YouSaid · the spoken record

Michael J. McDonough

lines on the record: 26
first: 2022-12-13
most recent: 2022-12-13
sittings or episodes: 1
sources: podcast

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“So technology and distribution definitely front and center in terms of product development, despite the recent volatility, it still seems like the alternative products is very central to where people are investing on the new product side of things. And look, I think Broadly seeking for ways to outsource is another important element here where a lot of the asset managers, especially on the traditional side, have been facing significant revenue headwinds. This year, but they've also been facing a lot of structural outflows for many years. So these kind of pressures are really exacerbating margin compression and forcing companies to seek out more efficient ways of doing business, which often will lead you to outsource some of that non-cooperations.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Companies expand the type of banking products that they offer. And I think when you talk to the banks, they're not as concerned as to what the bank down the road is going to do from a competitive position over the next decade. They're worried about what tech companies are going to do. And increasingly, they view those as the companies that they quote unquote have to beat from a quality of service standpoint and from just a consumer experience standpoint. So there's no question you are going to see higher levels of investment as banks look to improve the range of digital services that they offer to their customers. Because if they don't, they understand they won't be competitive over the next decade.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Clearly, there is a very significant shift in the way in which people consume banking services. The banking industry is digitizing in a very rapid way. So if you think about how consumer payments are made increasingly they're made over your iPhone, if you look at corporate payments, obviously they're migrating towards, again, digital forms of payments versus things like checks. And I think there's a view that regardless of the economic cycle, this is a trend that is just not going to change. And there is a lot of competition from non-banks, increasingly technology companies are investing in their payment capabilities. We have seen a number of”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“And finally, our conversation is focused primarily on cyclical risks. But how are banks thinking about investments in strategic priorities in the coming year and over, let's say, the next several years?”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“And maybe just to piggyback on that, we got a lot of questions around systemic risk when it comes to private markets just by the fact that they've grown so much, right? This is the space that has been growing at a 15 to 20 percent Kager for the last several years. And to Richard's point, some of the lending that used to take place in the banking system now is done by a number of funds. But I go back to one of the key pillars of causes, stress in the system, which really starts with liquidity and funding. And most of these firms, actually all of these firms have incredibly long structural funding where clients give them money sometimes into perpetuity. But the typical duration is somewhere between five to ten years. So these firms are never really forced sellers because they have funding locked in place. And it also gives them more time to work through credit troubles of some of their portfolio companies if that becomes a real issue.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“That exists in non bank lenders. So over the last 10 or 12 years, you have seen this significant shift in terms of lending from the banking system to the non-banks. And I do think there are concerns that some of those non-bank lenders could have problems if we do go through a deeper economic downturn than we currently anticipate.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“The key place to look for systemic risk is really in funding markets. So when banks are worried about systemic risk or when investors are worried about systemic risk, you typically see breads on funding move very rapidly. We're not seeing really any indication of that at all. I think most banks are focused on risks outside of the banking system. So there's two I would point to. The first is that market liquidity has deteriorated considerably over the course of this year across a broad range of assets, including equities, corporate credit, as well as treasuries. And I do think banks are worried about the liquidity dynamic in financial markets heading into next year, in that I think they're worried that if something happens, they may not be able to sell positions in a way that they historically could. And secondly, I think they're worried about some of the risks.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“I think bank stocks are very simply reflecting a very high probability of a recession. So on our numbers, I think bank valuations are building in something close to a 50 to 60 percent probability of a recession over the next 12 to 18 months. That is much higher than the probability that our economists have. But I think it does speak to just the overall level of uncertainty around what could happen.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“So, even if the banks are relatively optimistic and you seem relatively optimistic on the sector, bank stops are down 24% this year, even though they've had considerable earnings upgrades. So what concerns are being reflected in that valuation?”