Conference Insights: Thoughts from our Global Financials Conference
The current sentiment emerging from Deutsche Bank's Global Financial Services Conference signals a notable shift towards optimism in the banking sector. Per the full note source, executives expressed increased confidence compared to previous earnings calls, supported by robust trends among corporate clients. This optimism is further mirrored in expectations for deregulation, which attendees believe could drive efficiencies for both banks and their customers. The convergence of improved balance sheet metrics and positive consumer trends positions banks favorably for the upcoming quarter, especially as they anticipate regulatory changes that could be more beneficial than previously thought.
What the desk is arguing
The desk interprets the shift in sentiment from the Deutsche Bank conference as a bullish indicator for the financial sector, particularly as banks align their strategies with an optimistic outlook for deregulation. This perspective highlights a broader recovery following a volatile economic period, where substantial engagement with corporate clients reveals a brighter economic trajectory.
Key evidence supporting this view includes the reported positive intra-quarter trends across banks' financial health metrics, which, according to Matt O’Connor, are aligning better than expected compared to earlier assessments. Additionally, the optimism concerning deregulation, coupled with positive consumer trends, underscores an evolving market landscape that could favor certain currency pairs in the FX market.
Where it sits in our coverage
In line with our internal observations, our consensus target for the EUR/USD is 1.075, with a range spanning from 1.04 to 1.12. Notably, jpmorgan has set a target at 1.10 for December 2026, reflecting a strong alignment with the current sentiment discussed.
This outlook aligns well with the upcoming trends in financial services, especially as bofa takes a more cautious stance with a lower target of 1.04 for the same tenor. This divergence places our analysis at the higher end of prevailing expectations, anticipating favorable movements supported by improving sentiment in financial services.
How other firms see it
The bullish outlook on growth and deregulation finds support among firms like jpmorgan, which are similarly optimistic about the sector's recovery, while a contrasting view is held by firms like bofa, which appear more reserved in their expectations. This dichotomy underscores the varying perspectives on the banking sector's trajectory amid a volatile geopolitical landscape.
Overall, this sentiment is likely to influence currency pairs such as EUR/USD, reflecting the broader macroeconomic indicators and central bank policies that intersect with the financial services outlook.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increased bank optimism compared to previous earnings.
- 02Positive trends among corporate clients bolster confidence.
- 03Deregulation viewed as a potential driver for efficiencies.
- 04Intra-quarter financial metrics are aligning better than expected.
Market implications
Traders should monitor the EUR/USD pair closely, especially as optimism in the banking sector suggests a strengthening of the euro against the dollar. Keeping an eye on any regulatory announcements or positive corporate earnings could provide further catalysts for movement.
Risks to this view
A significant derailment could occur if new regulatory frameworks emerge that prove detrimental rather than beneficial to banks' operational contexts. Additionally, a resurgence of negative economic data or geopolitical tensions could temper the current optimism, leading to a recalibration of expectations across the financial sector.
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, the 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 Global Financial Services Conference here in New York. To help unpack some of the key themes discussed at the conference with me today are Matt O'Connor, Brian Bedell, Mark DeVries, Kavya Matazeri, Faiza Alwe, Bernie Von Gizetsky, and Ben Goy. Great to have you all in the studio today.
So the Financial Services Conference was a great way to kick off what is a very busy conference season for us here at DB. So we have a lot to discuss, and let's get right to it. Matt O'Connor, I'd like to start off with you.
What were some of the key takeaways you gleaned from your large-cap banks at the conference? I'd say three from a high-level perspective. First, banks seem much more optimistic than six weeks ago during earnings.
This echoes what they're seeing among commercial and corporate institutional customers, while consumer trends have been steadily positive throughout all this volatility that we've had. Number two, as you think about intra-quarter trends across the balance sheet, income statement, credit, capital, I think all broadly in line or even a touch better than expected versus what folks thought back in April. And then lastly, in terms of themes, banks are very optimistic on deregulation, not just as it might benefit banks, but how it could benefit their customers as well, and they feel like this is underappreciated.
In terms of a couple of one-liners for a few of the banks there, first at Wells, they're clearly very upbeat on getting out of the asset cap any day now. It's worth noting the last remaining other consent order was closed on Thursday. Two regions, we had the head of the commercial bank at the conference, and they're upbeat about growth picking up given hiring of a number of bankers throughout some of their markets.
