Conference Insights: Thoughts from our Global Financials Conference

PodZept, the podcast from Deutsche Bank Research, with interviews on current economic and financial topics. Listen as economists and analysts from Deutsche Bank present their views. Welcome.

You're listening to another episode of PodZept, a series where we discuss some of the best ideas coming out of Deutsche Bank Research. My name is Matt Barnard, Director of U.S. Equity Research.

Last week, we hosted Deutsche Bank's annual financial services conference here in New York. The conference was a great way to kick off what is a very busy conference season for us here at DB. This conference is also unique because it brings together leading financial services companies from the U.S. and abroad, giving us a true global perspective.

Overall, the macroeconomic backdrop remains very dynamic, to say the least, marked by a backup in rates, $100 oil prices starting to feed into higher global inflation, still lingering questions around private credit, and of course, everyone's favorite topic, AI. So let's unpack some of these key themes discussed at the conference. With me today are Matt O'Connor, Brian Bedell, Ben Goy, Mark DeVries, Faiza Alwe, and Nate Stein.

We have a lot to get to today, so let's dive right in. Matt O'Connor, let's start with you. So what were the key takeaways from your large cap banks from the conference?

We had several U.S. banks at the conference and also met with JP Morgan's credit card head two weeks ago and took M&T's CFO on the road. So I'll weave those in, but the overriding theme is that the U.S. banks continue to perform very well against what's a strong backdrop for key businesses. So for example, JP Morgan and others have noted that consumer spending is accelerating even within discretionary areas, loan growth overall continues to accelerate, and a number of banks pointed out that it's broadened out into other asset classes that haven't been growing as much of late.

And while deposit pricing is inching up a little, the better loan growth will more than offset this and drive better than expected net interest income. And then both investment banking and trading are also tracking better than expected. So the overall picture for the banks from a fundamental point of view is quite positive.

In terms of where we've been getting the most interest, wealth and Huntington have been key areas of focus in many of our conversations the past few weeks. And on the back of this, we've done three iterations of what we call five frustrations on Huntington to address some of the key issues that have been up for debate. And then we also took a deeper look at Wells' underlying trends post the lifting of the asset cap over there.

Great. Thanks, Matt. I appreciate it.

You highlighted an accelerating loan growth and stronger than expected investment banking, trading revenues. That's a bit surprising given some of the volatility in the market and everything going on a global macroeconomics perspective. How sustainable is that?

And how do you think that is factored into street consensus forecast going for the rest of the year? Yeah, I mean, it both is surprising, but at the same time, equity markets have been amazingly resilient, credit markets amazingly resilient. And I think the combination of these resilient markets, deregulation, freeing up capital at the banks and some incentives for companies to borrow and invest this year, we do think it's at least directionally sustainable.

It's always hard to tell the magnitude, but we do think the combination of loan growth, investment banking, trading will be resilient going forward. That's great to hear. It's a good thing for us as employees here at Deutsche Bank for sure.

Ben Goy, I'd like to bring you in on the conversation. You had a number of your European financial banks at the conference. What did you pick up from your conversations?

Yes, so we had 17 European banks reunite spread across business models and geographies. I think the overriding theme is that the performance remains strong and it might be surprising for some considering the macro, because Europe is more exposed to higher energy prices. As you mentioned, we have GDP downgrade, but you don't see it at the bank level yet.

When I look at maybe three key themes, the first net interest income, the growth profile has changed as compared to the start of the year, meaning volume growth remains resilient, but we don't see the acceleration in the slower growth countries we were hoping for. But so far it has also not deteriorated. On the flip side of it, the margin is actually coming in much better than expected with higher rates.

I don't want to get too much into technical details, but those banks with the big hedges benefit for our non-hardcore financial fans. It's simple to think about it. Those banks have roughly a 1% bond portfolio, which they are refinancing closer to 3% right now.

So there is a big tailwind that is coming through every month and that provides a tailwind for net interest income, which makes the growth more acid light, which not everyone likes, but it's ultimately beneficial. Then second link to that, to the macro environment, you don't see the deteriorating macro and higher energy prices as a quality yet. So the performance is still very resilient and I think overall a positive thing to note.

Also private credit, at least for the European banks, didn't feature at all anymore in the discussions. So it feels like people have understood the exposures, the risk in Q1 and started to move on or at least be more relaxed about it. And then another topic that is for the last one, two years, a big theme for European banks is M&A.

