Peter Dawkins | 00:06
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever changing world. I'm your host, Peter Dawkins, vice president here at RBC Capital Markets, and I'm delighted today to be joined by Anke Reingen and Gerard Cassidy to provide our 2025 Global Banks Capital Markets Outlook. Anke is the Global Co-Head of Financials Research and covers European Banks. And Gerard is the Global Co-Head of Financials Research, head of US Bank strategy, and is based out of New York City. Gerard, Anke, welcome to the podcast, and thank you again, so much for taking the time to meet with us today
Anke Reingen | 00:43
Thank you, Peter.
Gerard Cassidy | 00:44
You're very welcome.
Peter Dawkins | 00:45
I thought perhaps we would start the podcast with a little bit of a scene setting. 2024 was a remarkable year for banks, posting strong earnings, strong balance sheets. And I think the number one question many investors are thinking about now, as we look into 2025, can that momentum carry forward and what will performance look like? So Gerard, I thought we would start with the US. I'd love to hear your high level outlook on what you think bank performance will look like in 2025 and how that might compare to 2024.
Gerard Cassidy | 01:09
Sure. Peter. What was very interesting in 2024, the US bank stocks, as measured by the S&P bank index, they were up 34% - easily outperforming the S&P500. And I think what you're likely to see in 2025 is similar outperformance. Year to date, we are already outperforming by approximately 700 or 800 basis points. And the reason being is coming into the year, the banks here in the United States set up very well, and they set up well for a couple of reasons. First, the economic outlook is still quite positive in the United States, and as many bank stock investors recognize, banks are products of their economy. And so if the economy continues to grow at two to two and a half percent, and nominal GDP growth comes in around 5%, that's very positive for the banks. Second, the change under the new administration in the regulatory outlook is significant, and what we're seeing is the new administration is replacing all the heads of the different regulatory agencies, and we believe it's going to be a much softer touch for the banks than under the prior Biden administration. And in fact, Basel III endgame, which is one of the big regulatory changes that is under discussion right now. It was introduced back in July of ‘23 and on average in the United States, the Federal Reserve indicated that capital requirements for the top 30 banks would rise by about 16%. The pushback was so significant that that proposal was rejected, and now under a new proposal, we think that the actual capital increase requirement will be zero. The third pillar of why we think the stocks outperform this year is that the interest rate environment higher for longer is very positive for the banks. We have to go back 20 years for the last time we've seen the Fed funds rate exceed 3% and we have a positive slope to the curve. That means that the banks will be earning profits from their deposits on their balance sheet as those low cost deposits are deployed into higher yielding assets. Also, you will see a number of their assets repriced into higher yielding assets as they mature this year and next year. So the combination of those three macro trends, a stronger economy, a better regulatory outlook, and a very attractive interest rate environment leads us to believe that the bank stocks will continue to outperform the general markets in 2025.
Peter Dawkins | 04:01
Thank you, Gerard. If we pivot here to Europe. Anke, how do you look at European bank performance, and maybe contrast that to the US and also to 2024.
Anke Reingen | 04:10
Frankly, a 15% increase in European bank share prices year to date is much better than we had expected. A steeper or less inverse curve and no negative news on the economic political side so far have helped European bank share prices. The Q4 results season and the 2025 outlooks provided at the time did not point to any major disappointments on net interest income and provided generally positive news on the non-interest income side, like fees and trading. Violations are not screamingly cheap, so we were looking for earnings momentum, which is largely a function of the economic environment and political uncertainty, so the outlook is more muted here. We forecast moderate EPS growth in 2025 across our coverage, and that's higher for banks which have less gearing to net interest income, but more fees and trading income. But we expect earnings growth to accelerate in 2026 as we expect the economy to recover.
