Mike Mayo, head of U.S. large-cap bank research at Wells Fargo Securities — who has earned his fifth No. 1 position this year on Institutional Investor’s All-America Research Team — made some time one recent morning (the day after a busy Friday of third-quarter bank earnings reports) to discuss this year’s turbulent markets, including the March regional banking crisis and the subsequent failures of Silicon Valley Bank, Signature Bank, First Republic, and Heartland Tri-State.
The veteran analyst is succinct in his thoughts about 2023: “I would just say the one word to describe the year is: Wow.”
With 30 years of experience at seven different firms, Mayo has a unique vantage point. Named one of the eight analysts who foresaw the 2008 global financial crisis, he was the first to testify on the causes to the Financial Crisis Inquiry Commission in 2010. So 2023 was a bit of déjà vu. “When the condition of banks is on the front page of every major newspaper and it’s day-to-day conversation among people away from the financial industry, you know it’s your moment of truth,” Mayo says.
The day-to-day was really more night-to-night, he adds. “It was literally nonstop,” he says. “It was constant analysis, observations, taking the pulse, writing research, talking with investors, monitoring conditions . . . wash, rinse, repeat.”
The crisis was not limited to the regional banks. “There was also a major credit reset for risk globally, so for the first time in almost 15 years, I was back to monitoring credit default swaps on all the major banks,” Mayo explains. “I was monitoring the credit default swap spreads of Credit Suisse and trying to get ahead of what was happening. It was really a cascading effect of bank issues, many of which were really unrelated, but the press was trying to make them related, and that’s all you needed to have a flammable situation back in March.” By the middle of the month, UBS had agreed to acquire Credit Suisse in a deal orchestrated by the Swiss government and the European financial markets authority.
Mayo wasn’t the only top analyst trying to make sense of macroeconomic forces and volatile markets this year. For Elyse Greenspan, the turbulence provided more opportunity than ever to be there for clients. “I think when markets are volatile, that’s when you can provide the best help and be the best resource to your clients because they’ll just have different requests depending upon what they’re focusing on,” says Greenspan, who has been in sell-side research for two decades as managing director for insurance equity research at Wells Fargo.
“I think throughout this year, definitely the number of interactions that we’ve had with clients has gone up,” she adds. “Especially if they’ve needed help as we’ve dealt with the midcap bank crisis and the overall environment in general throughout the course of the past year.”
For BofA Securities’ Craig Siegenthaler, who earns his fourth No. 1 slot in the brokers, asset managers, and exchanges sector in this year’s ranking, the macroeconomic backdrop was the key challenge. But the tenured analyst, who first joined equity research at Credit Suisse in 2005 with a focus on insurance, was prepared. Siegenthaler has covered the entire financial services sector at some point during the past 18 years, including regional banks from 2009 to 2014 while also covering asset managers. “Specifically, I first launched on the asset managers in 2007 and helped to take many of them public over the years, including Blackstone,” he says. “I later added the broker and exchange verticals.”
During this challenging year, these top analysts pursued activities outside of research to provide a counterbalance. Mayo took up powerlifting and finished second in the National Powerlifting Championships this fall. For Greenspan, it’s running, including a dozen marathons, though lately she has been focusing on shorter-distance races and those through Central Park.
For Siegenthaler, it’s spending time with his wife and five-year-old daughter, whom he has taught to ride a bike, do stand-up paddleboard, and play soccer. “Outside of work, I spend most of my time with her, and it’s a nice break from analyzing financial statements and discussing companies with investors,” he says.
Here’s how they expertly navigated another unprecedented year and still rose to the top.
Elyse Greenspan, Wells Fargo
Insurance Nonlife
How would you describe the past year in the sector you cover?
The past year has been dynamic, and each of the insurance subsectors faces different macroeconomic forces. Property reinsurers are benefiting from extreme price increases and strong expected returns on equity. On the flip side, personal auto insurers are also seeing healthy price increases, but margins have been under pressure from high and persistent inflation driving up car repair costs.
What’s the biggest challenge your sector faces right now?
Personal auto insurers are facing the pressure of significant inflation and the delayed regulatory approval process for premium rate increases. Life insurance firms have large investment portfolios, and many companies have material holdings in commercial real estate. Investors are concerned about office exposure and potential credit impairments.
What’s the best call you’ve made this year?
Being bullish on the reinsurance sector. Our top ideas are Arch Capital, Everest Group, and RenaissanceRe. All of these stocks are benefiting from a generational hard market (with significant price increases) and the strongest catastrophe reinsurance market we have seen in three decades. For example, Arch is up approximately 90 percent since the start of last October.
