U.S. Financials Conference: Three Key Themes to Watch

Summary

Podcast Summary: Thoughts on the Market Episode: U.S. Financials Conference: Three Key Themes to Watch Host: Morgan Stanley Release Date: June 9, 2025

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Introduction

In the June 9, 2025 episode of "Thoughts on the Market," hosted by Betsy Grasic, Morgan Stanley delves into the pressing themes set to shape the upcoming U.S. Financials Conference. Grasic, alongside colleagues Manon Gosalia and Ryan Kenney, provides a comprehensive overview of the key debates and trends influencing the U.S. financial sector. This episode offers valuable insights for investors and industry professionals seeking to navigate the evolving financial landscape.

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Economic Landscape and Regulatory Shifts

The episode opens with an analysis of the current economic uncertainties facing the financial sector. Grasic highlights factors such as new tariff policies, inflation concerns, and immigration challenges that are impacting financial growth and credit quality. Despite these challenges, there is a silver lining in the form of potential regulatory shifts under the Trump administration, which could ease banking regulations for the first time since the Great Financial Crisis.

"Investors are grappling with navigating economic uncertainty from new tariff policies, inflation concerns, and immigration challenges, all of which impacts financial growth and credit quality."
— Betsy Grasic [00:54]

Mid Cap Banks: Loan Growth, Net Interest Margins, and Capital

Manon Gosalia outlines three pivotal themes for mid cap banks: loan growth, net interest margins, and capital.

1. Loan Growth: Gosalia notes that loan growth for regional banks has been modest, around 2-3% year-over-year. Initial uncertainty following tariff announcements in April led to mixed borrowing activities. However, with recent positive developments in tariff negotiations, management teams are expected to adopt a more optimistic stance, emphasizing sustained loan growth with robust pipelines.

   "We expect that the tone from bank management teams will be more positive. Now we don't expect them to say growth is accelerating, but we do expect that they will say loan growth is holding up with strong pipelines."
   — Manon Gosalia [01:30]

2. Net Interest Margins: There is potential for margin expansion driven by lower repricing of bank term deposits and the rollover of fixed-rate loans and securities at higher current rates.

   "We expect there is still room for margin expansion as we go through this year... as bank term deposits continue to reprice lower and the back book of fixed rate loans and securities... are now rolling over at today's higher rates."
   — Manon Gosalia [02:18]

3. Capital: While the rise in the 10-year yield poses a slight negative for bank capital due to higher negative marks on securities, regional banks remain in a stronger capital position compared to two years ago. Gosalia emphasizes that accumulated higher capital levels will mitigate the impact of increased yields on capital plans.

   "We believe that higher capital levels that regional banks have accumulated over the past couple of years will help cushion some of these negative marks."
   — Manon Gosalia [03:28]

M&A Trends and Private Capital Advisory

Ryan Kenney shifts the focus to merger and acquisition (M&A) activities, anticipating a cautious yet gradually improving environment. Following a period of subdued deal-making due to tariff uncertainties, Kenney expects increased confidence and a resurgence in M&A activities fueled by pent-up demand and structural corporate needs such as AI capabilities and biotech consolidation.

"There is tremendous pent up demand for corporate activity over the last three years... Structural themes for corporates like the need for AI capabilities, energy and biotech consolidation and reshoring that should fuel mergers as the cycle gets going."
— Ryan Kenney [05:05]

Additionally, Kenney highlights the significant growth in private capital advisory, where investment banks advise private equity firms and other entities on capital raising and liquidation strategies. This sector is poised for expansion, driven by increasing demand from diverse clients like universities and local governments seeking liquidity solutions.

"Private capital advisory is a major growth area for the boutique investment banks that I cover."
— Ryan Kenney [06:18]

Large Cap Banks and Capital Markets Activity

Betsy Grasic transitions to discussing large cap banks, projecting a robust performance in initial public offerings (IPOs) and overall capital market activities. With IPO numbers rising—26 in the past week compared to an average of 22 year-to-date—Grasic is optimistic about continued momentum in equity markets, provided volatility remains contained.

"We look at IPOs where we had 26 IPOs in the past week alone. That's up from 22 on average year to date in 2025."
— Betsy Grasic [07:17]

Grasic also connects increased capital market activity to enhanced lending, particularly in corporate and investment (C&I) loans driven by M&A financing. She forecasts a significant uptick in C&I loan growth from the current 2% to 5% over the next year as M&A activities ramp up.

