Financials globally begin to find their footing

John Jordan: I think financials have been performing well in the overall market, either holding their own or outperforming meaningful parts of the market, and I think that’s been driven by good, underlying fundamental trends in earnings and returns. I think I’d also put into context that 2023 was a tougher year for financials. If you recall, we had Silicon Valley Bank fail. We had First Republic Bank fail, and for a meaningful part of 2023, sentiment on financials was quite subdued. And I think we’ve been able to see that while significantly rising interest rates can bring challenges, particularly for firms that struggle with their asset liability management, for the majority of banks, they took a much more conservative approach. So, we’re seeing that continue to help earnings, and I think the tailwinds from that are not fully through the system yet.

I think European banks have done quite well, and we continue to be quite constructive on finding opportunities there. I think the European banks are generally better managed than they were 10, 15, 20 years ago. They’ve streamlined their businesses. They’re focused on areas where they have the most competitive advantage or the most opportunity for returns.

And then, importantly, the backdrop in terms of the environment in which they operate has gotten meaningfully better. So, starts with higher interest rates. Coming from a world of 0% rates, where low-cost deposits are not particularly valuable, to a world even of a couple-percent interest rates is very helpful for returns. We’ve also seen regulation, which had been steadily getting worse and more onerous from capital and other perspectives, start to level out and, in a number of cases, improve. We’ve also seen institutions that were building capital trying to get to those higher capital targets for many years. They’ve now surpassed those and are in a position to return significant capital both through dividends and buybacks. And then, more recently, we’ve started to see increased consolidation, or at least the potential for consolidation, in some European markets. And because of the overlap in branches, the overlap in functions, those deals could be quite value-creating when they happen in terms of, particularly, cost synergies but other operational improvements.

2023 and 2024 were relatively subdued years for overall M&A announcements, you know, mergers and acquisitions; also, for IPOs and other equity offerings. So, I think the general expectation, which we would see an improvement off those, those relatively low levels. And I think optimism has continued to increase over the last few quarters for a few reasons. We’ve seen some stabilization in interest rates, which makes it easier to underwrite the cost of capital. And then I think post [U.S.] election, we’ve also seen increased optimism potentially around the regulatory side. I think the jury is still a little bit out on how much easier it will be able to do deals where there might have been antitrust scrutiny. But I think there’s hope that there will be at least some amelioration of the approach that’s been taken in recent years, which I think was historically quite tough.

We’ve also heard that the pipeline for potential IPOs is rising meaningfully. We really haven’t seen a lot of that yet happen in the markets. But the likelihood of improvement in 2025 seems like a good base case to me.