Document Text Content
2016 Future of Financials Conference
Management and client bullishness implies
further upside
Price Objective Change
Equity | 17 November 2016 Corrected
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Conference tone bullish into 2017
We recently hosted over 90 public and private companies and 700 attendees at our
Future of Financials conference, where investor attendance was up an impressive 66%
YoY. The tone from management and investors was uniformly bullish, with more
generalists attending than we have seen in previous years.
Revenue & regulatory upside + positioning = raising POs
We are raising our price objectives across most of our names. Three primary reasons
why we think there is upside remaining after the recent rally: 1) an improved outlook on
both activity levels and interest rates, driving revenue upside; 2) potentially lower
regulatory burden, particularly as new supervisory leadership can come with the new
administration; and 3) relatively lighter positioning in US financials vs. other sectors.
Full house at innovation-focused panels
New this year, we hosted expert panels on the evolution of clearing, fixed income
market structure, equity market structure, and payments, and how innovation in
blockchain, big data, and robo advisory can change the game. Strong panel attendance
suggested high interest in these themes, and polling feedback suggests shareholders
want banks to make investment spend in innovation a priority -- so long as it is self
funded with savings found elsewhere.
Banks: Most constructive we've heard in years
We are raising our POs for our banks by c11% (see Table 1 page 63). When asked if the
election results changed 2017 outlooks, all banks were more enthusiastic about growth.
Echoing sentiment from our panel on regulation and M&A, banks were upbeat on the
CCAR process potentially evolving post-election. Our top picks out of the conference:
WFC (sentiment over retail sales practices clouding EPS sensitivity to improving macro),
C (solid momentum on revenues and capital return), IBKC (moving closer to strategic
targets), and EWBC (sentiment post-election appears constructive on regulatory relief).
Brokers, Alternatives, and Asset Managers
The sentiment around the capital market sector was mostly favorable post the election
outcome, given the potential for de-regulation, pro-growth, rising rates, lower tax rates,
and increasing activity levels. For the brokers, given mostly favorable 4Q activity trends
(more so for trading vs. banking), 1H17 seasonality with easy comps, and potential for
de-regulation and lower taxes – we like the outlook, particularly for GS. For the asset
managers, despite the move higher post the election on a potential DOL
delay/modification and lower tax rates, most expect the DOL to continue in some form
and the core trends remain challenging – we remain cautious. For the alternative
managers, while we continue to view the structural growth as attractive and a lower
corp tax rate could potentially increase the odds of a transition to a C-corp , given the
potential for a higher carry tax, rising rates, and de-regulation of banks potentially
moderating some of the newer growth areas, we view the outlook as more balanced.
Specialty / Consumer finance
Companies were generally bullish on the US consumer heading into 2017. AXP
presented a fairly upbeat outlook on billings, loan and revenue growth, while cautioning
that Discount rate pressures and FX headwinds could impact near-term results. The
private tech based lenders were cautiously optimistic that hiccups from earlier this year
were behind the sector, while the private payments companies stressed the importance
of partnering with incumbent leaders and the need to maintain safety standards.
BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 78 to 81. Analyst Certification on page 75. Price Objective
Basis/Risk on page 64. 11687665
Timestamp: 17 November 2016 06:24AM EST
United States
Banks
US Financials
MLPF&S
Erika Najarian
Research Analyst
MLPF&S
+1 646 855 1584
erika.najarian@baml.com
Michael Carrier, CFA
Research Analyst
MLPF&S
+1 646 855 5004
michael.carrier@baml.com
Ebrahim H. Poonawala
Research Analyst
MLPF&S
+1 646 743 0490
ebrahim.poonawala@baml.com
Kenneth Bruce
Research Analyst
MLPF&S
+1 415 676 3545
kenneth.bruce@baml.com
See Team Page for Full List of Contributors
Conference tone bullish into 2017
We recently hosted over 90 public and private companies and 700 attendees at our
Future of Financials conference, where investor attendance was up an impressive 66%
YoY. The tone from management and investors was uniformly bullish, with more
generalists attending than we've seen in previous years. When asked how they would
describe their portfolio positioning in financial stocks, 60% of the investors polled noted
that they are either slightly overweight or very overweight the sector (see Chart 1).
