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Capital markets backdrop is as good as it’s ever been: analyst

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Yahoo Finance’s Brian Sozzi and Myles Udland break down the start of earnings season and discuss what to expect with Devin Ryan, JMP Securities Senior Research Analyst.

Video Transcript

MYLES UDLAND: All right. There we go. Devin Ryan, JMP Securities, thanks for bearing with us there. Again, let's re-start this talk a little bit more about Goldman's quarter, and then we'll get into some of the other trends you're seeing in your coverage area.

DEVIN RYAN: Sure. Well, first off, it was a absolute blockbuster quarter, $18.60 of earnings. We were the Street high at nearly $13. Consensus was $10. So essentially they squeezed two to three quarters of activity into one quarter. And I think that's maybe why you're seeing a little bit of a muted reaction here. There's questions about how much of this is sustainable.

But the reality is the capital markets backdrop is as good as it's ever been. SPACs is clearly a hot topic, and SPACs are starting to come under a bit of scrutiny. But you know, one thing I would say around that is, you know, the equity capital markets that we saw this quarter, you have probably only 20% to 25% of the revenues from SPACs have actually come through the system thus far. So you've really got this embedded, you know, terrific runway for the next three quarters for investment banking.

So people will question how strong this quarter was. This full year looks terrific, even if you do see some moderation in, call it, new SPACs coming through. And then trading activity was great. And the last thing I would say about Goldman was with the revenue strength and record revenues, expenses were in line. And on the compensation side, I think they're leaving themselves some flexibility for later in the year. So I think the results could have been even better if they pulled the lever on compensation. But I think they're saving some for the rest of the year.

BRIAN CHEUNG: Hey, Devin, Brian Cheung here. I want to ask about the trading desks at these investment banks so far. What do you see in the performance? Because what was interesting to me was that it seemed like FIC trading was really what kept these banks afloat when a lot of the sell-offs were happening at the beginning of the pandemic. But we saw about $3.9 billion in FIC at Goldman Sachs, and I highlighted the $9 billion over at JPMorgan.

So was that above, below your estimates, especially given where bond markets have been trading and the volatility that we kind of saw, specifically at the beginning of this year?

DEVIN RYAN: Yeah, it's a great question, Brian. So you know, the equity underwriting M&A theme that we saw in the first quarter, we've modeled pretty well. And so that was a record, but we were there. You know, fixed income and equities trading were definitely better than we had modeled. And I agree, I think the level of activity and engagement in the market right now is incredibly resilient. Last year, there was a lot of volatility with the pandemic. We've kind of come out on the other side of that, where volatility has been declining yet engagement's still really high.

What you're seeing is repositioning in portfolios. You had the 10-year Treasury have a big move up in the first quarter. Securities yields were up 70 basis points, Fannie Mae securities yields. And so you're seeing repositioning happen. And you know, the credit backdrop is still very benign. So if people continue to squeeze in for yield, and so that's been pushing new issuance, it's been pushing secondary trading of new issuance. So very constructive backdrop, and I think surprisingly resilient.

Similar to investment banking, I think some moderation would be healthy. But you know, the first quarter was an environment where really every business was hitting on all cylinders. That's why you saw a record.

BRIAN SOZZI: Devin, saw some large I guess unex-- not, not any surprise here-- large inflows in the asset management businesses of JPMorgan and Goldman Sachs. Is that the influence of this rise in the retail trader we've seen in recent months?

DEVIN RYAN: Well, I think that there's two different things going on there. So there definitely is the rise of the retail trader, which we've spoken a lot about, and that's affecting, I'd say, those two firms to some degree, not as much as some of the others, like Morgan Stanley. On Friday, you're going to see really strong Wealth Management results partially because of the E-Trade business that they own. But I would say for both Goldman and JPMorgan, you know, there's a concerted effort around fundraising, alternative products, particularly at Goldman I think they're having a lot of success on some of these newer growth initiatives and third-party fundraising.

And so asset management, being a capital light business, is an area that I think a number of firms are focused on right now. And some of the-- it's kind of a tale of two cities. Some firms are moving in the right direction and see really strong inflows. Other firms are facing kind of those secular headwinds in the more competitive parts of asset management. But I would say Goldman and JPMorgan are having a lot of success in areas that are, you know, a little bit more differentiated.