"C and I loan growth we do think will be moving from current levels of about 2% year on year... to 5% as M&A comes through over the next year plus."
— Betsy Grasic [08:02]

Furthermore, the discussion touches on non-depository financial institution (NDFI) loans, asserting that their risk profile aligns with overall C&I loans, despite recent attention to their reclassification.

"Our view is that it's similar to overall C and I loan risk and we will dig into that outlook with management at the conference."
— Betsy Grasic [08:45]

Regulatory Easing and Future Strategies

The episode concludes with a nod to anticipated regulatory changes that could influence capital utilization and deployment strategies within large cap banks. Grasic encourages listeners to pay attention to these regulatory developments, as they may significantly impact strategic decisions and growth trajectories.

"Additionally, we will touch on regulation and how easing of regulation could change strategies for capital utilization and capital deployment."
— Betsy Grasic [09:20]

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Conclusion

The June 9th episode of "Thoughts on the Market" provides a thorough examination of the critical themes expected to dominate the U.S. financial sector conference. From loan growth and net interest margins in mid cap banks to the resurgence of M&A activities and the rise of private capital advisory, the discussion underscores a cautiously optimistic outlook. Large cap banks appear poised to benefit from increased capital market activities and strategic regulatory adjustments. Investors and stakeholders would find this episode invaluable for understanding the nuanced dynamics shaping the financial landscape in the near future.

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Note: This summary condenses the podcast's core discussions and insights, offering a clear and comprehensive overview for those unable to listen to the full episode.

Transcript

[Betsy Grasic]

Welcome to Thoughts on the Market. I'm Betsy Grasic, Morgan Stanley's US Large Cap Bank Analyst and Morgan Stanley's global head of banks and diversified finance research. Today we take a look at the key debates in the U.S. financials industry. It's Monday, June 9th at 10:30am in New York. Tomorrow, Morgan Stanley kicks off its end annual US Financials conference right here in New York City. We wanted to give you a glimpse into some of the most significant themes that we expect will be addressed at the conference. And so I'm here with two of my colleagues, Manon Gosalia, US Mid Cap Banks Analyst and Ryan Kenney, US MID Caps Advisor Analyst. Investors are grappling with navigating economic uncertainty from new tariff policies, inflation concerns and immigration challenges, all of which impacts financial growth and credit quality. On the positive side, they are also looking closely at regulatory shifts under the Trump administration which could ease banking rules for the first time since the great financial crisis. Let's hear what our experts are expecting. Manon, ahead of the conference, what key themes do you expect mid cap banks will highlight?

[Manon Gosalia]

So there are three key themes that we've been focused on for the mid cap banks, loan growth, net interest margins and capital. So first on loan growth. Loan growth for the regional banks has been fairly tepid at about 2 to 3% year on year and the tone from bank management teams has been fairly mixed. In the April earnings season that followed the tariff announcements on April 2, some banks were starting to see the uncertainty weigh on corporate decision making and borrowing activity, while others were only seeing a slowdown in some parts of their portfolio with a pickup in other parts. Now that we've had two months to digest the announcements and several more positive developments on tariff negotiations, we expect that the tone from bank management teams will be more positive. Now we don't expect them to say growth is accelerating, but we do expect that they will say loan growth is holding up with strong pipelines. On the second topic, net interest margins, we expect to hear that there is still room for margin expansion as we go through this year and that's coming in two places, particularly as bank term deposits continue to reprice lower. And then the back book of fixed rate loans and securities, essentially assets that were put on the books four to five years ago when rates were a lot lower, are now rolling over at today's higher rates.

[Betsy Grasic]

So is the long end of the curve going up a good thing?

[Manon Gosalia]

Yes, for net interest margins. But on the flip side, the 10 year going up is slightly negative for bank capital. So that Brings me to my third theme. The regional banks are overall in a much better place on capital than they were two years ago. Balance sheets have improved, capital levels remain solid across the sector. But the recent increase in the long end of the curve is marginally negative for capital. Given that there will be a higher negative mark on securities that banks hold. But we believe that higher capital levels that regional banks have accumulated over the past couple of years will help cushion some of these negative marks. We don't expect the recent shift in the 10 year will have a meaningful impact on bank capital plans.

[Betsy Grasic]

The increase in the 10 year pulls down capital a little bit, but not enough to trip any regulatory minimums.