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Feds' own balance sheet. So, even though I think there's a lot of macroeconomic uncertainty, I think they feel very confident about their own ability to weather an economic downturn, but also serve the needs of their clients in terms of continuing to originate loans through an economic downturn. And I think that's actually very important. Because if you think about prior macroeconomic cycles, often what you see is banks start to contract their balance sheets at a time that their clients need it the most because financial”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“I think the tone overall was cautious. I still think there's a lot of uncertainty around what will happen to the economy next year. There's still a lot of uncertainty around where interest rates are going to end up. Is the Fed going to have to go unmaterially above 5%? How long are interest rates going to remain structurally higher? And I think the banks themselves are also trying to figure out themselves what higher interest rates are going to mean in terms of long-term consumer spending patterns and longer-term corporate spending and investment patterns. I think that is something where there's still a lot of uncertainty. I think where the banks feel confident is just in their own capital and liquidity positions. The banking system in the US has seen a considerable increase in the amount of capital that they're required to hold. They're still sitting on very high levels of liquidity as a result of the expansion of the”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“If I could maybe just add to that, alternative managers, private equity firms, private credit firms, obviously a huge consumers and customers of capital markets businesses 20, 25% at least probably of the revenue pull, right? So they've been generally sidelined this year for many of the reasons that Richard talked about. So as you think about next year, one of the themes that I've heard loud and clear from a number of large private equity firms is that the appetite for public to private transactions is definitely starting to pick up for the first time in quite a long period of time. It takes some period of time for the sort of bid ask to narrow and for seller expectations to become a little bit more grounded, but we're likely to see more public to private transactions so that will help the M&A backdrop. And as far as the IPO activity goes, the sponsors are still sitting on effectively record amount of embedded gains, even after marking down over the course of 2022. We think there's going to be greater emphasis on seeking ways to realize some of these investments. That's probably second.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Also, going to start thinking about how best to capitalize on some of the lower valuations that exist in today's market. On the IPO side, I think we do need to see a few things before activity picks up. The first is we need to see lower levels of volatility so that bid offer spreads narrow. And secondly, I do think investors really take a view on what they think structurally higher interest rates mean in terms of what they're willing to pay for some of the longer duration growth companies that historically attracted very, very high multiples.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so this year obviously, as you mentioned, has been a much weaker year for capital markets. So if you look at M&A activity, it's down 35%. If you look at IPO activity or equity capital markets activity more broadly, it's down north of 70% compared to last year. And that's obviously been driven by a combination of factors, including weak performance of equity markets, very high levels of volatility, as well as the market, I think, just resetting to a new valuation paradigm as a result of structurally higher interest rates. Our expectation is that activity will start to pick up next year, but probably not until the second half of the year. So there are some signs that the M&A market is starting to stabilize. We do think that financial sponsors are going to start becoming at the margin a little bit more active at redeploying capital. And we do think corporates are”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Where capital is going. If anything, the events of 2022 really shown the focus on alternative energy sources one and two, just the need to transition faster and the amount of capital that's required to do that is in trillions of dollars. So we think there's going to be a lot of capital coming into this part of the market to solve this void.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Protection. I think probably more search for alternatives and more ways to look for uncorrelated assets. When it comes to the more traditional asset classes, so a record amount of outflows from traditional fixed income funds. Now, when you look at the available yields today, you could actually earn for the first time in probably more than a decade pretty reasonable return, both on cash as well as things like liquid investment rate, probably north of 5%, high yield, closer to a high single digits. So we think there's going to be a massive amount of inflows back into fixed income because you can actually earn pretty reasonable returns. And that will benefit a lot of players across the board, both on the private credit side, because those are typically floating rate loans that they're making, ETFs for sure. We're starting to see some of that already come back. And some of the traditional Fincstone managers, but the dispersion is going to be really wide based, again, on the underperformance that some of the managers have seen. And I guess the last theme I would point to is energy transition as far as”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, this was really an unprecedented year in many ways. You've had the typical 60-40 investment portfolio, so 60% equity, 40% fixed income, is down something in the teens. And if you look at parts of fixed income market, they're down as much as 20%, especially at the longer end of the curve on the duration side. So this is really not something that we've seen in a long time, and that's clearly impacting both institutional and retail investors in a really broad way. Having a lot of the CEOs at our conference here over the last couple of days, a couple of themes really stood out. First, we think there's going to be a lot more focus on portfolio construction. If you look back over the last decade, the very easy FAT policy, significant amount of liquidity, just made it very easy decision just to be long beta. Equity market's been rising very steadily. You've seen that in a most pronounced way in growth, but frankly, in fixed income as well. When we pivot to 23 and perhaps longer with a less accommodating Fed policy, you could see much more focus on downside.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“It is. I think it's impacting the sector in several ways. I think the most obvious way is actually being through loan demand. Very simply, inflation has resulted in more loan demand over the last few years. So as an example, if you go out and buy a used car today, it's probably going to cost 20 to 30 percent more than three years ago, which means that the size of the loan is 20 to 30 percent larger than a few years ago. If you go out and buy a house, it's going to cost more than a few years ago, which means the size of a loan is going to be bigger. The second thing that inflation has done, I think, has resulted in a pickup in corporate loan demand. And I think what's happened, especially...”