BRIAN SOZZI: And Devin, all eyes, of course, today on the Coinbase IPO. You know, when you talk to your contacts in the industry, how serious are Goldman and these other investment banks at getting into crypto? In a year from now, are we sitting here saying, hey, because of these investment banks being in crypto, they just beat on earnings?

DEVIN RYAN: Yeah. So in my opinion, there's no doubt that these firms will be in the crypto space. You know, this whole ecosystem we follow closely, and it's not going anywhere. It's gaining steam. So on the institutional side, acting as custodian, transacting with clients, to the extent clients are engaged in the market, these firms will get there.

I think there's differences between the institutional part of the market and the retail part of the market. But even Morgan Stanley announcing a couple weeks ago that they're going to be allowing their clients on the retail side to buy into Bitcoin fund directly, I think is a sea change for the space. And some of the firms, I think, are a little behind the curve in terms of understanding where the ecosystem is going.

But there's no doubt in my mind that firms like Goldman Sachs and JPMorgan and Morgan Stanley are eventually going to get there. There's a bit of channel conflict, right, with their business model. So I think that there's that push and pull. But to the extent clients want to be there and want to transact in this asset class, these firms will have to get there, and I think they will.

MYLES UDLAND: And you know, Devin, speaking of, you know, transitioning business models, I'd almost forgotten that Morgan Stanley purchase E-Trade, and that's certainly a change for them. But you know, Goldman right at the top of their presentation has as a nice pie chart of the mix. And 36% of their revenues in the latest quarter coming from asset management or the consumer side of the business.

As you think about Goldman specifically over time, how do you kind of see that mix changing within the portfolio? Or do you think that at least the Solomon regime is happy with where they've gotten to?

DEVIN RYAN: Yeah, it's a great question. So this quarter is a little bit unusual, because in the asset management segment there were some huge gains, especially in the equities book. And so that makes it look a little bit outsized maybe relative to what it is normally. But the reality is is they are pushing hard into some of these consumer and asset and wealth management areas which are, for Goldman, really newer and smaller growth parts of their business in terms of just the absolute size of it.

But the growth rates are very strong. So the consumer business, year over year, grew by 16%. That's going to, I think, consistently grow in the double digits and maybe a high double digit rate for the next handful of years. So just by definition of that growth, it's going to become a much larger piece of the overall business.

And they're doing it in ways that I think are differentiated. They're leveraging technology on the consumer side. They are going into parts of the market that are large addressable markets, but, you know, a number of firms haven't really figured out how to offer all the products and services that Goldman has the connectivity to be able to do, but also, the balance sheet and the resources to be able to do. So they're operating in somewhat of a startup mode but with all the resources that Goldman brings to bear. So I think it's a pretty compelling model, and that's why they're going to be able to grow that business at a pretty good rate over the next handful of years.

BRIAN CHEUNG: And Devin, lastly, what's been interesting is that it seems like Morgan Stanley's been getting a bid pre-market as a result of the Goldman Sachs earnings, likely, even though they haven't reported this morning. Broadly speaking, though, outside of the intraday movement here, do you think that there's more to go in these bank stocks broadly? I've been talking to some people that say that it could be a 30% to 50% upside with that economic optimism rising. Do you see that as the case, despite the fact that there's already been a pretty impressive rally in financials since November last year?

DEVIN RYAN: Yeah. So there's a couple things going on. There's obviously the interest rate trade. Interest rates have really started to move over the last three months. And there's no really better way to play that than financials. So I think even though these stocks have been moving, and on paper they're not necessarily as cheap as they were, I think we're still early days into the interest rate trade. So firms with exposure to that I think have a benefit.

And then just the broader reopening, the broader economic recovery trade is good for financials also. And so you kind of get this double benefit as you're thinking about going forward here. So yeah, the stocks have done terrific. But we still think that there there's room for-- I'll try to-- I want to be more tactical.

So I like Goldman here. The stock's still trading at less than 10 times earnings. The numbers are going to have to go up after earnings today. And even with that dynamic of questioning how much of this is sustainable, it's still a better environment than I think most people appreciate. I mean, they almost beat numbers by 2x, right? It's a blowout quarter. And so numbers will have to go up following results today.

MYLES UDLAND: All right. Devin Ryan, analyst over at JMP Securities, and Yahoo Finance's Brian Cheung, thank you both for jumping on. Devin, really appreciate you taking some time to talk with us this morning. I know we'll be in touch.