Investment Update – Financials
Commentary as of October 19, 2020
Several financial institutions, including several large banks, reported earnings last week. Regarding strengths and weaknesses, what is your take on the group?
As an analyst, one of the most important items I try to identify through company/industry analysis is to determine permanent versus transitory events. In my view, margins are going to be semi-permanently impaired as the rates banks can charge borrowers is lower than previous. I believe this trend is likely to continue as the U.S. Federal Reserve (Fed) keeps rates at extremely low levels. Additionally, commercial real estate is going to face headwinds stemming from growing work-from-home trends and the rise in bankruptcies. On the other hand, consumer credit, given the amount of stimulus in the system, will be a comparative bright spot. In banking and trading, Morgan Stanley and Goldman Sachs have done well. Goldman Sachs beat earnings-per-share (EPS) by 75% in the most recent quarter. As a team, we have been positive on Morgan Stanley, Goldman Sachs and Discover based on the points I just mentioned.
On the negative side, Wells Fargo has its own unique challenges, including macroeconomic and regulatory (fake accounts) issues. In my view, regional banks are more reliant on spread income, which has been hampered due to low overall rates. As a result, net income has been pressured.
What are your current thoughts on payment processors and FinTech?
Within the payments and FinTech space, the COVID-19 pandemic has benefitted the space. The pandemic has accelerated a lot of positive trends that were already in place. The acceleration of global commerce and digitalization have benefitted payment-oriented companies. For instance, PayPal and Square have had massive net new active accounts. New customers tend to have relatively low usage rates initially, though as they become accustomed to using the technology, user rates typically rise. This is a great indicator for future revenue growth.
Growth in e-commerce started out of necessity during the early stages of COVID-19 – grocery stores come to mind. Over the last few months, those habits have been fairly persistent. It is relatively easy, safe and fast to shop online, thus new habits are forming.
Both Visa and MasterCard witnessed headwinds from the decrease in travel expenditures. Cross-border transactions have been much weaker, which is a higher-yield transaction. That said, their remaining business has benefitted from the acceleration of cash to card.
Do you think these consumer trends will continue?
I expect the e-commerce and mobile trends to be persistent. Even among traditional retailers, they realized they needed or benefitted from an omni-channel solution (online, in-store, hybrid pick up). Holistically across the commerce universe, we expect these trends to continue. Within consumer credit, the more stimulus available and the longer it can last, may allow individuals to stay afloat until they are able to go back to work. While it can feel short term in nature, it may have lasting long-term impacts on the financial positions of banks and consumer lenders.
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The opinions expressed in this commentary are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Oct. 19, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. It should not be assumed that investments made by any Ivy Investment product will match the suggested performance or character of the investments discussed in this commentary. Investors may experience materially different results. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Any securities discussed herein are presented in a fair and balanced manner and were chosen based on objective, non-performance-based criteria, and securities discussed may or may not be held now, or in the future, by any Ivy Investment product. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
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