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“I don't think the banks have really changed their appetite to lend that much. Keep in mind most of these banks will lend through an economic cycle. What they are looking for is ensuring that they are adequately compensated for the risk that they're taking on. So rather than pulling back in terms of availability of credit, I think what most banks are doing is adjusting the price of that credit or the price of that loan to really compensate them for what they perceive the economic risk to be.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“I do think at the margin, banks are starting to tighten underwriting standards. And I think they're doing it for a few reasons. The first is that some of the largest banks are capital constrained at the moment. But secondly, I do think that some of the banks are worried around what could happen to asset prices. So, for example, if you look at the housing market in the US, house prices are up 40% over the last few years. There is a clear expectation that house prices decline as much as 5 to 10%. As a result, I do think they are thinking about lending into the mortgage market in a slightly different way than a year ago. I do think banks are concerned around pockets of commercial real estate, especially office. There is clearly a very active debate about what the long-term picture for office space is going to look like. So I do think at the margin they are showing some caution there.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“the employment picture in the United States changes until unemployment rates start to go up, we're not really expecting to see much, so that's going to be clearly the most important variable to watch over the next six to 12 months.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Credit quality is incredibly benign at the moment. So if you look at loan losses, they are at the lowest level that they have been in 30 years. They're about half the level that they were at in 2019. So really at this point in time, credit losses are really, as I said, at a very low levels and are likely to increase from here. So there is an expectation that as interest rates go up and as economic growth slows, credit losses will normalize. So far, we really haven't seen much. The only area that we've seen some normalization in terms of losses is in credit card portfolios, but it tends to be in the lower FICO bands where I think inflation is having the biggest impact. Really, the biggest driver for credit losses is going to be a pickup in unemployment. And obviously at this point, we're just not seeing that.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Think the overall message from the banks is that the economy is strong today, but there's a lot of uncertainty about what will happen over the next 12 months, mainly because I think there's just a lot of uncertainty around how the tightening of financial conditions by the Federal Reserve is going to impact things, like consumer spending and corporate confidence. So far this year, the banks have had a very good year, partly because of the tremendous increase in interest rates that's led to this margin expansion that's been coupled with very strong levels of loan demand. So if you look at the top line for the banking system, it's growing at high single digit, which is a reflection of both the change in interest rates and the change in loan demand. I think there's just a lot of uncertainty, though, heading into next year around what will happen to loan demand. Are consumers going to start to retrench as a result of inflation and as a result of lower confidence? And are corporate's going to carry on?”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Private markets is probably a better place to start here. And as Richard mentioned, banks generally facilitate the flow of funds in the economy and provide capital to whether it's consumers or corporations. Private markets over time have taken a bigger role here. And I wouldn't say they provide the daily liquidity in a way, but they certainly provide more capital into the space. So over the last several years, private markets have grown to about $11 trillion in total global assets under management. The companies that we cover, the publicly traded alternative firms, have about a third of that. So speaking with them about where they're deploying capital and how they anticipate capital flows to come through over the next 12 months also tells you what kind of opportunities they see into space, but also tells you perhaps some of the areas of stress, like we saw earlier this year when banks retrenched from some parts of the credit market and a lot of these private credit firms really stepped in.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“Around what could happen to the economy over the next six to 12 months. Obviously, this year it's become increasingly important. There's been a tremendous debate about the path for the economy heading into 23 and 24. And I do think that investors are trying to read the tea leaves from what banks are saying about the path for the economy.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT
“I think banks are the most macro of the micro sectors. And by that, what I mean is that the drivers of a bank's income statement are really macro variables. So if you think about revenue, it's really a function of the level of interest rates, the trajectory of interest rates. It's driven by loan demand and changes in loan demand. Credit quality is a function of factors like unemployment, as well as expectations of changes in unemployment as well as factors like corporate defaults. So I think a lot of investors often look at banks as a leading indicator of not just what is happening in the economy, but what could happen over the next six to 12 months. So small changes in how banks are thinking about loan demand, how thinking about changes in asset quality give you in many ways the best insight you're going to get from the mic.”
2022-12-13 · Goldman Sachs Exchanges · The Outlook for Financial Services · IDENTIFIED FROM THE TRANSCRIPT