There remains a significant interest in M&A, strategically, I would say across three axes. The first is domestic bolt-on deals, which many banks are looking at. We had seen a number of deals already.

It could be more. Italy is particularly the main frontier here, but also business models. So a lot of European banks looking to diversify revenue streams, whether it's acquisitions of asset, wealth managers or insurances, they are still active to deploy excess capital.

It depends more on the sellers rather than the willingness of the buyers. And the third point to mention is cross-border deals, historically the most difficult and there are still a higher bar. But also here we feel like that the conversation has changed more towards the positive and investors being more open to cross-border deals also going forward.

Great. I appreciate that update. I think it was only last year, you know, the focus squarely was on the European financials as there was an increase, an expected increase in spending, especially in defense and even more specifically out of Germany, would probably bring up capital markets activity in the European region overall.

How has that played out and what do you think the forecast for that is going forward? I think what Matt mentioned there, what the US banks are seeing, meaning a very good backdrop also in the second quarter, broadly applies to the European investment banks. But typically the questions were not only cyclically what are you seeing in terms of positives, but it's a structural question that comes alongside of it, how European banks are competing with US banks who are seeing deregulation and can deploy more capital.

The message there was typically they are focused on the business they are strong in, so they pick their battles and they have done well to improve revenues per capital deployed, but there's generally a feeling it gets more competitive. Got it. Okay.

Appreciate that. Let's move over to Brian Bedell. Brian, you had a number of companies, even more than last year, I think, at the conference this year, talking about everything from AI to tokenization to private credit, a lot of topics.

So what were your key takeaways? Yeah, great. Thanks.

Yeah, we had good participation across asset managers and both alternative and traditional, as well as several traditional and digital exchanges and a couple of online brokers in there as well. So top overall themes, like you said, AI, tokenization, private credit. So first on AI, naturally this is going to be the most topical subject being discussed in every meeting in various forms, but overall management teams have developed their use of AI much more aggressively over the past year, and their focus has shifted more toward revenue generation while also continuing to accelerate cost-safe potential.

And while we are seeing AI increasingly being deployed across the asset management space, the more substantial use cases are really within the exchanges and e-broker sectors. You know, I'll highlight Robinhood on this theme. They announced they will be allowing their customers to use their own AI tools for agentic trading in designated accounts, starting with equities and then rolling out to other asset classes over time.

They're also allowing their customers to use agentic AI on their credit cards for automated spending and comparison shopping. On the second theme, which is tokenization, you know, this was also prevalent in many meetings across our coverage, and suffice it to say, most companies are at least beginning to establish a view on what a tokenized market structure paradigm can look like and are at least working on projects to begin weaving it into their product lines. But clearly, the digital asset firms we had at the conference are leading this charge to build the infrastructure for the ecosystem within this convergence theme of traditional finance and decentralized finance we call the TradFi and DeFi, you know, we've been writing a lot about this.

I'll highlight Bullish as the company on the forefront here. They discussed how they are already building stock tokenization capabilities ahead of their planned acquisition of Equinity, which is the second largest stock transfer agent globally, as they view the transfer agent as the most important component in the equity tokenization product being led by the issuer. And then just lastly on that third theme of private credit, this was also one of the hottest topics and debates at the conference, and while the alternative managers view credit quality as being generally good with low software exposures, they all agreed that redemption request queues in their retail funds are likely to stay elevated, certainly at least into the second quarter.

So we're still not quite out of the woods yet on the private credit debate, though management teams were optimistic on fundraising prospects broadly across their platforms, including Blackstone, who talked about their fundraising driving much stronger growth in fee-related earnings in the back half of this year. Yeah, I mean, I think the tokenization, you know, evolution going forward seems really interesting, but we're early days in that, as you said, it seems like AI is starting to have a more meaningful impact even today. So what are the companies or what are the sectors more further along that curve, and how do you see that affecting their efficiencies in the business models going forward?

Yeah, I would say, I mean, across the board, really, but exchanges and e-brokers, especially on the revenue side, and that's where I think investors are going to start looking at more. Early agentic AI trading is a whole new emerging debate in terms of what, you know, to what extent retail investors use their own AI tools to plug into trading, how much that can actually accelerate trading volumes across the space, and not to mention the different asset classes that are being adopted. So it's actually creating a whole new paradigm.

