The flows of capital to the investment community is going against the banks: Analyst

Devin Ryan, JMP Securities Analyst joins the On the Move panel to discuss the latest Goldman Sachs bank earnings.

Video Transcript

JULIE HYMAN: We are joined now by Devin Ryan, who's an analyst who covers the company. He's with JMP Securities. And he's joining us from New York City.

So Devin, when you look at these Goldman numbers, you know, we're seeing strong numbers. I'm looking at the stock, though, which is only up about a third of 1%. Was there something in there that was not quite up to snuff? Or do you think it's victim of sort of market forces today?

DEVIN RYAN: Well, it's, I think more than anything, a victim of what's happening in financials more broadly. In the lead-in, you guys talked about interest rates and credit. And as a result, investors, overall, I think, are underwaiting the financial services group.

And so, flows of capital from an investment community is going against firms like Goldman Sachs and the rest of the banks. And so that's kind of the first point.

But beyond that, it was just a phenomenal quarter. You know, revenues across the board incredibly strong, expenses, both compensation and non-compensation costs were under control and lower than modeled.

And so, the provision cost as well was quite a bit lower. When you put it all together, a great quarter. I was looking at it today. Goldman Sachs has grown book value by $10 year-to-date, even with dealing with the one MVB overhang that they put behind them. So that created some charges. They're still growing book value by $10. And the stock price is down $20.

So I think there's a pretty massive disconnect here between the actual performance of the company, and maybe even more importantly, where they're going in terms of just the investments they're making and the potential from those investments and how the stock is being treated.

So we think this is a great opportunity. Obviously, it's taking time to play out, but there really isn't anything to pick at this quarter. And I'm sure you can try to find something, but we just thought it was a really good quarter.

ADAM SHAPIRO: Devin, when you talk about where they're going, you know, asset management and trading so much a part of the big revenue picture there. But I want to talk about something.

I think a lot of us look at what they're paying on the CDs for markets and digital banking. And I understand why they're going there, but how big is that going to become for them? Or are they going to always be kind of a big player?

DEVIN RYAN: So that's the opportunity. And they're able to pay more than, call it the traditional banks, because they don't have the branches. So they don't have the same cost to deliver as the traditional banks. And so they can accrue more of that benefit to the end customer. I think that's a competitive advantage.

They also, in our opinion, because they're building the ecosystem on new technology versus a legacy infrastructure, they also have an advantage around that as well. So what they're doing today and we're very excited about, we think they're probably in the second or third inning of a consumer business.

Consumer and wealth management, overall, is roughly 10% of firm wide revenues today. I think that goes to probably 20% over the next five years. And over the next 10 years, it could be quite a bit more than that.

So the progression takes time. And I think that's maybe where some of the frustration is. And investors are very short-term focused in the group right now because of what's happening with interest rates, what's happening with the macro.

But therein lies the opportunity. If you can kind of extend your horizon a little bit on what the company is evolving towards and consider the investments they're making today to improve their positioning, especially in these areas like consumer, wealth management, and some of the other technology banking initiatives on the institutional side. You know, it's a great opportunity.

JULIE HYMAN: Devin, just to dig a little bit more into that, I have had trouble figuring out why Goldman is so committed to that consumer segment of the business when, traditionally and fairly consistently, they have been so good at what their bread and butter is, right? So where does the consumer fit? And why is it-- why have they committed so much-- so many resources to it?

DEVIN RYAN: Sure, well, I think there's a couple reasons. One, it's a completely new growth avenue. So there's so many different areas within the consumer you can start to think about where they could touch. And so you think about the opportunity to grow revenues in areas that historically, the firm has not been in, whereas the legacy business still has some growth to it.

But I think most people would admit that the trading businesses are not going to be growing at a compelling growth rate. So even though there is an increasing pie or the addressable market does increase, it's at a slow rate.

The other big driver of consumer is that they're doing it on a technology backbone because technologies evolved, and it's allowing firms to reach consumers in a way that historically they weren't able to. If you were a bank 20 years ago, the only way you could have a conversation with a consumer or gather a deposit was through the customer coming into the branch.

That's not necessary anymore. So there's a lot of things that you can leverage on a technology backbone to go out and touch consumers in a way that historically you've not been available to do. And so that's another big reason that they're really building this platform on a technology backbone that's differentiated, and their cost to deliver is lower. And so I think that gives them some competitive advantages.

RICK NEWMAN: Hey, Devin, Rick Newman here. A lot of bank analysts are worried about credit losses rising into 2021, both on the personal and the corporate side. What are you expecting there? Is that going to hurt some names more than others? And is that going to affect profitability and possibly stock prices?

DEVIN RYAN: So it's a good question. And I think the answer depends on the direction of the virus. So what you saw in the first half of the year was really substantial loan loss provisions from the banking industry because they're trying to get ahead of future issues, and uncertainty was incredibly high.

Obviously, we saw unemployment rates go up dramatically. And the economy contracts substantially. And those are typically indicators of a worsening credit environment.

What's actually happened is credit conditions have been much more benign than the reserves that were built over the first half. And so that's why you're seeing, in this period, the provision costs are a lot lower than they were in the first half.

Clearly, things could change. And we could have another shutdown down. And that would affect the credit outlook, potentially making it worse from here. But at the moment, I think the picture is the companies actually feel like they adequately have been provisioning and that the first half of the year, you could even argue maybe there was a little bit of over provision that occurred here, based on what we're seeing today in the credit landscape.

So I think companies are going to remain conservative because there's a lot of uncertainty. And there's a lot of different paths for the virus in the economy. But where we stand now, I think it's hard to argue that the outcome has not been quite a bit better than maybe people were concerned about three months ago, six months ago.

And so if this rate continues, we may get into next year and even have a better credit story because firms over reserved. So that's what we're all looking for. It could go either way, but right now, we feel very good about how the banking industry set aside reserves, at least in the first half of the year.

JULIE HYMAN: Devin, thanks. Devin Ryan is an analyst with JMP Securities. Appreciate it.