Chart 1: How would you describe your portfolio positioning in financial stocks, excluding insurance
and REITs?
40%
37%
35%
30%
25%
20%
15%
10%
5%
0%
23%
16%
15%
Very overweight Slightly overweight Neutral Slightly
underweight
9%
Very underweight
Source: BofA Merrill Lynch Global Research
New this year, we hosted expert panels on the evolution of clearing, fixed income
market structure, equity market structure, and payments, and how innovation in
blockchain, big data, and robo advisory can change the game. Strong panel attendance
suggested high interest in these themes, and polling feedback suggests shareholders
want banks to make investment spend in innovation a priority -- so long as its self
funded with savings found elsewhere. 68% of those polled across multiple company
presentations believed that institutions should invest in innovation projects but be
mindful of self-funding (see Chart 2).
Chart 2: Chart 2: As a shareholder, what statement most closely aligns with your view on how
traditional financial institutions should allocate investment spending on innovation?
80%
70%
60%
50%
40%
30%
20%
10%
0%
26%
Investment spending on
innovation should be top
priority
68%
6%
Given the revenue Institutions should focus on
environment, institutions should improving the bottom line and
invest in innovation projects but delay innovation projects
be mindful of self-funding
Source: BofA Merrill Lynch Global Research
2 2016 Future of Financials Conference | 17 November 2016
Banks Takeaways
With our conference coming a week following a historic US presidential election that
helped boost bank stocks by 12%, bank management teams were generally optimistic
with regards to the economic outlook heading into 2017. Greater fiscal stimulus that is
expected to spur economic growth coupled with potential regulatory relief has helped
improve the overall sentiment in the sector. When asked what the biggest impact of the
GOP sweep would likely be to bank earnings, 35% noted tax cuts and infrastructure
spurring growth as the biggest impact.
Chart 3: What do you think is the biggest impact of the GOP sweep to bank earnings?
40%
35%
30%
25%
20%
15%
10%
5%
0%
24%
Interest rates rising
faster across the curve
due to stronger dollar
35%
Tax cuts and
infrastructure spending
spurring growth,
therefore better loan
demand
31%
Lower regulatory
burden, driving higher
ROEs as excess
capital is returned
back to shareholders or
reinvested for growth
9%
No real impact/too
early to tell
Source: BofA Merrill Lynch Global Research
An area that has attracted particular attention among bank investors is around the
current landscape of multifamily lending. We polled the audience around their outlook
for multifamily lending in 2017 and found that 49% of those polled said there was some
concern, but only in certain regions and at certain rental price points. Meanwhile, 29%
noted softening fundamentals that should lead to slower financing activity and
worsening credit metrics (see Chart 4).
Chart 4: How do you view fundamentals for multifamily lending in 2017?
60%
50%
40%
30%
20%
10%
0%
10%
Softening
fundamentals
should lead to
slower financing
activity next year
2%
Softening
fundamentals
should lead to
worsening credit
metrics
29%
Softening
fundamentals
should lead to
slower financing
activity and
worsening credit
metrics
49%
Some concern, but
only in certain
regions and at
certain rental price
points
11%
No concern
Source: BofA Merrill Lynch Global Research
2016 Future of Financials Conference | 17 November 2016 3
Brokers Takeaways
In brokers, GS presented, while MS hosted 1-1 meetings with investors. During the
conference we polled the audience on several topics including the outlook for capital
markets revenues.
Investors modestly positive on capital markets over next 1-2 years
Given the election outcome, recent rise in rates, potential for higher growth and deregulation,
and lower corporate tax rates, we asked investors about their outlook for
capital markets over the next 1-2 years. The majority of investors (78%) were positive
about the capital markets sector, with 56% who expect modest improvement in
regulation, revenue growth of 5-10%, and returns of 10-12% and 22% who think we
could see significant improvement in regulation, revenues growth of 10%+, and returns
12%+.