On top of that, you know, combining that in with tokenization for the market structure, and this is very early days and will take a long time to evolve. But there is, you know, once again, rising debate about exactly what that means for the whole exchange landscape and, you know, market structure ecosystem, and, you know, a lot more to come on this, but certainly the companies that are, you know, fueling this on the digital asset side are the ones that are best positioned, and, you know, it's sort of weaving in together with AI to create, you know, what could be, you know, a pretty big acceleration of, you know, of trading revenue globally. Yeah.

I mean, that's a great point. I think it's something we'll be watching closely going forward. Mark DeVries, let's move over to you.

So you had a number of mortgage finance companies at the conference, so focus on housing. That's been a key debate here in the U.S. economy for quite some time, but now we've had a backup in rates. How is that impacting your names and the companies you had at the conference?

Yeah. Thanks, Matt. I mean, I think the high-level takeaways is the backup in rates is clearly not a good thing.

You know, the key takeaways I wanted to highlight from the mortgage finance sector is, you know, continued headwinds to the near-term earnings, stable competitive dynamics, and ongoing investments to drive long-term growth. Starting with the near-term headwinds, you know, as you alluded to, the rates are now 10 years, about 4.5%, above levels embedded in expectations for industry mortgage originations for 2026. In addition, the high interest rate volatility experience in recent weeks significantly increases hedging costs, making it challenging to implement cost-effective hedges of mortgage servicing rights, which should pressure returns for the mortgage originator servicers we cover.

So if rates remain at these levels and rate vol remains elevated, there's likely risk to 2026 estimates for the mortgage originators. While the volume and hedging outlook is challenging, you know, management did indicate that competition has been fairly stable, with some of the more aggressive competitors being more constrained of late. Now, more specifically, some of the players who've used more aggressive pricing tactics in recent years to take share have been more cash-constrained and, as a result, have been less aggressive, leading to a more predictable pricing environment.

The GSEs remain fairly aggressive bidders in the cash window, which competes directly with correspondent lenders like PennyMac Financial Services. But unless Treasury lifts the retained portfolio limits for the GSEs, their capacity to continue growing their mortgage portfolios could run out later this year, forcing them to step down their activity as well. Despite these near-term pressures on mortgage activities, companies remain focused on investments that should drive longer-term value through both technology implementation and M&A.

For example, PennyMac is in the early stage of implementing its new loan origination system, Vesta, which management reports is going very well, and is in the middle innings of a drive to get its already low-cost of service down roughly 40 percent over the next few years through tech-driven process improvements. It's also looking to build new operating leverage through its acquisition of SEMLR, which, much like some of the broader tech investments, will be near-term diluted expectations, but longer-term should be meaningfully accretive. Yeah.

And as volumes start to stay pretty low here because of the backup in rates as we talked about, it sounds like there's some levers these companies can pull. Maybe the competition isn't as fierce as it used to be. Certainly AI probably has a role to play here.

How do you think – what are the low-hanging fruit that they could pull to maintain margins in a lower-for-longer environment here? Yeah. I think it's continued tech implementation.

I think the mortgage finance industry is probably the furthest behind the curve across most industries in terms of implementing tech to create efficiency. So as I highlighted with PennyMac, they're implementing both a new loan origination system and on the loan servicing system, so they should be able to handle the same amount of volume with fewer employees, providing a margin boost even in an environment where volumes remain pressured. Got it.

Okay. Good stuff. Faiza, let's move over to you.

You had a number of info services companies at the conference, and AI is the central thesis for all your companies, both in positives and negatives, depending on who you talk to, I guess. So what did you pick up from the conference? Yeah.

Yeah, for sure. So yeah, my takeaway is really from the perspective of the financial data companies and credit rating agencies. First, I'll just reiterate that despite the higher rates and the geopolitical backdrop, management teams were pretty constructive around the macro environment, both for corporates and for the consumer, which is a positive.

On the topic of AI, financial data providers have seen a substantial increase in data usage from their customers as these automated models and systems sort of continuously ingest and analyze the data while they utilize AI. And then AI tools in particular, the MCP connections that a lot of the data companies have with LLM companies is actually helping with new business, helping with cross-selling and upselling just because it makes the data sets easier to discover and integrate. And then increasingly, the data companies are becoming more channel agnostic with respect to distribution channels.

So we're seeing focus shifting from the software solutions that they have been investing in over the last few years towards data feeds that are embedded deeper into the workflows. We think AI increasingly shifts the competitive mode from pure data delivery platforms to companies that own the highly curated proprietary contributory data, which is needed for effective and token efficient AI deployment. So we think the incumbent providers are benefiting from the trusted standards, their brands, their data governance, which again is even more important at this point.

