Goldman Sachs Posts Best Stock-Trading Quarter in History

0:00As a listener, you're looking for ways to help teams move faster, make sharper decisions and turn scattered context into work they can use. ChatGPT for Business can help. ChatGPT for Business gives teams a shared workspace with admin controls, permissions and access to work and codecs in ChatGPT. This means your business can move from question to answer and code to rollout quicker. Join over 10 million business and enterprise users worldwide already using ChatGPT for Work. Download the ChatGPT desktop app or contact sales to learn more. Never bet against American grit or American energy. Through innovation, Venture Global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time.

0:52So while others are busy talking, we're busy building. That's Venture Global. That's unstoppable energy.

1:04If you listen to financial news, you know a lot of time is spent thinking about what's next. The next opportunity. The next investment. The next move. But sometimes what matters most is being ready for what you never saw coming. For more than 75 years, Cincinnati Insurance has worked with independent agents to help protect businesses, homes, valuables, and more. Because planning for the future isn't only about knowing what's next. It's about making sure you're ready for what you can't predict. Let Cincinnati insurance make your bad day better. Find an independent agent at CINFIN.com. Bloomberg Audio Studios.

1:46Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. This is Mateo Paul Sweeney live here in our Bloomberg Interactive Broker Studio. We are streaming live on YouTube as well, so go check us out there. I've been doing the stock market thing, Lisa, for like 40 years almost. I still have no idea how this whole thing works. I mean, look at Goldman Sachs, Morgan Stanley, B of A. They had what I thought were really pretty darn good quarters in a world where we're not really sure what's going on.

2:25So, of course, all the stocks are trading down today. So I can't figure it out. But our next guest is an expert. She knows what's going on. Allison Williams, senior analyst. She covers all the big banks and all that kind of good stuff for Bloomberg Intelligence. She joins us here in our studio here. So as you looked at, you know, again, we've had two days of the biggest banks, Allison, and you've been covering these guys for a very long time. You've seen it all come and go. How are the big banks, investment banks, doing this quarter? Well, you mentioned you've been doing this 40 years, and you've never seen a quarter like you saw at Goldman Sachs, equity trading, record trading.

3:00I mean, the really standout for Goldman is they're the biggest in equity trading. They are the biggest in M &A, and they had the biggest jump, so really solidifying that leadership. I mean, equity trading up 36%, prime brokerage, cash, derivatives. We talked about the fact that we saw record trading on the equities exchanges this quarter. We certainly saw that come through at the banks. M &A, Goldman talking about the fact that announced volumes are up 30 percent and we're running above average now. So that bodes well for the future. And I think, you know, in terms of the stock reactions that you refer to, I think, you know, so as I said, we can see that there was a lot of strength in the exchange volumes.

3:43We could see that, you know, IPOs had rebounded the last couple of months. even though it wasn't in analyst numbers. I think there was some visibility there. So I think in terms of what the stocks are reacting to, Morgan Stanley had a really strong quarter, beat everything, but just not as good as Goldman. And I think people are looking at that equities trading. Morgan Stanley was in the lead for a few years and now Goldman is really pulling ahead. Yeah, and I see, because the whole morning I was like, why is the stock over ever since the bell opened? It is, and by the way, Like wealth is the business that people watch for them.

4:18The wealth flows. You know, the numbers were good. So, again, what are people worried about? So it could be the market share. Morgan Stanley did point out that they had a record quarter in Europe. They say that they're gaining share. We'll see what happens when the Europeans report. And Asia, the other thing is capital. So buybacks, better than expected at Goldman, weaker at Morgan Stanley. And keep in mind, we've seen these big moves in the financials. A lot of that is really about the capital return story. Well, and the consumer resilience, we looked to Bank of America for that. So did you see it?

4:54We did see it. And I think that is what we saw in the quarter. So net interest income as well as charge-offs. Those are kind of the two bank business lines, if you will, that are most revolving around lending and consumer health. and interest income. It was a little bit soft in the quarter, but the outlooks are fine or better. And credit coming in line to better than expected. And the reserve building really telling you that, look, there is some conservatism baked in for some uncertainty in the second half. But in general, things are improved. When President Trump was elected for this second term, almost immediately people are saying, buy the banks.

5:39They're going to be the beneficiaries of reduced regulation and reduced oversight. Has that happened? Do we still expect that to happen? Is that still part of the story? I think, you know, we're on a journey, I guess, if you'd say. Isn't that the current rhetoric? But I think that's why the buybacks were important, right? So the reason, one of the things that people are very excited about in terms of reduced regulation is holding less capital. Returns on equity are going to go up mathematically. There'll be more money to return to shareholders. I mean, Goldman had really that leading dividend increase that we saw after the stress tests.

