Vito (00:06):
Hello and welcome back to Strategic Alternatives, the RBC Capital Markets Podcast. This is the second episode that we're doing with our financial institutions group. I'm joined by Larry Stein, deputy Chairman of Global Investment Banking, Vinny b Nial, head of Financial Institutions here at RBC and Jason Bronstein, head of Financial Institutions m and a here at RBC. And we're recording this today, almost a week post our financial institutions conference. I believe we had over 140 companies and over 900 attendees here in New York last week at the conference, which are records. And I'm just going to say this is the best conference in the sector. Vinny, I'll start off with you. Talk to us a little bit about what do you think drives that attendance because it could be an indicator of the types of activities that our clients are anticipating and sort of how they're thinking about things. So maybe before we get into some of the themes, maybe set the landscape a little bit in terms of what you saw
Vinny (01:07):
First. Look, I want to take the opportunity to thank all our clients and the investors and other attendees who took time off to join this conference to make it the success because I think the success was driven by them making the effort to being there. But to your question, Vito is what drove probably this record attendance in addition to participation and support we saw from our client is one, I think a greater realization by our clients for more active dialogue with their key stakeholders and shareholders. And second, after the year that we've seen investors being more optimistic and excited about the future of the sector. The year last year that we saw a lot of macro challenges to our sector and we saw our clients work through those challenges. And as we are entering 2024, people are expecting a little bit more stable environment, a softer landing in terms of the economy, but every company trying to position itself of how to improve its overall returns and profitability and the different strategies that they plan to adapt at, one of which obviously will be in organic.
(02:28):
And that dialogue with investors is more important and relevant than ever. And I think that's one that we were able to take advantage of. In terms of last week, and I agree with you, this has obviously been our best and most well attended conference to date, but the overall dialogue that we had with our clients and also the clients had with investors was probably more robust and more engaging and interactive than we've seen, which why we tend to be very quite optimistic about the years to come for the overall financial services sector. It also speaks very important to the resiliency of the sector because if we think about the last one year, we saw the Friday after a conference, the failure of signature in Silicon Valley, a whole banking system that was tethering for a while, and people were thinking about the spillover effect to a year later that we've seen the sector be resilient. We saw the UPS Credit Suisse merger and what that would happen to potentially the European financial issues, but the sector has managed through those events and most of the management feel are better and more well positioned than they've been in a reasonable period of time, or at least for the first time since the emergence of covid.
Larry (03:57):
Yeah, I mean the contrast has really been dramatic, Vinny, and I think as we look forward now, there's perhaps a stabilization of confidence, but I know that one of the themes at the conference was really the effect of the US presidential election year, and maybe the two of you can give us a sense of how clients are thinking about that and what their questions are about the impact of the elections that always, always have knock on effects on all businesses, but particularly financial institutions.
Jason (04:35):
Yeah, lemme just go back to Vito's question for one more second. I also think vi, the reason why investors are showing up in greater numbers these days is this is when you make money in the sector, right? The financial services businesses typically steady any kind of business. You can't make outside returns unless there's a big catalyst right now, we're in a point in a time where some companies are failing, some companies are trading at all time highs, all kinds of companies in this sector, the largest banks in the world, the only ones that are trading above book value or in North America, all of the banks across the globe are trading below book value. So I think this is a time when you have turmoil like this, ups and downs, uncertainties when investors will make bets and when you can make a real return private equities back in the business, right? We've seen three large private equity investments in the bank sector in the US in the past year that we haven't seen in a very long time. So I think investors are showing interest again in the sector for good reasons and bad.
Vito (05:37):
Jason, you and I were in several meetings together and one of the conversations around the US elections, I would say my perspective is that the transactions that we're seeing right now, the ones that are being worked on, and we know we have one of the most active pipelines we've had in history here at RBC, those transactions deals that have been talked about for some time, and there are situations that folks are revisiting relative valuations from a year or two years ago, three years ago, whatever it was, and these are businesses they know it's not a greenfield start in terms of the transaction. And we expect the first half of this year to be active, and I would say we've counseled clients that September and October of this year will have a lot of noise in the system given the election, and as a result, it's unlikely that folks are going to want to be in the market at that point.
(06:30):
That could change by August. But certainly as we talk to clients, they all felt in a similar fashion. And then we mentioned in the prior episode the expectations of rate cuts starting from the Fed in June by our economists, and that they expect three rate cuts, 75 basis points for the rein of the year. One of the questions I received from one of the clients, and I think you were in the meeting Jason, was do you think the Fed stops right around the election? And my view is that they have indicated what they're looking for, what specific metrics they're looking to show up to drive rate cuts, and so they're going to feel confident in that and they can point to those prior messages if they decide to do something close to the election. So not to seem political, but any thoughts you have in terms of what you heard from clients on that regard?