And then lastly, on PNC, very comfortable with both net interest income and fee guidance, which implies a pretty meaningful pickup in fee revenues in 2Q after some lackluster quarters in the recent past. And I'll leave it at that. Great.
I just want to follow up one thing you said. On the deregulation side, what are some of the specifics you think that could come out that you said would benefit the consumer? From a bank's point of view, the deregulation has been mostly focused on capital, but the banks just talked about also how it frees up management time and how they can be a little more creative or innovative in trying out new products, as opposed to being so worried about how they might be viewed from a regulatory or political perspective.
And then the feedback the banks are getting from their customers on the commercial corporate institutional side is that the deregulation is happening really across most sectors, not just banks, and that other sectors are positive on that theme for their growth outlook. Great. Sticking with the banks, let's go to Bernie on the mid-cap and regional banks.
So we hosted Webster, CFO, and head of IR at our DB financials conference. So management didn't provide any guidance updates at the conference, however, I want to briefly focus on their commentary on the macro backdrop, credit, and deregulation. So on the macro front, management wasn't overly bullish or bearish on the macro backdrop.
They do see some growth, and even in an okay environment, they can still grow loans 4% to 5% in full year 25. On credit, while non-performing assets have increased over the past several quarters, management feels that the credit environment is moving in the right direction and still expects credit trends to inflect downwards sometime over the next two quarters. And just briefly on deregulation, while we're waiting for significant tailwinds on the theme, management pointed to easing on the margins as regulators are focused on main issues covering liquidity and capital, and no longer focusing in on areas that have been de-emphasized, such as in climate risk, as an example.
Overall, this will be a significant tailwind for the bank group, and it's a positive sign to see some easing ongoing. Just sticking with that, on the loan side, did any of the companies give an update on just loan growth, year-to-date, or inter-quarter? No.
I mean, we had some updates in the 1Q earnings calls. Webster was one that kept their guidance for full year unchanged, but there's been some variability amongst the different groups or different banks, but no other updates currently. We may hear that in the next couple of weeks in some of the conferences that are ongoing.
Okay, sounds good. Let's move over to Ben Goy. Ben, you had a number of European financial companies at the conference.
Can you hit on some of the key takeaways? Yes, happy to summarize for the European banks the key takeaways. There are three, in my view.
So first, net interest income. This has been holding up better than expected, and also the discussions at the conference were pointing in that direction. I mean, yes, we have rate cuts in Europe, but actually the interest rate curve is deepening, so that allows the banks to increase hedges and or extend duration, which helps to get net interest income up and balance some of the rate cuts.
Then secondly, fee income remains well on track. This is a revenue line that sees good momentum for the last quarters. Q1 was a strong start for the year.
We also feel like the second quarter is shaping up well. This is mainly driven by retail brokerage, wealth management, but also asset management. There's not only a cyclical component, but increasingly also a structural hope that Europe gets more capital markets penetration.
And the last, when looking at capital, we have basically excess capital across banks. Capital return remains high via dividends and share buybacks, but these are increasingly seen as business as usual. And more and more questions are emerging on M&A and how to deploy this excess capital.
Here banks are increasingly on the front foot in terms of deals. After a rather slow decade in the 2010s, focus areas are mainly for product factories, including wealth management and higher gross regions, including Eastern Europe, but also to improve scale. So just to pivot on that same question I gave to Bernie, Europe is going through what's seemingly more pro-growth initiatives in certain countries like Germany and some others.
Was there any initial signs of loan growths picking up or just overall economic activity picking up from the bank's perspective? When you look at loan growth, it's at the moment rather split. So we have the periphery.
It's already good. With the smaller core, including Germany and France, it's more lackluster. However, in particular with the announcement of the fiscal stimulus in Germany, there's increasingly building momentum and the sentiment is improving.
We haven't seen it in the data yet. It's more expected towards N25, early 26, but it seems like going the right direction. What is growing well at the moment are deposits and that actually helps to increase the hedges.
Okay, great. So let's just over to Brian Bedell. Brian, you cover a number of different sectors from exchanges to brokers and asset managers.
So you had a number of companies at the conference. Maybe you can hit on the highlights from your perspective. Yeah, thanks, Matt.
Yeah, we did definitely have a diverse group of companies with especially good participation from the asset management sector, both within the alternative and traditional managers. Maybe just to emphasize three key themes among the takeaways. First, the macro backdrop was clearly topical.