6:15Buybacks better than expected. You know, and meanwhile, we saw the weakness of Morgan Stanley, Wells Fargo, another one that was another bank that investors were really optimistic about after the U.S. election. They did get the asset cap removed. So I think there's a long-term overhang over the stock. But in the current quarter, people were a little disappointed. Like, you know, they didn't give any guidance on buybacks. They didn't change their return target. And, you know, it just might be that that's going to come, but didn't get the news yesterday. Private credit. Where do banks stand with private credit?

6:50You had JP Morgan say they would invest like$50 billion in private credit. So what kind of example is that said for the industry? You know, I think, and Jamie Dimon also, I think, you know, made some comments around private credit that I know were picked up in the headlines. I think that, again, you know, private credit, it's been sort of, you know, the hot item for us all to talk about. But, you know, maybe, you know, and we are seeing, you know, continued strength. I think we do expect continued fundraising. But, you know, I would say nothing really stands out this quarter for many of the banks.

7:27Yeah. Lisa was asking before we went on there, can she ask you about private credit? And I said, you can ask Allison about anything and she'll have an informed opinion. That's why I'm going down this alley. Strong results out of the U.S. big banks this week. We're going to hear from the European ones, I guess, next week. When is the European Union going to say, if we ever want to compete in global finance, we have to allow cross-merger deals. Is that even on the table? I mean, I think that it does come up, and I think we have heard regulators talk about it, like, oh, yes, we should do something.

8:06But the question is, everyone wants to be the one, the victor. They want to be the one where their champion is the buyer. And so I think that's, you know, where the rubber meets the road, if you will. It will be interesting, to your point, when we see those Europeans report. Again, Morgan Stanley, record quarter in Europe. They said the first half, they called it extraordinary in Asia. Obviously, we know Asia is a lot of diverse parts. But the Europeans, like UBS, have tended to be stronger there. So if this quarter we don't see them participate and kind of follow that Morgan Stanley lead, that will give us further proof that they're actually losing share in their home market.

8:51And that should be a little bit more concerning. I mean, you could argue that the horse is already out of the barn. They've missed it. I'm just thinking 20 years ago, it was so much more competitive. They were so much more competitive. I remember just going up against some of those big European banks. And now it's almost like an afterthought. It's just amazing how that's evolved. Allison Williams, thank you so much. Appreciate that. Allison Williams, she's a senior analyst, covers all global financials. If you have any question on anything on Global Wall Street, you can just go up to Allison on the street and she'll have an answer for you.

9:22You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. This is Bloomberg Intelligence. I'm Lisa Mateo alongside Paul Sweeney. We do have some news out of Hewlett Packard Enterprise. So it's creating this new strategy committee, turning to Elliott Investment Management for help with this. Here with all the details and to break it all down for us is Wu Jin Hu, Bloomberg Intelligence Senior Technology Analyst. Wu Jin, thank you for joining us.

9:58I want to start with, of course, who is involved in who is part of this committee? Yeah, sure. Thanks, Lisa. So it is a hand-picked board member by Elliott Management. Keep in mind, Elliott is an activist investor that has a 10 % plus shareholding of HPE. I believe they made their position early in this year. And who they appointed was Bob Calderone, who has done similar type of deals in terms of taking companies private or, more importantly, operational streamlining. So any changes, I think Elliot is going to try through Bob to affect a lot of changes at HPE. Muj, just remind us what HPE is today, number one.

10:46And number two, what do they need to fix to move this thing forward? Yeah. Hey, Paul. So HPE is one of the leading enterprise IT infrastructure vendors. They provide servers, storage, now a bigger networking presence with the Juniper acquisition. And actually, quite frankly, there's quite a bit to fix. From an operational standpoint, they fumbled the first quarter results by mispricing their server business. And it seems to be reconciled now, but it flags some of the operational issues, number one. Number two, they have made a lot of M &A that just didn't create the synergies that they had hoped.

11:30So, you know, they did hire the former HP CFO to streamline the financials. And with the Juniper merger starting underway, I suspect that, you know, the new strategy board will try to find more operational synergies between the two networking businesses. Wojian, could you dig more into how it's under pressure, kind of like lagging behind Dell and growing AI? What kind of pressure is it facing in that market? Yeah, so if we think about AI, right, you know, HPE actually owns Cray. And we think about high-performance compute. They are the market leaders there. HPE has not been able to transition that trade business elegantly to the AI side of things.

12:25Let me put this into context. I think HPE should be on track for about$3 to$4 billion in AI sales this year, possibly $4 to$5, right? Dell is going to be on track for about$15 billion this year. and Supermicro is probably on track for about$20 billion this year. So they've lagged on the AI front, even though they have some of the leading technologies on high-performance compute. That's an area that could be fixable under the right hands. One more here before we let you go, Wuj. You mentioned they own Cray, they own Juniper. If I'm Elliott Management, am I thinking about maybe they could be selling or spinning off some of these businesses to enhance value?