Jason (07:23):
I think the expectation around lowering rates has cooled quite a bit. I think unless there's a real cool down of the numbers, I don't see much justification for dramatically lower rates, but that could change quickly. I think what's on clients' minds more than rates is the political environment, the election. I think those are real factors that can drive your m and a decisions, not necessarily because the ultimate answer can change as to whether your deal gets approved or not, but more so about the timing, right? If you go across an election and there's a new administration and your deal gets extended by five months, that's a disaster. I think that's more of the concern. It's the timing of an approval process more so than anything else.
Larry (08:08):
So great discussion about the factors influencing banks and also themes at our conference, but I wanted to take the opportunity to broaden the discussion a little bit, and perhaps Vinny, you can tell us a bit about what's going on in broader financial services, other areas that we cover such as insurance, and just give us a sense of how they're thinking about the world in this turbulent environment.
Vinny (08:34):
So the impact that we had over the last one year on the mini banking crisis that we saw and the spillover impact on Credit Suisse, UBS merger, et cetera, did have some impact on our other sectors in different ways. As you know, the investment portfolios of all of our life insurance companies includes exposure to commercial real estate, and also they happen to own bonds or preferred in many of these institutions that were taken over by the government or went through mergers and people had to take meaningful losses on some of this exposure. Second, obviously the rise in interest rates also had an impact on funding costs for the other sectors, especially sectors that relied on roll-ups of m and a, such as insurance brokers and wealth management, et cetera. That's it. As we look at over the last one year and we see what has happened in the different sectors in insurance, we see a continued trend of some of the life companies moving to more of an asset like model.
(09:49):
You see the continued role of PE players trying to establish subsidiaries or ownership or support of life insurance companies as being a provider of funding for assets. On the other hand, the deals that we are seeing is split between what we call reinsurance deals and platform deals in the life insurance sector on insurance broker, we see continued activity and probably moderation of valuation. There has obviously been a big pickup in multiples that we've seen, which right now has more stabilized and we've seen the biggest deals that the sector has ever seen, obviously with Aon acquiring NFP, and you saw CDNR and StonePoint acquiring Truist Insurance, and then you've seen Hub, which is another large insurance broker getting a minority investment from Leonard Green. So we've seen continued activity there. Same thing in the wealth space. We saw ci, wealth Management and others being able to get new investment in terms of new players.
(11:06):
And we also saw, again, stone Point and CD and R acquiring Focus Financial, so quite a big role to play in other parts of financial services, huge growth in multiples in the whole alternative asset management space. And you've seen also traditional asset management and diversifying. Obviously you saw BlackRock pursuing the acquisition of GIP and other players who are looking at alternative asset management or infrastructure players. So we've actually had one of our more busier years in m and a across the financial services landscape, and we're seeing those trends continue in 2024, and we expect a more robust m and a activity in the years to come outside of the banking sector in financial services.
Vito (12:04):
Vinny and Jason, to add to that, be curious to drill into the question of what type of m and a is occurring? So as we've talked about the financial services, financial institution sector needs m and a to grow, innovate, and become more resilient. And as I think about it, we talked a lot about growing scale, but there's also capabilities, and it seems to me that if we go back, Vinny maybe five years plus, there was a very significant conversation with your clients about acquiring technology and building a resilience around that element of the business, and certainly using it to generate more supplement their fee businesses in terms of as costs are coming down and the like. Right? As I think about that, I would also think that banks maybe at times have struggled to integrate FinTech businesses as an example, and maybe those have been much more difficult, especially because there are such people intensive businesses. You mentioned private equity. Certainly when I think about private equity in this sector, they're more interested in the fintechs or the asset managers and the like, and not necessarily the banks themselves, but would be curious as to how the conversation with your clients has been around using m and a to build greater capabilities, whether it's technology or others, and how that's shifting today.
Vinny (13:33):
I think first on macro, you're right on two parts on m and a is one. What we haven't seen though we do have seen with certain situations like Cap one Discover is the large corporate to corporate m and a. What I think, as we've seen, as I mentioned to you, it has been a very busy year for us in 23 and we expect that to continue in 24 is you've seen certain m and a obviously like cap one, discover R-B-C-H-S-B-C, Canada, et cetera, with traditional corporate, corporate. Otherwise, the points that I mentioned to you was a meaningful role of private equity in wealth management in insurance brokers, also in the insurance sector overall as they're trying to build alternative asset management capabilities. And as we think about the last few years, there was a lot of conversation of the disruption of FinTech on the sector, and there might be acquisitions of some of these players by the traditional financial services players.