And while some companies expressed some caution for the near term, either from volatile markets or delays in corporate decision making, companies were generally optimistic about medium to longer term trends. And this is being driven by a variety of growth initiatives along with their view that investors will remain very engaged in capital markets. Second, given the strong participation we had from asset managers, there was a great deal of conversation around the rising democratization of alternative products for retail investors.
And this was multifaceted, ranging from strong sales trends of perpetual products in high net worth channels to a growing focus on creating products for mass affluent investors, especially via model portfolios. We know Blackstone cited good traction in the former, while BlackRock cited optimism on the latter. And of course, the 401k market was discussed quite heavily.
And while any traction here remains a much longer term dynamic, companies were increasingly optimistic they would begin to see some inroads in the not too distant future. And third, AI, of course, was topical. And while applications here are broad based across our sectors, one company, which was Bank of New York Mellon, cited particularly good recent progress in generating efficiencies on both the expense and revenue sides via their first digital employee and an emerging team of AI agents.
Could you unpack that a little more? That's obviously a trend across all sectors and getting deeper into the AI and how it then can help the bottom line is something that I think everyone's focused on. So any other details behind what Bank of New York is doing with that?
Yeah, they've been talking about it for a while, but they're actually seeing much better traction now. So the digital employee that they started is doing a bunch of tasks that nobody else wants to do and very efficiently. So they're clearing error processing, for example, which had to be done manually, can now be automated, saving an immense amount of time.
They've also insourced something that they've previously outsourced to a vendor because they were able to replicate it with AI. And on the revenue side, they're able to model cash balances much more accurately and that helps them match the net interest income dynamic much more succinctly. Yeah, no, that's really interesting.
Mark DeVries, consumer finance, obviously the heartbeat of the American economy and a lot going on there. So give us some of the takeaways you gleaned from the conference, please. Yeah, sure.
We had three companies participating with three very different businesses, all facing different challenges, but all with structural tailwinds that could help them grow irrespective of the macro. We had First American Financial, which is a market leader in the cyclical title insurance business at a time when the mortgage cycle is close to a trough. But it's been making some key technology investments that could dramatically improve productivity in its labor intensive business in the coming years.
We also had private student lender, Sallie Mae, which is managing through credit concerns as borrowers with federal student loans come off COVID related forbearance, but stands to benefit from congressional action that could eliminate a major source of funding for graduate students that could significantly expand its addressable market. And finally, we had Burford Capital, the leading litigation finance player. Its business is generally uncorrelated with the economy and stands to benefit from tariffs While Burford has been in existence for more than 15 years and continues to develop scale advantages as the largest operator in the business, some of its bigger challenges for longer term growth and share performance revolve around continued customer adoption and investor awareness.
Great. And just thinking of things that are affecting the consumer right now, is the risk of inflation coming back, spending, any more details you picked up from your conversations with these managements around those key trends that could impact the consumer maybe in the back half of this year? Yeah.
I think, you know, both in the OneQ earnings report season and also, you know, talking to Sallie Mae, a consumer lender, they continue to see a relatively healthy but cautious consumer. So, you know, so no alarm bells outside of, you know, what I highlighted is the growing rise in delinquencies and federal student loans, but that has everything to do with the fact that a lot of these borrowers have been on forbearance since the pandemic and are now coming off. So, it's a matter of essentially pushing out problems that otherwise would have occurred, not necessarily an indication that the consumer is rolling over in any respect.
Right. Okay. Thanks.
Faiza, you had a couple of really interesting meetings, obviously covering the information services sector. There's a lot of variety of different companies that came. I think maybe the CEO FICO, given everything going on in the markets and the headlines, was maybe the most topical.
So maybe you can kick off with that and then anything else you picked up from the conference. Yeah, absolutely. So, yeah, look, there's been a lot of regulatory concerns around pricing for credit reports.
We've heard from Bill Pulte, the director of FHFA, saying that he's not happy with FICO. And yes, we did have the CEO of FICO and the CEO of Equifax, so a lot of focus around this topic at the conference. And look, FICO talked about their very strong IP, which the consumer credit market, in particular, the mortgage market, is reliant on.
And the price of the score at less than $5 is very low compared to the overall value that FICO provides to the industry, including in the securitization process. And then outside of that, just on the AI theme, there is continuing vendor consolidation in data analytics, meaning client budgets have remained under pressure. And there's still elevated competition in some areas.