13:12Well, you know, Bob Calderone used to be on the Juniper board, and they actually helped with the operational streamlining of Juniper, right? So I think you want to keep Juniper. There are other aspects of the networking business that you could probably parse away, right? The credit business you'd want to keep because AI is going to be the growth engine and also help you transition to the enterprise AI. All right. Woo Jin-ho, thank you so much for joining us. Woo Jin-ho is Senior Tech Analyst for Bloomberg Intelligence based down there in our BI offices down there in Princeton, New Jersey. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done.

13:55ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. Let's talk about healthcare for a second.

14:33It doesn't always work the way people expect it to. If you've ever waited on a prescription refill or had a hard time getting the care you needed, you know the feeling. The system should just work better for everyone. That's exactly what the people at Optum are trying to do every day. They're a health care company linking patient care and pharmacy services and using data and technology to drive the whole system so care is connected, not complicated, for patients and providers. Things like making it easier to get care that looks at the whole person, from primary care doctors to mental health support and even in-home care, and then using technology to make sure they all work together.

15:09technology designed to help doctors spend less time on busy work and more time with their patients. And those prescriptions? Optum is working to bring costs down, save patients money, and make it easier to get refills. Little by little, Optum is helping make healthcare work as one for everyone. Head to business.optum.com to see how. Coffee genius here. Most people see a busy cafe, but I see precision at every step, thanks to Genius from Global Payments. Transactions? Instant. Inventory? Precise. Operations? In sync. Absolutely genius. From sold-out crowds worldwide to managing the morning rush, genius keeps operations running smoothly.

15:52One portado. Flawless pour, perfectly timed. Just beautiful. Big League reliability for any business. That's genius. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, let's get back to a story that crossing the tape over in Europe earlier this morning. Diageo CEO Debra Crew steps down. What's going on there? Duncan Fox, Bloomberg Intelligence Senior Consumer Staples Analyst, joins us here. Duncan, what's happening at Diageo?

16:34well i suppose the performance of the shares and the organic growth and sales etc haven't been very good for the last couple of years since she became ceo so there was sort of rumors bit of pressure that she should go but it's ironic that she has outperformed the other spirit companies in europe over that time period so i think you know it just shows you have to show something to shareholders as not to sort of have rumblings of discontent in the background. So how long has she been there? And then who's stepping in for now? Well, at the moment, well, she's been there two years as CEO, and she was sort of going to take over from the previous CEO.

17:17And she'd been there about six to nine months before that to sort of get to know the business. Temporary CEO is going to be Nick Chiangyangy, who's the CFO. He's only been there nine months. So it's quite clear they now have to go out and get the right CEO to take them to the next phase, which essentially is getting through tariffs. And now that they've got rid of the excess inventory in most countries around the world, actually driving organic growth again. All right. Looking at the stock over the last five years on a compounded annual basis, Diageo down 5 percent per year. And when you put that against the FTSE, up almost 11 % a year, you see the real underperformance there.

17:57But if you just look at it relative to the FTSE All Share Beverages Index, that's down more than 2%. So it's not that bad relative to the industry, but it's a tough industry. Duncan, are there growth drivers for the spirits business? Long term, yes. So in the short term, you had obviously the excesses after COVID where shutdowns of clubs and bars really hurt. So they had a nice benefit when everybody restocked. But then interest rates went up, inflation. That really killed people going out. And that's really the problems they've had to get over. And subsequently, you had tariffs in China, 39 percent of Kanye, not actually affecting Diageo.

18:40But obviously, President Trump, which I heard talking about just earlier, I could not tell you what European tariffs would be. We know the UK will be 10 percent, so it's good for scotch. But I have no idea what it's going to be for anything else that they've got within their portfolio. So, you know, this is the problem. It's very difficult to pin down your earnings estimates. And they've obviously been falling for about 18 months, two years now, to really say that the recovery is coming. because we just don't know whether it's going to be 200%, which was rumored at some point after April, or it could go down to 10.

19:16It really is up in the air at the moment, and that's the problem for the whole spirits industry, I'm afraid. Yeah. Now, Duncan, you mentioned tariffs, but also there's a lot of stories we've been talking about about people drinking less. I mean, does that play into this as well? Please. Except for Paul. Well, well done, Paul. We need you to drink a lot more, by the way. There's a couple of issues there. It's true that the Gen Zs have, at some point, were sort of abstaining a little bit from alcohol, and I think people took that a little bit too far, assuming that people were going to switch to cannabis-based beverages or something else.