(14:45):
You saw obviously Prudential acquiring SureTech and many others bought different players. You saw conversations, a number of these players that they would be acquired by the large financial service player. And I think what we've seen is two things. One, some of them developing capabilities or buying smaller platforms where the capital investment was not as high. So that activity has been quite robust in terms of the larger players, we have not seen as much as what we would've envisioned five years ago, and mainly it's because of valuation and the impact of goodwill on these players. But we do expect that the interest in expanding on capabilities and being more competitive remains, and you'll see some of that is just a question of the magnitude and level that we probably thought five years ago did not play out.
Jason (15:44):
Yeah, Vito, it's a good observation. I think what's played out is what a lot of us thought was going to happen, which is the technological advancements are very massive throughout the sector, but they're taking place more and more within the banks than outside the banks. So our and financial sus in general have done a good job in housing the technology investments rather than wait for a disruptor to get there first.
Vito (16:11):
Guys, it's interesting. We're using AI artificial intelligence quite a bit here internally at RBC. It's not just driving consolidation of information across the firm. It's providing insights to clients in many departments, including our own investment banking department. So it'll be interesting to watch that going forward.
Vinny (16:33):
And Vita, one interesting observation to add to it is also what we thought five years ago is that a lot of the traditional tech companies will move into financial services, and I think they've been careful on how far they go in to not be able to invite some of the regulatory hurdles and challenges that would be expected from being more mainstream and financial services. They're certainly trying to play and play a meaningful role and will play that going forward, but they're also being cautious on how far they go, where they think they'll actually attract the attention of the regulators.
Larry (17:12):
And then of course, we all experienced what we would define as a very anomalous period that was an extended anomalous period of 0% interest rates going back almost 15 years. And as we reset to a world where that's unlikely to be the case in future, that has tremendous indirect and direct impacts on the pace of innovation, the cost of capital, not just for the financial institutions, but for their customers. And it will, I think this reset that we've been experiencing the last few years will bring us to a slightly different point of equilibrium than perhaps we were all used to for the last decade or so.
Vito (17:52):
It's been interesting to watch for the four of us, the four of us work at the fifth largest financial institution in North America, and Vinny, Jason, you guys are intimately involved in a lot of the strategic review that our firm does as they consider alternatives. And oftentimes on the technology front, there is a big question of whether you buy, you build or you partner, and I know all the way to the top of the house here, including our CEO, he keeps very close contact with the leaders across the technology space, and they're always talking about what's going on at their firms and vice versa. So it'll be interesting to watch how that evolves going forward.
Vinny (18:36):
And Vito, this was a very important topic in the conference last week and where people were a little bit more optimistic compared to the past on how they were going to be able to compete and what was required to compete. I think they felt that there was a little bit more of democratization of availability of this technology and that you had access to it or you could partner and when they think about m and a that it wasn't purely technology that was going to be the driver of m and a, it was either adding capabilities or scale or products and services or customers. That was more the driver of m and a. Then one of the teams we used to always hear in the past was obviously access to technology. So I think people are, as you said, Vida developing and being more open to doing some of the technology development like we are in-house, and obviously some of it including partnerships with the large traditional technology players.
Vito (19:41):
I would just highlight for our listeners that right now the advice we are giving to our clients is that this is an appropriate time to really sit back and reevaluate the themes of the m and a that you're considering and pursuing. Certainly be up to date in terms of the strategic alternatives that you have available to you as you're thinking about transactions across the landscape, but certainly in this space here, be thinking about an elongated and increased regulatory process as you consider deals. But certainly we're seeing consolidation occur now, and we only expect that to grow going forward. Larry, thank you as always for joining me. It was great to be here and Vinny and Jason, welcome to the podcast and look forward to having you on future episodes.
Vinny (20:28):
Vito, Larry, thank you for having us. I'll only leave with one parting shot, remain quite optimistic about the resiliency of the sector and the future of the sector and potential consolidation of the sector, but one thing I've also learned is the next year never ends up being exactly as what you think at a certain point of time, and it's people who will adapt to these unforeseen changes who will come out of the following year in a better position and very much look forward to maybe revisiting this in a year from now and seeing how 2024 has played out, and then thinking about what could be potential trends for 25 and beyond. But appreciate the opportunity to join both of you. Thank you.
Vito (21:20):
You have been listening to Strategic Alternatives, the RBC Capital Markets Podcast. Join us for more analysis about what's moving the m and a markets in our next episode. If you'd like more information on the topics discussed today, please contact us directly or visit rbc cm.com/strategic alternatives. This podcast was recorded on March 13th, 2024. If you're enjoying strategic Alternatives, don't miss an episode. Subscribe to us on Apple, Spotify, or wherever you listen to your podcasts, and please drop us a review and or a comment.
Speaker 5 (21:56):
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