And then, as you can expect, the companies have also been highlighting productivity gains across engineering, research, product development, and all of that. It's allowing them to reinvest and increase product velocity, speed to market, sort of things like that. And then lastly, just because private credit is such a big focus, we did have rating agencies there.

And so they've been emphasizing that even though revenues from private credit ratings is quite small right now, but it is growing very fast as issuers are looking for a consistent rating methodology across public and private markets to allow for refinancing across those, but also LPs are looking for, you know, the ability to track their exposures using a consistent methodology. Great. And sorry, I keep coming back to AI questions.

It's obviously what everybody wants to talk about. So as clients start to embed the AI process into their workflows, the clients of these companies, what's the pricing dynamic going to look like? There's been a huge debate about how the SaaS model is going to have to change and the data provided.

So your companies are at the forefront of this because of the data that they provide. How do you think pricing is going to change? Yeah.

So that's why they're highlighting the increased usage. And their view is that over time, you know, some companies are actually testing or saying they're going to start to test consumption-based models, pricing models. Historically, these have been subscription-oriented businesses.

But I'm also sensing that there's a bit of hesitation in these early days to just go entirely to consumption-based models because you never know, are we just experimenting with a lot of data right now? The last thing you want is, you know, for that data consumption to go down. So really, the message that we've been getting is, you know, it's going to take some time, I think, where upon renewal, you can have a more active discussion with your clients.

Hey, look, this is the value that we've been providing to you as evidenced by the increased usage. So I think it's going to take some time. But yes, the hope is that that would lead to acceleration in pricing over time.

There are some companies that have talked about, you know, higher pricing relative to like the raw data feed that you were previously getting. But now you're getting it in an AI-ready form, and that does allow for higher pricing. But our view is that that is pretty small right now and probably doesn't move the needle in a big way.

Got it. Yeah. Interesting, too.

Neitzstein, let's wrap up with you. So you cover the boutique M&A banks, and they've been pretty active last year, and it sounds like 2026 is off to another good start. So what did you pick up from your conversations?

Yeah. So we hosted all three boutiques under coverage and wanted to highlight three main takeaways that were fairly consistent across the board. One, large cap deals continue to dominate the market.

Two, the outlook for restructuring activity has picked up. And three, secondary market advisory remains very active. So if 2025 was the year of the large and mega deal, 2026 is showing a similar trend.

Firms are seeing robust activity across companies' desire for scale, ample liquidity, and a supportive regulatory environment for strategic consolidation. I would say all three firms indicated a positive or at least active outlook for restructuring. Management teams pointed to several near and longer-term tailwinds, including software pressure and debt maturity walls approaching in 2028 and 2029.

Finally, the independents all view the secondaries market as a long-term growth area, offering liquidity solutions for private equity firms, which is especially important in today's market where sponsors are holding onto portfolio companies longer than ever. The last thing I'd note is that a big debate in the meetings was basically whether AI will either A, replace junior investment bankers entirely, or B, render investment banking advice obsolete. By and large, the boutiques believe it will be a productivity enhancer above all else and longer term, may cause a slowdown in banker hiring, but could never replace the value corporate boardrooms get from top-tier bankers when undergoing large transformational deals.

Well, that's good to hear for us as well. I think, you know, as we think about the secondaries market, that's something I don't think we've talked about a lot. Can you just dive in a little bit deeper?

Is that a new revenue stream for these banks, for these advisors, and how do you feel that might impact their business model and the numbers going forward? Yeah, so the secondaries market is basically where, to give LPs increased liquidity in portfolio companies, private equity companies will sell stakes of some of their portfolio companies into what's called the secondaries market, which is basically where you can sell a portion of a company that you own that you don't want to sell outright or maybe you can't sell as part of an M&A transaction. And that's become a much larger business across the board the last few years as sponsors hold on to their companies longer than ever.

I think the average holding time across basically every industry for sponsors is much longer than it's been historically. So the boutiques and really the bulge brackets as well have been building out these businesses for the last two years, basically since the pandemic. And I would say right now it's about anywhere from 20 to 40% of total revenues at the boutiques, depending on the firm.

And I can see, I think most of them have talked about it growing to be about as large as their M&A advisory businesses overall. Interesting. Okay.

That's a good update. Well, I thank everyone for joining me today. It was a great conference.

I think we learned a lot. Obviously a lot of unanswered questions that will be coming back to this group from time and time again. So thank you for your time today.

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