Chart 5: Based on the backdrop and the election outcome, what is your outlook for the capital
markets over the next 1-2 years
60%
56%
50%
40%
30%
20%
10%
9%
13%
22%
0%
Little to no change in
regulation, flattish
revenues, and stable
returns
Little to no change in
regulation, but
improving revenues
(5%) and returns
(10%+) with GDP
growth
Modest improvement in
regulation, revenues
(5-10%), and returns
(10-12%)
Significant
improvement in
regulation, revenues
(10%+), and returns
(12%+)
Source: BofA Merrill Lynch Global Research
Asset Manager Takeaways
In asset management, four of the largest public managers, IVZ, EV, LM, and AB either
presented or engaged in fireside chats, while several other firms including AMG, APAM,
BLK, CNS, OMAM, and VRTS hosted 1-1 meetings with investors. During the conference
we polled the audience on several topics including the outlook for DOL (in the panel
section), the outlook for fixed income given the recent rise in rates/expected rate hike
and outlook, active vs passive market share, M&A, and pricing/fee structures.
Fixed income outlook more muted
Given the recent rise in rates, a looming rate hike in December, and the potential for a
higher growth/inflation outlook for the economy, we asked investors their outlook on
fixed income performance and flows vs equities. The majority of investors believe we
will see weaker fixed income performance and flows offset by stronger equity
performance and flows (52%). Weaker fixed income/equity performance and flows was
the second most popular answer at 24% while flat flows and performance came in third
at 16%. Only 8% of the audience think we will see stronger fixed income/equity
performance and flows, while nobody thinks fixed income will be stronger and equity
will be weaker (both flows and performance).
4 2016 Future of Financials Conference | 17 November 2016
Chart 6: What is your outlook on fixed income performance and flows versus equities?
60%
50%
52%
40%
30%
24%
20%
16%
10%
8%
0%
Weaker FI performance
& flows / Stronger
equity performance &
flows
Weaker FI and Equity
performance & flows
Flat FI performance &
flows / Flat equity
performance & flows
Stronger FI and Equity
performance & flows
0%
Stronger FI
performance & flows /
Weaker equity
performance & flows
Source: BofA Merrill Lynch Global Research
Active vs passive outlook – passive to continue to gain share
Given the ongoing shift to passive investing from active, we polled the audience to see
where they think the share split between the two styles eventually settles. Currently the
share split is roughly 70% active and 30% passive which was the least popular answer
(10%) when asked “do you see improving cyclical demand for active management,
despite structural headwinds, and if so where do you think active/passive share settles?”
Most investors do see improving cyclical demand for active management and think
passive will eventually control 40% of the market (50%) while 40% of respondents do
not see improving trends for active and that passive will eventually capture 50% of the
market.
Chart 7: Do you see improving demand for active & where do you think active/passive share settles?
60%
50%
40%
30%
20%
10%
0%
Yes, but structural will persist, with
share heading to 60% active / 40%
passive
No, and structural will persist, with share
heading to 50% active / 50% passive
Yes, with the share settling near the
current 70% active / 30% passive
Source: BofA Merrill Lynch Global Research
M&A activity likely to rise
Given a recent pickup in M&A and pressures within the industry that will likely continue
the trend, including rising regulatory costs, some fee pressure, and active outflows, we
asked investors their outlook for M&A in the sector. We found that the majority think
2016 Future of Financials Conference | 17 November 2016 5
that the number of deals in the asset management sector will increase modestly in
2017 vs 2016 (56%), 32% see M&A picking up significantly, and 12% see flat activity in
2017. Nobody sees lower M&A activity in 2017 vs 2016.
Chart 8: How will 2017 asset management M&A activity (# of deals) be versus 2016?
