Investor Insights Sessions, Episode 1: The Future Of Finance

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TRANSCRIPT

Sandra Lawson: Hi. Welcome to the Investor Insight Sessions, our new audiocast series where we discuss the mega forces that are changing the world and shaping the markets. I'm your host, Sandra Lawson, head of client content in the global client business at BlackRock.

In this series, we're going to bring you some inside perspectives from BlackRock on how our investors are thinking about what we call the mega forces. Mega forces are the big structural changes that are affecting the world of investing, not just today, but also well into the future.. They change the long-term outlook for growth and inflation. They're poised to create big shifts in profitability across economies and sectors, and you'll see their impact play out in everyday life as well.

We're starting our investor insight sessions with a look at the future of finance. The complex ways that economics, changing regulation and technological innovation are disrupting traditional business models. As the financial system evolves and adapts, what will the future look like for savers and borrowers? What risks and investment opportunities will this create for investors?

To help answer these questions and to imagine what the bank of the future might look like. I talked with three BlackRock colleagues who have deep experience in banking.

I started off with Alex Brazier, who's the deputy head of the BlackRock Investment Institute and a former central banker. Alex has been one of the leading voices behind the future of finance as a mega force. I asked Alex why banks are so important and what it is about their business model that can lead to instability.

Alex Brazier: Banks play a absolutely critical role in economic activity, and they do so in very many different ways. on the one hand, they're taking deposits from all of us, very short-term deposits that we use to make payments with, and they're providing us with payment services. So that's really critical to economic activity. And at the same time, they're lending long-term to households and businesses to help them fund investment and jobs and growth.

But they're doing it all together and that can cause problems because overall, banks are taking in short-term deposits and using it to fund long-term loans. So when the loans aren't paid back depositors who expect the full value of their money back get worried. And when they want to take their money out, they think they've got a promise to do so quickly. And if they all try and do it at the same time, get a bank run. and that causes real problems.

Sandra Lawson: I also asked Alex to think about what the bank of the future might look like.

Alex Brazier: I think banks could look quite different, but I think we have to remember that banks have been around for hundreds, if not thousands of years, because they play a major part in driving economic activity, and I think they will still be around in hundreds, if not thousands of years from now.

But what I think we could see is development towards a kind of platform service. Where banks are primarily a platform on which you access different services or different combinations of services. So rather than having to bank with one place and get all your services from them in one bundle, you can imagine a bank as a platform where you go and pick, who's going to provide my payment services, which leading edge tech provider is really going to be best for me in enabling me to make the payments I need efficiently and speedily. Then you'd use the platform to pick, who am I going to use to provide my rainy-day fund? My buffer of liquid assets, my current account, that's much closer to money market funds, current accounts, short term certificates of deposit, you could see a range of things there on the platform.

And then the last way in which you could see this platform developing is there could be options for how you as an investor want to invest in credit extension. Do you want to hold investments in private credit, or do you want to put your money in a more bank-like structure?

So, ways in which people can be offered more choice, but also generally, because all these different things could be unbundled in future. An industry like almost any other actually, where technology is enabling more choice for consumers and more effective service for consumers as well. So, there's no need to take banks out of the equation completely. But you could imagine some degree of unbundling of credit extension from deposit taking.

Sandra Lawson: After speaking with Alex, I wanted to dig deeper into the impact of technology on banks. So, I spoke with Natalie DeMar. She's responsible for BlackRock's credit analysis and investment recommendations on European banks.

I asked Natalie about how European banks are navigating technological change and what this might mean for the bank of the future.

Nathalie De Chaisemartin: Clearly, digitalization has brought about a seismic shift in the banking sector, both in the US and in Europe. I would say both Europe and the US I've seen a dramatic reduction in branches.

There's been a drastic increase also in mobile and internet banking. There are more daily transactions being handled digitally, and this has encouraged banks to improve their mobile and internet, offerings and strengths on also cybersecurity.

My view is that the European Bank of the future will have very few branches and will likely be near or completely digital. Walking into a bank in the future might be drastically different, mainly because a customer might be the only human inside the building.

Technology is often seen as disruptive for many banks. But I think actually for many European banks, digital banking is seen as a new opportunity to distinguish themselves from the rest of the pack.

Sandra Lawson: So, they use this as a platform to create a competitive advantage. And banks, tend to use technology effectively to capture new business rather than just simply gobbling up competition, I also talked with Kevin Maloney about the state of US banks Today. Kevin's a credit analyst within BlackRock's Global Fixed Income Group I asked him about the Bank of the Future in the us, namely the outlook for consolidation in the sector.

Keven Maloney: Overall, the large banks are still in relatively good shape they've raised capital ratios, they've kept deposits pretty much indoors, and loan growth has slowed so that, their balance sheet hasn't risen much. The story here is that profits are still okay, but the growth that we saw during covid is done.

 We probably don't see many acquisitions happen in '24. But in '25, '26, I think what we're going to see is a return to consolidation in the system. The large banks you're going to see them grow organically, but the mid-tier banks there's, about 20 of them in the next few years are probably going to do more acquisitions because they need to build scale to be competitive with larger institutions. Most of those will need to grow organically as well as through acquisitions What we expect to see is more consolidation and have some of the mid-size regional banks become bigger and more important, have larger footprints. And the larger institutions will maintain their size because they're very diversified.

Sandra Lawson: Overall, I came away with the impression that banks are indeed facing a period of rapid change. And that the future of finance is likely to play out differently around the world with more consolidation in the US and as Natalie says, fewer people and fewer branches in Europe.

But as Alex says, banks have been with us for hundreds of years, if not thousands of years. So, it would be a mistake to write them off even in the face of technological disruption.

In the next episode of our Investor Insight Sessions, we'll look at private debt, which is one of the key sources of disruption for the banking sector today, it's also one of the big investment opportunities. Thanks for listening.

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