What’s the worst call you’ve made this year?
We double-upgraded Progressive to overweight from underweight in March. We had been negative on the personal auto sector for a couple of years and decided to turn positive on Progressive when it pivoted toward higher growth. Our upgrade was right on time for the company to post some of the worst monthly results in its history, and we downgraded the stock to equal weight in July.
What’s the best way analysts can add value when markets are turbulent?
By being there for your clients and being responsive to questions. When the midcap bank crisis began to unfold in March, we were quick to pull together insurance company debt and equity holdings of troubled banks. This is just one example of how speed to market on the right topics can add value for clients as they make decisions about allocating capital in the sector.
Mike Mayo, Wells Fargo
Banks Large-Cap
How would you describe the past year in the sector you cover?
Large-cap banks had the most disruptive year since the global financial crisis. This started with the failure of a few midsize banks and continued with a negative feedback loop — stock market volatility on Wall Street contributed to deposit outflows on Main Street, and vice versa. Many banks were painted with the same brush, leading to significant sector stock underperformance.
What’s the biggest challenge your sector faces right now?
Large banks face headwinds from rates, recession, and regulation. Pressure derives from the fastest Fed rate hikes in four decades. A slowing economy gets reflected in higher loan losses and tighter loan underwriting. Proposed regulatory changes are the most in more than a decade.
What’s the best call you’ve made this year?
We applied the theme “Goliath is winning” to the sector. The biggest banks performed the best — led by JPMorgan, the largest bank.
I was probably the most negative person on JPMorgan in the previous year because there was just spending, much with unclear targets and visibility. But then with the failures of the regional banks, I upgraded JPMorgan and made it my No. 1 pick, and it’s been the best-performing large bank in 2023.
Having covered the industry for three decades, this is really the reason the Interstate Banking Act was enacted in the mid-1990s. That was to create more diversification, not just for lending, but also for deposits, and you saw the vision from 25 years ago play out in materially better performance by the big banks. Diversification is still good, and therefore, big banks were better-positioned and more resilient. And that resiliency was reinforced by enhanced regulation after the global financial crisis. One of the questions now is, okay, regulators did a very good job. Do they need to do as much as they plan on doing now to the largest banks, when they were the port in the storm of 2023?
What’s the worst call you’ve made this year?
Truist. It failed to deliver results from the 2019 merger and hold itself accountable. I followed up with a report that it is primed for an activist.
What’s the best way analysts can add value when markets are turbulent?
Visibility. No hiding. I’m proud that our team — when it mattered most — was prolific with balanced written research and engaged with investors.
Craig Siegenthaler, BofA Securities
Brokers, Asset Managers, & Exchanges
How would you describe the past year in the sector you cover?
Rising interest rates, a volatile stock market, and mixed volume trends have created challenges for the diversified financial stocks that first emerged in 2022. However, the asset managers, brokers, and exchanges operate “capital-lite” business models that are well positioned around key secular growth themes, including the privatization of markets, the digitalization of brokerage, and the rise of independent advice through the RIA vertical.
What’s the biggest challenge your sector faces right now?
The key challenge is the macroeconomic backdrop, which is summarized by a slowing economy combined with elevated inflation. This is causing yields across the fixed-income universe to compete more aggressively for client assets with equities. We also expect rising defaults in 2024 to reinforce which managers are the best underwriters in credit, allowing best-in-class asset managers including Ares, Blackstone, and Blue Owl to take market share.
What’s the best call you’ve made this year?
In early January, we double-downgraded Charles Schwab to underperform from buy, on the investment thesis that client cash sorting and deposit growth would miss expectations. Our cautious view was proved accurate by Schwab’s financial results from the first quarter to the third quarter of 2023, with the company needing to revise down key targets, borrow liquidity from Federal Home Loan Banks, and raise brokered CDs. This all drove downside to earnings-per-share estimates.
What’s the worst call you’ve made this year?
We entered 2023 with an underperform rating on CME Group. We believed CME’s strong volume growth in 2022 was not going to be repeatable in 2023. However, the U.S. regional bank crisis in March served as a negative catalyst for much of our financial services coverage and helped CME outperform other exchanges, given its defensive and monopolistic qualities and the need for market participants to hedge.
What’s the best way analysts can add value when markets are turbulent?
It’s critical for research analysts to remain visible and be responsive to help advise their clients. Following the Covid-19 pandemic, we have been able to leverage new technologies and digital platforms to reach a wider audience than ever before. My client touchpoints outside of the U.S., including Asia, Australia, Europe, and South America, have grown by several multiples relative to before the pandemic.