[Manon Gosalia]

Correct.

[Betsy Grasic]

So all in the 10 year yield going up is a good thing.

[Manon Gosalia]

It's slightly negative, but I would expect it does not impact bank growth plans.

[Betsy Grasic]

Okay, all in. What's the message from mid cap banks?

[Manon Gosalia]

All in. I would expect the tone to be a little more positive than the banks added April earnings.

[Betsy Grasic]

Excellent. Thanks so much. Manon Ryan, what about you? What are you expecting Mid cap advisors will see say?

[Ryan Kenney]

So I think we'll hear a lot about the trends in M and A. And when we last heard from investment bank management teams during April earnings, the messaging was more cautious. We heard about M and A deals being paused as companies processed deliberation day tariffs and a small number of deals being pulled. Tomorrow at our conference expect to hear a measured but slightly improved tone. Look, there's still a lot of uncertainty out there, but what's changed since April is the fact that the US Administration is flexing in response to markets. So that should help shore up more confidence needed to do deals. And there's tremendous pent up demand for corporate activity over the last three years. So 2022 to 2024 M&A volumes relative to nominal GDP have been running 30 to 40% below three decade averages. Equity capital markets volumes 50 to 60% below average. There is tremendous need for private equity firms to exit their portfolio investments and deploy $4 trillion of dry powder that has accumulated. And also structural themes for corporates like the need for AI capabilities, energy and biotech consolidation and reshoring that should fuel mergers as the cycle gets going. So I think for this group the message will likely be April and May more challenge from a deal flow perspective. But back half of the year you should start to expect some improvement.

[Betsy Grasic]

So slightly improved tone.

[Ryan Kenney]

Slightly improved. And one of the other really interesting themes that the investment banks will talk about is the substantial growth of private capital advisory. So this is advising private equity funds and owners on capital raising, liquidation, including secondary transactions and continuation funds. And what will be interesting is how the client set here is growing. We've seen this quarter major universities, some local governments that increasingly need liquidity and they're hiring investment banks to advise on selling private equity fund interests. It's really going to be a great discussion because private capital advisory is a major growth area for the boutique investment banks that I cover.

[Betsy Grasic]

How big of a sleeve do you think this could become? As big as M and A outright?

[Ryan Kenney]

Probably not as big as M and A outright, but significant. And it helps give the investment banks relationships with financial sponsors who are active on the M and A front so it can be a share gain story. So Betsy, what about you? You cover the large cap banks. What do you expect to hear?

[Betsy Grasic]

Well, before I answer that, I do want to just put a pin on it. So you're saying that for your coverage, Ryan, we have some green shoots coming through.

[Ryan Kenney]

Yeah, green shoots and more positive than in April.

[Betsy Grasic]

And Manon on your side, Same little.

[Manon Gosalia]

Bit more of a positive tone than April earnings, but more of the same as we had at the start of the year.

[Betsy Grasic]

Okay, going back to the future then, I suppose we could say excellent. Well, on large cap banks, I do expect large cap banks will be reflecting some of the same themes that you both just discussed. In particular, you know, we'll talk about IPOs. IPOs are holding up. We look at IPOs where we had 26 IPOs in the past week alone. That's up from 22 on average year to date in 2025. And I do think that the large cap banks will highlight that capital market activity is building and can accelerate from here as long as equity volatility remains contained, by which we mean Vix is at 20 or below. And with capital market activity should come increased lending activity. It's very exciting. What's going on here is that when you do an M and A, you have to finance it. And that financing comes from either the bond market or banks or private credit. MA financing is a key driver of C and I loan growth. A lot of people don't know that. And C and I loan growth we do think will be moving from current levels of about 2% year on year as per the most recent Fed H8 data, to 5% as M&A comes through over the next year plus. And then the other major driver of C and I loans is loans to non depository financial institutions, which is also known as NDFI loans. NDFI loans have been getting a lot of press recently we see this as much ado about reclassification. That said, investors are asking what is the risk of this book of business? Our view is that it's similar to overall C and I loan risk and we will dig into that outlook with management at the conference. It'll be exciting. Additionally, we will touch on regulation and how easing of regulation could change strategies for capital utilization and capital deployment. So you want to have an ear out for that. Well Manon Ryan, it's been great speaking with you today.

[Manon Gosalia]

Should be an exciting conference.

[Betsy Grasic]

Thanks for having us on and thanks for listening everyone. If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

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