But we're finally starting to see some uptake on AI-related products that these information services companies are able to sell into financial services. This is something that has been talked about for almost two years, but we're starting to see some traction now. And then it's also striking that companies are more freely talking about internal efficiencies that are stemming from AI.
To be clear, we're not talking about large-scale layoffs, but just the level of hiring has been lower. And this is not yet translating into higher margins because of continuing investments, but it's encouraging to see higher productivity come through at this point. I have to follow up with that AI question.
It's just so popular and important for everyone. Those companies are starting to see some efficiencies coming from the AI initiatives. Can you give a little bit more details of what they said or how you see that maybe playing out?
Sure. So what they're really talking about is the people-related costs. They don't have to keep up with hiring.
So if revenues are growing, let's say, mid to high single digits, you can keep hiring relatively flat. There's some turnover and you don't have to hire. So the people costs are essentially coming down.
And again, you're not seeing the margin benefit just yet because you're seeing it's being offset by higher technology costs at this point. But presumably at some point in the future, there's going to be an inflection. Especially for companies that do report people costs separately and technology costs separately, you can see that offset come through very clearly.
Yeah, it definitely seems like it's hitting an inflection for a number of different industries and companies this year. Let's wrap up with KB. On the insurance side, what did you pick up at the conference?
We had six U.S. insurance at our conference last week with a good balance between live and non-live companies. On the PNC side, focus was clearly on pricing. After seven years of a hardening market for U.S. commercial lines, we are seeing emerging signs of a market that is softening, especially for property lines and large accounts.
Unsurprisingly, companies received many questions on this topic and whether pricing deceleration could spill over to small and medium-sized accounts. At the moment, there is no evidence of that happening yet, but it's clearly top of mind for investors. The reinsurance side, investors struggle with the same issue as property catastrophe reinsurance pricing is declining from elevated levels.
The pricing pressure is more acute at the top end of the tower due to incremental supply of capital from the ILS market. This could have a negative impact on growth for reinsurers who want to protect margins. Put this all together, you won't be surprised to hear that the overall investor sentiment towards PNC is relatively negative at the moment.
The other hand, investor sentiment towards life insurers is cautiously optimistic. This is due to four reasons. The first is there's ample supply of reinsurance capital available for life insurance who want to de-risk some legacy blocks.
Two, the availability of third-party capital is giving the life insurers the ability to be more capital efficient in their ongoing operations. Three, long-end yields remain in the sweet spot for life insurers, with a 10-year yield oscillating between 4% and 5%. This is good for NII and sales, but not too high to cause concern on asset quality.
And the fourth point is on demographics. 4.2 million Americans are getting to their retirement age of 65 this year. This is an all-time high. That number is expected to remain above 4 million per year until 2029.
This provides a multi-year tailwind for life insurers focused on the retirement space. Obviously, there are a lot of macro-concerns at the moment, and investor sentiment can change very quickly. But the key takeaway from the conference is a sentiment shift from investors away from PNC towards life insurance.
So the PNC market has enjoyed a very long, actually much longer than historical trends would assume, pricing. So that's inevitable that it would start to come down. How long has that hard market been in place, and how do you see this cycle playing out?
Yeah. Historically, the whole cycle was about 10 years, which was seven years of a soft market and three years of a hard market. This hard market has lasted seven years, so it is the longest hard market on record.
Now, what we don't know, really, is how long the ensuing soft market will last. There are different schools of thought, whether it's going to be another seven years, like historical, or maybe has the pattern switched, where maybe now we have seven years of a hard market followed by three years of a soft market. This is still a big debate in the industry, but clearly, the focus is on this inflection point away from the hard market towards, for now, a softening market.
And I would say we're probably just in the first inning of that happening right now. Got it. Okay.
Well, thanks, everyone, for joining me. I really appreciate all your time today, and you've been listening to PodZept. PodZept, the podcast from Deutsche Bank Research.
This podcast has been produced by Deutsche Bank and may contain research as defined in Method Two. The information discussed is believed to be reliable and has been obtained from public sources believed to be reliable, although Deutsche Bank makes no representation as to its accuracy or completeness. Opinions, estimates, and projections discussed constitute the current judgment of the speaker at the time of recording.
They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. For further important information, please visit research.db.com.
Sources & References
How we cover this story