Goldman Sachs’ underlying business ‘has never been in better shape’: Strategist

Devin Ryan, JMP Securities Director of Financial Technology Research, joins Yahoo Finance Live to discuss fourth quarter earnings for Goldman Sachs and other big banks as well as digital innovation in the financial sector.

Video transcript

[ALARM BELL]

- Shares of Goldman Sachs under pressure in the session right now, down more than 8% after the bank reported earnings showing a 13% decline in profit for the fourth quarter. To break down those numbers for us, let's bring in Devin Ryan, Director of Financial Technology Research at JPM Securities, a Citizens company.

And Devin, it's good to talk to you today. It feels like there's a common theme that we're starting to hear from some of the big banks, which is the cloud in terms of the expenses that are continuing to go up, operating expenses up more than 20% in the quarter. How much of the moves we're seeing today, you think, are justified given the numbers that we got from Goldman?

DEVIN RYAN: It's a great question. I mean, I think ultimately Goldman Sachs is leaning in on investments because those investments are working, and they're executing on their strategic plan. So I think you need to take a little bit of a step back and think about why this is happening. And we would argue it's a good thing.

So I think the stock reaction today is a bit of an overreaction. But I do think that there are some things that we're going to see continue through earnings season and into 2022. One point that we've been making to clients this morning is that, if you look at the financial technology space, financial technology companies raised $130 billion of capital last year. That was up over 100%, year over year.

So what that means is that now they're at record capitalization to invest in innovation, new products, and really to grow their business. So that's competing directly with the financial services companies. So leading banks like Goldman Sachs and JP Morgan, I think, are really going to aggressively continue to invest in their business to be as competitive as they have been. So that is a theme we'll see.

But the other thing that Goldman Sachs talked about today was a lot of the expenses are business related. And the reality is, we're coming off of record revenue backdrop, both in investment banking and capital markets underwriting and M&A. And that backdrop is still very good into 2022.

And so I think you want them to spend that money because it's directly correlated to those transactions. And so if that continues, that means that you have a very good revenue backdrop, probably better than people have modeled.

And the flip side is, if the revenue backdrop changes, then some of those expenses will come down. So it's not something we're overly concerned about. I think it's good expense because it's in the strategic plan and in future growth.

- Global markets still 37% of their full year net revenue for this most recent year. Where do you see the biggest opportunities for their global markets division and perhaps some of the expansion opportunities ahead?

DEVIN RYAN: Yeah, Brad. So I think there's no doubt in the investment bank that they've gained market share, both in investment banking, advisory, equity capital markets, debt capital markets, but on the trading side as well. And we think those market share gains will continue.

So even though most analysts, like myself, are modeling some level of normalization in the backdrop, last year was unusual, where we had four really good quarters in a row. And I've covered the space for nearly 20 years, and that's just very unusual. So I think the expectation is, even though things remain very constructive, you'll see some moderation in the investment bank.

But I think the market share gains will stick, and that's probably the most important point. And then these new initiatives, I think Goldman Sachs is growing their underlying business faster than any of the other large banks that they're competing with. And that's because of the investments in consumer and wealth, and transaction banking which is cash management for corporations. And they're doing it primarily on a digital backbone.

And so when I look at their business model, what's exciting is that a lot of these businesses are starting at a small base, but they're disrupting in some ways, the legacy firms. But they're not a small startup. They're a firm with tremendous balance sheets, tremendous resources. And so, you're getting a lot of the best of both worlds.

So that's where, look at today, today is an opportunity in the stock because the underlying business has never been in better shape. Yes, they are leaning on investments, but you want them to do that because that's going to grow their earnings power faster than what people were thinking six months ago or a year ago.

- Devin, let's pick up on that point that you made about these new companies that are really disrupting the legacy banks. I mean, you mentioned $130 billion pouring into fintechs. How do you think Goldman is positioned to compete with some of those newer players?

I mean, certainly they have made huge strides in trying to expand their pool, reaching out to younger, sort of-- I don't know if you can call them the millennial generation younger anymore-- but they've certainly had those initiatives in place. How do you think they're positioned when you compare it to some of their competitors?

DEVIN RYAN: Well, they're positioned really well. And the reason is that if you look at the other large banks that they're competing with in some of these initiatives you just talked about, those banks typically have very large infrastructures. They have branches. They have people. They have a lot of legacy infrastructure that essentially adds cost.

Goldman is building a digital bank. And what that means is that they're leveraging technology to drive the expansion there. And so, not only does that give them a clean slate to drive the business of the future, but also it significantly lowers their costs. So when you have lower costs, you can reinvest some of that benefit back to consumers in terms of pricing or a better experience.

And so they don't have a lot of legacy tech debt of the larger firms, but then relative to their smaller startup competition, they still have all of the history of Goldman Sachs. They have all of the corporate relationships which help with customer acquisition. They have all the technology resources and risk management that Goldman Sachs brings to bear.

So you get a little bit of the best of both. And that puts them in a really nice position. I also still am very bullish on the fintech space. So you've seen some deterioration in valuations recently. I think this is going to be the year where firms really differentiate themselves. And a lot of firms have raised capital, as I just mentioned a minute ago. That's going to put them in a position to innovate and drive new products.

And that's what 2022 is all about. It's going to be a record year of innovation. And I don't think the market's really that focused on that. People are looking at business models of last year. I think you're going to see a lot of change in the next few months. And it's going to be pretty exciting for the space.

- Yeah. We'll be watching that storyline really closely. And Devin, hope to have you back on the show again soon. Devin Ryan, Director of Financial Tech Research at JMP Securities, a Citizens company.