Peter Dawkins | 05:03
I think before we move the discussion forward, it's obviously quite important for us to take a moment and reflect on the rapidly moving environment with respect to geopolitics, with regulations, and most recently, with the change in administration. So perhaps, if we actually start from the international perspective, Anke, it would be really great to get your thoughts on President Trump's trade policies, what you think that might mean for global banking and ultimately, when we look forward, what does it mean for international financial cooperation in the coming years?
Anke Reingen | 05:31
Concerns on how tariffs might impact the different economies has been a large overhang, especially in Europe. This uncertainty has impacted behavior of corporates, for example, in terms of investments. European banks have seen less demand for financing in Europe, but more demand for financing in the US and Asia. Our economist recently published a note arguing that the type of tariff is really important. We would view a removal or delay of tariffs as positive, but clearly the uncertainty is hanging over the sector. Added to this in Europe, there has been quite considerable uncertainty on the political front in France and in Germany. Behavior of retail clients has largely been unaffected, but corporates have been more hesitant to invest in Europe and to lend and finance.
Peter Dawkins | 16:11
Thank you, Anke, it definitely does sound like the uncertainty introduced is going to be a longer term discussion for the sector. If we look back to the US, Gerard, what's your view on any potential changes in strategic behavior, growth, behavior, M&A, buybacks. Really, where do you think the biggest changes might occur due to this change in regulation?
Gerard Cassidy | 06:30
Peter, you touched on a very important topic when it comes to M&A. In the last four years, the M&A cycle has been quite muted. Now, with the softer touch that we expect within the bank regulatory environment, we do expect to see M&A accelerate in 2025 and 2026. It's interesting because consolidation in the US banking industry has been going on for 40 years. There's peaks and valleys to it. Back in the 1980s we had 18,000 banks and thrifts. Today we're down to about 4,300 so we do see more consolidation coming, and we see it amongst the bigger regional banks. One of the areas that's particularly interesting is that when an American bank goes over the 100 billion in asset mark, the cost of exceeding 100 billion in assets is quite high with new regulatory rules that that bank will now have to live by. So we have a handful of banks that are in the $50 to $90 billion in asset level that are going to have real tough strategic decisions. So we do see more M&A activity, but at the same time, banks are over capitalized, and because of the over capitalization of the banks, we also see stronger stock buybacks. And once we see the finalization of the Basel III endgame, that will really dictate how much stock the banks will be able to buy back. But we do believe over the next two years, dividend increases are coming, and stock buybacks will be increasing for all of the large banks in the United States.
Peter Dawkins | 08:01
Thanks, Gerard, and I do want to pick up on something that you just mentioned at the end there, with the Basel III endgame. I think we’re seeing quite a different outlook between Europe and the US. So Anke, based on Gerard’s comments, I’d be really keen to hear what you think these regulatory changes might mean in the EU. And how might it differ from Gerard’s view on the US?
Anke Reingen | 08:18
Yeah, Peter, I think in part, it's too late for Europe to adjust the Basel III endgame, given that we’re already at the introduction on the 1st January in the Euro area. But there certainly seems to be
a general sense that the Euro and the UK regulators are much more attentive, and they're reviewing previous proposals to assure a level playing field, and especially with respect to market risk.
Peter Dawkins | 08:42
Gerard, you have written that you're quite optimistic for loan growth, particularly within commercial and industrial sectors. Where do you see banks finding that right balance as we as we go forward? Is it all about growth? Is it all about risk management? You know, where do you see the market settling in the coming year?