19:53But what is happening is, what's happened for the last 20 years is that people are drinking less, but they're drinking better. So that actually plays into the spirits portfolio better than probably beer, beer, to be honest, because you'll probably have an expensive cocktail whilst you're out with friends rather than four or five beers. So it's the way they've set the strategy up. Every company I follow has that as their strategy. They push you towards the premium brands. But to do that, you need inflation to be tamed. And that is still not a guarantee, just as we sit here today, as we saw from US and UK inflation today, US yesterday and UK today.

20:33So, you know, there's still question marks over when the volume and the mixed sales growth will return in the spirits industry. Well, we'll pay close attention to that. I can guarantee you that. Duncan Fox, senior consumer staples and downhills for Bloomberg Intelligence. Just breaking down what we're seeing in the global spirits business. Had some turnover, senior management at Diageo. And just kind of getting the lowdown on that side of the consumer right now. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App.

21:09Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's go to the commercial banks. We've been talking to Allison Williams of Bloomberg Intelligence the past couple of days on the big money center banks, the big global investment banks. Now it's time to focus on the regional banks. And what I learned during a regional bank crisis a few years ago is the United States has about 5 ,000 regional and community banks around the country. I had no idea it was that many. I don't think Herman Chan follows all of them, but he follows a lot of them. Herman Chan, Bloomberg Intelligence Senior, NLC covers the U.S.

21:42regional banks. What are you expecting, Nate, to hear from your banks this quarter? How is their business? Right. So earning season's kicked off today for a number of regionals. And what we've seen is just a resilient economy. Credit quality was really stable. A lot of the banks reduce their bad debt provisioning, so provisioning for credit losses. And that just shows that you're not seeing charge-offs really rise from here. Consumers are active in spending, and commercial borrowers are really transacting. They're preparing for tariffs, and you've seen an increase in lending activity because of that.

22:23Now, when we look at local banks, I look at my local bank, and sometimes it seems like more of a billboard. I don't see it as so busy. I mean, talk about the trend of how these local branches are changing. I mean, some are cafes even. Right, yeah. Banks view their branches as a marketing ploy and really to help support their customers. One thing that they're doing is they're reducing the real estate footage within these branches. So that's helping reduce costs. But a lot of the regionals that I cover are really expanding as well. They're growing in new markets, particularly where the growth is.

23:03So I cover a number of Midwest banks like PNC and Huntington, and they're growing in the higher growth areas, in the Sun Belt areas. So that's something that we see ongoing and just changing the mix of the demographic growth for that companies. How did the regional banks compete with private credit? A lot of the private credit funds that we talked to, at least at the beginning, they started out targeting the mid-market, middle-sized market companies, not like the big multi-gajillion dollar deals. But that's right where those regional banks like to play. Right. How's that dynamic, competitive dynamic working?

23:42Yeah, it's been interesting. I would say that for a lot of the regionals, there's not a lot of direct competition quite yet. I would say the private credit folks are are catering to a more riskier company. So, for example, we've taken a look at this a little bit where the private credit companies are, you're talking about loan yields north of 10%, whereas the traditional middle market bank borrower is much more stable. So we're talking about 6%, 8 % yield. So it's a different company, but we do see private credit really will continue to encroach over time. So you talked about some of the risks, some of the challenge that regional banks are facing.

24:27What are some of the things that they can kind of look forward to? Yeah, really what a lot of the regional banks have talked about thus far in the second quarter earnings is there's some pent up demand in lending. And that's been positive. Their customers are preparing for tariffs and really increasing their line utilization, which is helping commercial and industrial lending. And they've been really saying one about the risk of tariffs. And we haven't seen really the credit quality deterioration that folks may have anticipated in April after Liberation Day. Credit quality, specifically commercial real estate.

25:08There was concern that if there was going to be a problem in our financial system from some falling, particularly office real estate, that we'd see it in the middle-sized regional banks. Have we seen that? Yeah, I would say that's an ongoing issue. We've seen losses continue, but they're manageable. Office commercial real estate on average for the companies that I cover in the large regional bank space, it's about 2 % of their total loan portfolio, so it's manageable. PNC just talked about this earlier just a few moments ago on their earnings call, and they said that charge-offs could rise in future quarters because of deterioration in commercial real estate, but they're already fully reserved for that and they prepare for that eventuality.

25:53Now, I cover a lot of different conferences here at Bloomberg, and one of them is with banks and AI. So how do regional banks, because they're not as big as the big banks, so where do they stand as far as AI and how much money they put into it? Yeah, I view AI as a tool for the regional banks to continue to reduce their expenses. So it should help them in ways like reducing the employees in the cost center is one where regional banks use chatbots and AI-powered chatbots to really help their customer base in a more efficient manner. And things that are more human-intensive, it could help reduce and streamline operations.