Top 10 Takeaways from RBC’s Virtual FI Conference

By Gerard S. Cassidy
Published March 24, 2020 | 4 min read

Because of ongoing market volatility and the escalating COVID-19 situation, RBC Capital Markets held its annual Financial Institutions conference virtually. The online gathering saw investors and corporates from around the world join remotely with RBCCM experts sharing insights across several growing and fast-changing economic trends.

Not surprisingly, COVID-19 and its impact on markets worldwide was a topic on everyones’ minds. It was this unchartered territory that Dave McKay, CEO and President of RBC, addressed in his keynote.

Here, Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy and Large Cap Bank Analyst, lays out the ten key takeaways from the conference and what they mean for the year ahead.

1)

Mortgage demand booms but caution is advisable

With the 10 Year Treasury Bond now yielding less than 100 basis points as a result of COVID-19, there has been a major impact on the mortgage business with a substantial increase in both applications and refinancing. Spreads are widening while volumes will remain high for the rest of the year.

2)

U.S. Bank growth to be forecast conservatively

The overall health of the regional U.S. banks continues to be sound but concerns have arisen due to the economic consequences arising from the containment strategies regarding COVID-19 and lower commodities prices. Bank management teams are not expected to stretch for growth in the current environment and will price loans appropriately for risk, even with a competitive market that remains intense.

3)

Interest rate swaps offer an asymmetric risk

Interest rate swaps are not advisable at the moment because hedging net interest margins (NIMs) with derivatives is an asymmetric risk. If banks put on swaps, the benefit if rates go negative is plus or minus 50 bps. But if rates flip and go the other way, then banks could be underwater on their swap positions for a long time.

4)

An appeal to the regulators to help ease client burdens

Bank CEOs are appealing to the regulators to support them in helping clients who face short-term problems arising from the COVID-19. The regulators appear receptive to giving some relief in the handling of TDRs (Troubled Debt Restructure).

5)

Low rates could stimulate bank M&A

Regional and small bank M&A could be an attractive proposition in the current environment. There is consensus that the recent sharp selloff in the market is overdone and, in particular, that current bank stock valuations are very attractive. Banks also indicate that they would consider M&A opportunities as the current low rate environment is likely to hurt smaller community banks and drive more potential sellers disproportionately.

6)

Banks are well positioned to handle economic and market disruptions

The economic and market consequences from the implementation of the containment strategies for COVID-19 coronavirus will be significant. The banking industry with its strong capital and liquidity levels is in much better position to handle these disruptions as compared to their position in 2007. The sector is expected to suffer a loss in earnings (driven by customer liquidity issues) but it is not expected lead to a balance sheet event (driven by enormous credit losses).

7)

Fannie and Freddie face serious questions…

When Calabria walked in the door about 11 months ago, Fannie and Freddie were leveraged about 1,000-to-1. He suggested it's fair to say that no institution survives the turn of the business cycle with that kind of leverage. Today, they’re leveraged 240-to-1.

The Federal Housing Finance Agency’s (FHFA) objective is fundamentally to bring more stability to the mortgage market by bringing more stability to Fannie and Freddie. That means ensuring their capital levels are more in line with their risk profiles. That way, they would not only not fail in the next downturn but would be a source of strength for the marketplace when that happens.

8)

… in the face of demands for IPO recapitalization

Fannie and Freddie may look to IPO once the capital rule is finalized and in place. There are questions over whether they would go together or in multiple tranches. The earliest date for IPO would probably be mid-2021, to give a time window for what will likely be one of the largest public offerings ever.

An alternative would be for Fannie and Freddie to recapitalize themselves using retained earnings, but that would take a decade. Given the Treasury’s preferred share agreement, the right exit path would have to be considered, but the aim would be to keep the enterprises focused on building capital without too much risk.

9)

Gearing up for $40 trillion generational wealth transfer bonanza

Wealth management has reversed its polarity. It used to be that firms charged only for the investment process and threw in financial planning for free. But now investment-only wealth managers urgently need to build out their planning and fiduciary capabilities, investing in tools and people. With $40 trillion in intergenerational wealth transfer coming up, there is a compelling need to have financial planning capability in place.

However, the demographic of financial advisers continues to shrink and get older. There is now a significant recency bias challenge facing the wealth management industry. It’s been a pretty singular market for the last 10 years with low volatility, very few downturns and no inflationary pressures.

10)

Data and regulators are the game changers on climate change

Climate change and other ESG considerations have significant financial impacts which aren't yet being adequately priced in by financial markets. That will change as the banking sector develops new datasets and models that better assess performance on ESG metrics and then invest and allocate capital more effectively. ESG priorities for the banking industry have suddenly been overshadowed by the economic and equity market disruptions.

Transparency is paramount for financial institutions. It is not enough to comply with the bare minimum of disclosures required by regulators or by specific stakeholders. Instead, there is a need for really thoughtful transparency around what institutions are doing to position themselves better for the future with a focus on areas that are material, business relevant and truly help investors to understand their business.


Gerard S. Cassidy

Gerard S. Cassidy
Managing Director, Head of U.S. Bank Equity Strategy and Large Cap Bank Analyst


Bank ProfitabilityFinancial InstitutionsM&AMonetary PolicyRegulation