Gerard Cassidy | 08:58
The outlook for loan growth for the US banks, we think, is going to surprise to the upside. And we say that for a couple of reasons. You might remember, Peter, back in the fourth quarter of 2022, the yield curve inverted. And traditionally, an inverted yield curve is the telltale sign that a recession is coming. And many of the banks started to tighten their lending standards in anticipation of a recession, which obviously never showed up. Simultaneously in July of 23, as we talked about, the Basel III endgame proposal came out. So the banks started to go on what we called, at the time, risk weighted asset diets. They were shrinking their balance sheets. So now that the Basel III endgame proposal has been rejected. And now that we're not in a recession, the banks have been easing underwriting standards. We are quite optimistic that loan growth will start to accelerate as the economy grows in the United States. What's interesting is, when you go back 75 years in the United States, we've done a regression analysis to show that bank loan growth is tied to nominal GDP growth. If we think we're at a two to two and a half percent real growth environment, and we add 3% for inflation, maybe a little higher, we're probably going to see five to 6% loan growth this year. And we believe it's again going to come from corporate and industrial lending. And the reason we're confident about the commercial and industrial loan growth is that as companies start to become more optimistic about the outlook, they're going to, we think, draw down on their credit lines, start to build inventories, start to build out plant and equipment. And in fact, since the election, the survey of small businesses on their optimism, the index has gone parabolic. So we anticipate that the enthusiasm for the new administration will lead to better conditions for businesses, and therefore lead to, we think, stronger commercial loan demand throughout the year and into 2026.
Peter Dawkins | 11:05
Gerard, the US’s is inflation: a positive force or is it a risk that we need to worry about?
Gerard Cassidy | 11:09
We believe that the number one risk for our positive, bullish outlook for bank stocks is the reemergence of inflation. If inflation starts to come back into the mid-single digits in the United States, 5, 6% let's call it, we think the Federal Reserve would have to pivot on its monetary policy. A monetary policy shift to tightening from easing, which would drive short term rates higher, that would likely lead to an economic slowdown and higher credit problems and higher credit losses, and the stocks are not pricing that in today, and the stocks would underperform, in our view. But if inflation remains in check, the higher for longer interest rate environment is very positive for net interest income growth, and with the positive slope to the yield curve, that too is very positive for net interest income growth.
Peter Dawkins | 12:01
Anke, if we move to Europe, how do you feel about inflation? You know, what do you think the position is from a monetary policy perspective for the central banks?
Anke Reingen | 12:07
Yeah, in Europe, the direction of travel is somewhat different. Inflation is declining, and given the cautious economic outlook, the expectation is that ECB will continue to cut rates. The question is, however, how inflation in the US might impact Europe, plus government spending might push rates higher. Most banks have longer dated hedges in place that support net interest income even in a falling rate. But in the near term, we see headwinds given deposit rates are not coming down as fast as central bank rates. We're looking for lower rates to stimulate loan growth. For the time being, we can see this on the mortgage side, but on the corporate side, loan demand has been really muted, and that comes back to the point of the economic and political uncertainty.
Peter Dawkins | 12:53
We've seen quite strong performance from capital markets and the recently reported Q4 results. And if we try to unpack that performance and look at the different levers that are driving that performance. Anke, can we hear a little bit about your view for investment banking fees within capital markets for the coming year?
Anke Reingen | 13:07
We're coming off a very strong Q4 in total capital markets. The outlook for investment banking fees is strong with the pipeline building and deregulation in the US should be an additional driver. On the investment banking fee side, the start of the year, compared to last year, has been a bit weaker, but that's also because we look at a relatively high base in 2024. It's also because volatility on a number of markets have still been relatively high that has helped trading but came at the expense of lower investment banking activity and fee income. Longer term, you could say if there's more rate certainty and there's an improving macro picture that historically has reduced volatility and should help the pipeline and investment banking to materialize.
Peter Dawkins | 13:50
If we look beyond traditional investment banking fees and the importance that they play. Gerard, we've seen the growing importance of private credit, in terms of capital markets performance. I'd be curious to hear your view on this growing fee line and what it might mean for performance going forward.