60%
56%
50%
40%
30%
32%
20%
10%
12%
0%
Increase modestly
Increase
significantly
Be stagnant
0% 0%
Decrease
modestly
Decrease
significantly
Source: BofA Merrill Lynch Global Research
Pricing/fee structure in retail seems to have more of a following
Given some underperformance of active managers, some scrutiny around fees, as well
as fee pressure from passive, we asked investors if they thought a change in active
pricing could make sense, i.e. charge a lower base fee with a variable performance fee
that would be earned when alpha is generated. We found a majority of respondents
thought it would make sense to change the pricing structure and it could make active
more competitive vs passive (67%). The rest of respondents felt it didn’t make sense
either because it would be too challenging for the active industry or it would not slow
the flows into passive.
Chart 9: Do you think a change in industry active pricing (lower base + perf fee) could make sense?
80%
70%
67%
60%
50%
40%
30%
25%
20%
10%
8%
0%
Yes, it could make the product more
competitive vs. passive products
No, it would be too challenging for the
active industry
No, it would not change the flow trend
toward passive products
Source: BofA Merrill Lynch Global Research
6 2016 Future of Financials Conference | 17 November 2016
Alternative Asset Manager Takeaways
Within alternative asset management, four of the public managers, ARES, BX, CG, and
KKR presented, while the others did meetings. During the conference we polled the
audience on several key topics including the outlook for the equity and real estate
markets, potential impacts from the recent election, distribution outlook, and firm
structures and business models. Investors were generally bullish on the equity market,
potential for fiscal stimulus ahead, and a key focus from investors was on the potential
change in taxes following the election, and whether that means reassessing corporate
structures for the alts, with a possible change from PTP to C-corp.
Investors bullish on the equity markets
Our polling results indicate that investors are generally positive on equity market returns
over the next year. When asked “What is your expectation for equity market returns over
the next year?” the most common response was +0-10% (51%), followed by 10%+
(25%), 0 to -10% (15%), and <-10% (8%).
Chart 10: What is your expectation for equity market returns over the next year?
60%
50%
51%
40%
30%
25%
20%
15%
10%
8%
0%
10%+ 0 to +10% 0 to -10% More than a 10%
pullback
Source: BofA Merrill Lynch Global Research
Investors are less positive on the real estate market
When asked “Where do you think we are in the overall Real Estate cycle?” most people
think that we are in the middle innings with a few pockets of concern (57%), followed
closely by later innings with growing areas of concern (42%). Very few people think that
we are in the early innings of the real estate cycle (1%).
2016 Future of Financials Conference | 17 November 2016 7
Chart 11: Where do you think we are in the overall Real Estate cycle?
60%
57%
50%
40%
42%
30%
20%
10%
0%
1%
Early innings with limited areas
of concern
Middle innings with a few
pockets of concern
Late innings with growing areas
of concern
Source: BofA Merrill Lynch Global Research
Investors like the growth, superior performance, & distributions
When asked “What is the most attractive aspect of investing in an alternative asset
manager?” investors like both attractive growth & superior performance and high
dividends/distributions (both at 35%). Investors also like the long term locked up capital
(18%), while low valuations and wide moats were less important (both at 6%).
Chart 12: What is the most attractive aspect of investing in an alternative asset manager?
40%
35%
35% 35%
30%
25%
20%
18%
15%
10%
5%
6%
6%
0%
Attractive organic
growth & superior
performance
High
dividends/distributions
for shareholders
Wide moats for
established firms
Long term locked up
capital
Low valuations
Source: BofA Merrill Lynch Global Research
Despite moderating distributions of late, most expect flat to higher in ‘17
When asked “Where do you think distributions for the industry will be in 2017 vs.
2016?” investors expect roughly flat or up 5-15% (both at 37%), followed by down 5-
15% (21%). Few investors expect distributions to change more than 15% year-overyear.
8 2016 Future of Financials Conference | 17 November 2016
Chart 13: Where do you think distributions for the industry will be in 2017 vs. 2016?
40%
37% 37%
35%
30%
25%
20%
21%
15%