip side, the tenure going up is slightly negative
for bank capital. So that brings me to my third theme. The
regional banks are overall in a much better place on capital than
they were two years ago. Balance sheets have improved. Capital
levels remain solid across the sector. But the recent increase in
the long end of the curve is marginally negative for capital,
given that there will be a higher negative mark on securities
that banks hold.
But we believe that higher capital levels that regional banks
have accumulated over the past couple of years will help cushion
some of these negative marks, and we don't expect the recent
shift in the tenure will have a meaningful impact on bank capital
plans.
Betsy Graseck: So, the increase in the 10-year
pulls down capital a little bit, but not enough to trip any
regulatory minimums?
Manan Gosalia: Correct.
Betsy Graseck: So, all in the 10-year yield
going up is a good thing?
Manan Gosalia: It's slightly negative, but I
would expect it does not impact bank growth plans.
Betsy Graseck: Okay. All in, what's the message
from mid-cap banks?
Manan Gosalia: All in, I would expect the tone
to be a little more positive than the banks had at April
earnings.
Betsy Graseck: Excellent. Thanks so much, Manan.
Ryan, what about you? What are you expecting mid-cap advisors
will say?
Ryan Kenny: So, I think we'll hear a lot about
the trends in M&A. And when we last heard from investment
bank management teams during April earnings, the messaging was
more cautious. We heard about M&A deals being paused as
companies processed the Liberation Day tariffs, and a small
number of deals being pulled.
Tomorrow at our conference, expect to hear a measured but
slightly improved tone. Look, there's still a lot of uncertainty
out there, but what's changed since April is the fact that the
U.S. administration is flexing in response to markets. So that
should help shore up more confidence needed to do deals, and
there's tremendous pent-up demand for corporate activity.
Over the last three years – so 2022 to 2024 – M&A volumes
relative to nominal GDP have been running 30 to 40 percent below
three-decade averages. Equity capital markets volumes 50 to 60
percent below average. There is tremendous need for private
equity firms to exit their portfolio investments and deploy $4
trillion of dry powder that has accumulated and also structural
themes for corporates – like the need for AI capabilities, energy
and biotech consolidation and reshoring – that should fuel
mergers as a cycle gets going.
So, I think for this group, the message will likely be: April and
May – more challenged from a deal flow perspective; but back up
of the year, you should start to expect some improvement.
Betsy Graseck: So slightly improved tone…
Ryan Kenny: Slightly improved. And one of the
other really interesting themes that the investment banks will
talk about is the substantial growth of private capital advisory.
So, this is advising private equity funds and owners on capital
raising, liquidation, including secondary transactions and
continuation funds. And what will be interesting is how the
clients set here is growing. We've seen this quarter, major
universities, some local governments that increasingly need
liquidity and they're hiring investment banks to advise on
selling private equity fund interests.
It's really going to be a great discussion because private
capital advisory is a major growth area for the boutique
investment banks that I cover.
Betsy Graseck: How big of a sleeve do you think
this could become – as big as M&A outright?
Ryan Kenny: Probably not as big as M&A
outright, but significant. And it helps give the investment
banks’ relationships with financial sponsors who are active on
the M&A front. So, it can be a share gain story.
So, Betsy, what about you? You cover the large cap banks. What do
you expect to hear?
Betsy Graseck: Well, before I answer that, I do
want to just put a pin on it.
So, you're saying that for your coverage Ryan, we have some green
shoots coming through...
Ryan Kenny: Yeah, green shoots and more positive
than in April.
Betsy Graseck: And Manan on your side? Same?
Manan Gosalia: A little bit more of a positive
than April earnings, but more of the same as we heard at the
start of the year.
Betsy Graseck: Okay. Going back to the future
then, I suppose we could say. Excellent. Well on large cap banks,
I do expect large cap banks will be reflecting some of the same
themes that you both just discussed. In particular, you know,
we'll talk about IPOs. IPOs are holding up. We look at IPOs where
we had 26 IPOs in the past week alone.
That's up from 22 on average year-to-date in 2025. And I do think
that the large cap banks will highlight that capital market
activity is building and can accelerate from here, as long as
equity volatility remains contained. By which we mean VIX is at
20 or below.
And with capital market activity should come increased lending
activity. It's very exciting. What's going on here is that when
you do an M&A, you have to finance it, and that financing
comes from either the bond market or banks or private credit.
M&A financing is a key driver of CNI loan growth. A lot of
people don't know that. And CNI loan growth, we do think will be
moving from current levels of about 2 percent year-on-year, as
per the most recent Fed H.8 data to 5 percent as M&A comes
through over the next year plus.
And then the other major driver of CNI loans is loans to
non-depository financial institutions, which is also known as
NDFI Loans. NDFI loans have been getting a lot of press recently.
We see this as much ado about reclassification. That said,
investors are asking what is the risk of this book of business?
Our view is that it's similar to overall CNI loan risk, and we
will dig into that outlook with managements at the conference.
It'll be exciting.
Additionally, we will touch on regulation and how easing of
regulation could change strategies for capital utilization and
capital deployment. So, you want to have an ear out for that.
Well, Manan, Ryan, it's been great speaking with you today.
Manan Gosalia: Should be an exciting conference.
Ryan Kenny: Thanks for having us on.
Betsy Graseck: And thanks for listening
everyone. If you enjoy Thoughts on the Market, please leave us a
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