Gerard Cassidy | 14:05
Private credit expansion has been incredible over the last two years. I know many investors, and the very large investment banks are expecting a super cycle in investment banking, but there's certainly an enormous amount of backlogs on IPOs – initial public offerings – particularly amongst the private equity owners, those portfolio companies, we think there'll be a number of IPOs coming out this year and next year, and then, as we talked earlier about the new administration having a different view on mergers and acquisitions, not just in the banking sector, but in all sectors – that too, will have a real big impact on the investment banks. Circling back to private credit, what's interesting, Peter, is that for the last couple of years, the American banks, because of the concerns of capital, and again, the Basel III endgame, they haven't been very aggressive in competing in some of the areas that private credit has flourished. We now anticipate that with the lower risk profile that the banks have today, the large levels of capital, that they're going to go on the offense. So I think what you'll find is that, you know, private credit will still, of course, have its place, but we'll see the banks combat and be more competitive against the alt asset managers, as sometimes they're called.
Peter Dawkins | 15:32
And it will definitely be fascinating to see how this all plays out. I read about the record dry powder from these private players almost every day. If we take a step back and go even longer term and think about the horizon and think about technology. Gerard, I'd just be curious to hear your views on the future of global banking, and how banks should be thinking about positioning themselves in this changing environment.
Gerard Cassidy | 15:54
Certainly artificial intelligence, AI, is going to be a key foundation for the technology of banking in the future. It’s not necessarily going to be a differentiator between the banks. We don't expect outsiders or investors to be able to determine, you know, who's got the better AI, it's just a matter, you have to have it to be competitive. Billions of dollars, obviously, are being spent on it, and that will hopefully make the banks more efficient and possibly even more profitable because of the use of AI.
Peter Dawkins | 16:28
So I just had one more question for you both. But before I ask, I really wanted to take the opportunity to just flag our upcoming Global Financials Conference, which is taking place in New York City on March 4 and March 5, where we're really excited to dive much deeper into many of the discussion points that we've had today. So I guess my question really relates to that. You know, it's quite a complicated environment right now with regulatory, geopolitical and technology changes. So Anke, Gerard, ahead of the conference, I'd really love to hear your thoughts on what you think the key points of discussion that investors need to be thinking about will be, and what your views might be on those key discussion points.
Gerard Cassidy | 17:05
What we expect to uncover with our conversations with management teams at our Financials conference is their focus on organic growth. We're looking to see which banks can harness the deposit organic growth the most efficiently and most effectively, because the real value of a banking franchise is its cheap core deposits, and so we're looking to see which banks have embraced that kind of strategy, what they see for it over the next two or three years. Simultaneously though, we also want to dive into what are the banks going to do with all this excess capital. And how quickly can they redeploy that back to shareholders with share repurchases. And third, were the discussions around consolidation. M&A has been an ingredient, as we mentioned, in the banking industry for 40 years. We expect it to pick up, and we'd like to see what these management teams thoughts are on consolidation, and whether they’ll be a player in the consolidation over the next couple of years.
Peter Dawkins | 18:12
Anke, what about you? I'd love to hear your thoughts on positioning and strategy for European investors.
Anke Reingen | 18:18
The banks that will perform better are the ones that will be able to grow the EPS, and that should be the banks that are more diversified and not overly reliant on net interest income given our expectation of lower rates. The gearing to the US and investment banking are additional positives. And if the banks have excess capital that they can invest or to use for buybacks, that would help EPS as well. As coming back to a previous point, and given the importance of technology, I think the winners will be those banks that can capitalize on investments into IT for their customers and to realize savings.
Peter Dawkins | 18:53
First and foremost, thank you so much for joining us on the podcast. It's been a fascinating discussion. This industry clearly has a lot of change going on right now, and we appreciate your insight and input more than ever right now. So thank you both very much for joining.
Gerard Cassidy | 19:09
You're very welcome.
Anke Reingen | 19:08
Thanks, Peter.
Peter Dawkins | 19:16
Thank you very much for listening to Strategic Alternatives, the RBC Capital Markets podcast. This episode was recorded on February 14, 2025. Listen and subscribe to Strategic Alternatives on Apple podcasts, Spotify, or wherever you get your podcasts. And once again, we really do want to thank you for listening. If you did enjoy this episode, please leave us a review and share the podcast with others.