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Markets Update: Financial Services Outlook

2020-12-18

Richard Ramsden, business unit leader of the Financials Group for Goldman Sachs Research, provides an update on the financial services industry and the market backdrop going into 2021.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Welcome to exchanges at Goldman Sachs market Update for Friday December 18th. Each week, we've check literally across the firm to get a quick take on what they're watching in the markets on Jake Siewert go ahead of communications here at the farm and am delighted today to be joined by Richard Ramsden, who runs our financial group in Goldman Sachs Research today. It will give us an update on the financial services industry and the market backdrop going into twenty twenty one. Read your walk back to the problem. Thank you for having me again So you just saw your annual financial services conference virtually this year. What was the tone from the leaders in the industry regarding the state of the recovery I would say every bank feels much better about the world than they did in October and I think reason is simple, which is since most of these banks last spoke, which was early October. You now have the prospects of a successful,
Maxine being rolled out on its clear that that has shown and their economic outlook, especially over the next twelve to twenty four months, but I in addition to that, these banks are looking at the activity that they can see across their platform in the fourth quarter and as a number of encouraging trap. So consumer spending is actually increasing, it's hard to believe given that we were back in March and April that and see, spending in aggregate is actually up modestly in December, compared where we were last year. Loans that were put into forbearance back in March or April have continued to decline. So these banks of feeling a lot. about reserves that they have against that credit bosses and corporate com but then says also improved, especially because I think a lot of these corporates now are looking beyond the pandemic too.
A significant recovery in demand in the second half of the year and they think they're starting to prepare. For that. I thank you. addition, capital markets have continued to be wide. Open. Financing is broadly available of equity financing that financing even to companies that have been really impacted by the pandemic, and I think again that's just really helps in terms of the overall health of the corporate sector and I think the tone the bank's really came across as expressing during the conference just reflect So what does that improving outward mean? Further ability returned capital apsley this year, a lot of banks were held back by regulators dukes to see those capital returns ramp up and in what form, by Baxter dividends, show The bank's talked about how they are to return capital to shareholders, and can I just to give you a bit of a history here, you're back in March, the bank.
all agree to spend shabby backs just because of the huge level uncertainty in the fact that it wasn't Clara that point in time and just how long and I'm it was gonna last for what the economic damage was gonna, be they maintain dividends, but they were not allowed to increase dividends. This Friday gonna get the results of the second round of stress testing for the banks, which I think will really shine a light into how the fat is thinking about the capital position of the banking industry, and I think, there's a hope that after we get those results, that banks actively will be able to increase capital returns. That said, I think it's still likely that you wanna see significant shared by backs in the first quarter. I think it's difficult for these banks to
returned significant amounts of capital, while infection rates are obviously spiking and while there are selective shutdowns across the country, but the capital position in the banking industry continues to improve. There's a lot of access capital in the industry and not access capital is growing as these banks. Actually now have to release reserves because, as I said, that much more competent around what they think the ultimate losses are gonna be and in many cases those losses they think at this point in time will be lost. And whatever actually reserve so when it comes to investment, as the pandemic shifted the way these institutions are thinking about their strategic priorities or they doubling down early changing, or they just accelerating trends that were underway, the ones It was very clear in this conference- is rule this panel It is really gone from a strategic standpoint. Accelerate everything that was in place prepare pandemic you're. So I think most
He's banks would tell you. We had previously thought we would be in a fully digitized world, especially for consumers in a decade from now I think most of them will tell you we could, there soon as five years, and I think what I've seen over the course of this pandemic is there has been a significant shift towards digital adoption, especially amongst consumers. So a couple of examples: the usage of cash and checks have declined twenty percent of the course of the last six months, and those payments have shifted towards things like Ben Mo Ansel. Sixty percent ass a whole new loan origination. Today I done digitally, here's a it used to be thirty percent branch traffic. Even it countries that have reopened has declined significantly because people are no longer going to branches for transactions are going
two branches now because of complex transactions. They need a mortgage, they want to talk about the time and they want to talk about wealth transfer. To know that run, but they're not going to a branch to check their account balance anymore. More so you see leads. Banks accelerates the investment in Digital, the same time. They are accelerating rationalization of things like that branch, not Bob, and I think this success factors existed in the banking industry prepared now make a still there, but they're just become far more important than those success. Factors are having scale having best in Greece, technology having a national brand having a broad products offering and being the most efficient in terms of servicing the pipe base, and I think everyone recognize is that it's not a winner takes all market, but you are going see consolidation in the banking system and in the same five to ten years, this probably gonna be
real players that will have a sixty to seventy percent plus market share in this business. But, of course, everyone wants to be amongst those trees, Well, I know I've been since March, have probably part let trend One or two in those trends, you expect a continuing to twenty twenty one. Beyond that, I think that I think what will happen I think this year is that the revenue backdrop the banking industry is challenging. Large straits week alone demand capital markets that probably won't be as exuberant as they were, especially the first half of the year. will translate into a weaker revenue backdrop. I think the single biggest surprise, though, is I thought most banks. They love. The revenue backdrop is weaker as well. We will moderated investment spending that clearly was not the message with banks. In fact, a number of banks, most notably jig woman, actually came out I conference and said we plan to spend more lax cheer
and we had initially telegraphed you or me. Jake Movement increase their expense guidance at this conference by billion dollars and the reason I think it because they are ignored writing a number of investment initiatives that they had, because they do think we're gonna get to this digital economy faster, and they want to get that as far as a result of that sell. My big take away from this. Is this just much greater confidence in terms of where we're going? There is much much greater awareness about the importance of getting that fast and I think what we'll see over the course of twenty twenty one. Is the banks? Are gonna ready, accelerate a whole range of investment in this? It is really driven. Despite the changes and consumer behaviour, they saw the closet, the pandemic, which many of us think we'll stick postpone them
so to wrap it up Richard looking into twenty twenty one. What's another conversation you're having with client that speaks to the current sentiment amongst financial institutions and the sentiments definitely improving in, I think the bank's Kelly Reciprocal sector, the extent to which that we'd get a Bishop economic recovery next year, thanks be a major beneficiary of that. Now you should see a pick up in long growth in the second half of the year. A steep and yield curve really helps banks because they have a lot of liquidity from the deposit growth of seeing this year, the bank's seen a trillion dollars. A deposit read this year must have that money is sitting with the fat the extent to which they can redeploy that liquidity either into loans for into security, the high yield is gonna help the revenue backdrop you ve seen significant improvement in pipelines for things like emanate, backlogs equity capital market and that capital market backlogs, and you should see over a period time and improvements in efficiency as digitization. I think
its consumers, but I also think it benefits the banking history, because it allows banks to take out a whole bunch of inefficient processes. Must I think, the optimism piazza around the banking sector is growing and it is still one of the cheapest cyclical sectors. There is definitely a growing investor, interesting I read your book thanks for joining us today, will talk next year and see how this has played out a lot of sea mixture, and hopefully it will be in person or I will that's all, for this weeks markets update on exchanged Goldman Sachs case. You missed it check out or other parts step. So this week, with Jeff Curried Goldman Sachs Research on his outlook, both run for commodities and twenty twenty one. Thank you to listen hope I won't has great region is podcast recorded on similar fifteen near to
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Transcript generated on 2021-07-01.