Navigating the Evolving Landscape of Investment Banking

Our analysts Betsy Graseck, Manan Gosalia and Ryan Kenny discuss the major discussions they expect to highlight Morgan Stanley’s upcoming U.S. Financials conference.

Read more insights from Morgan Stanley.

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Betsy Graseck: Welcome to Thoughts on the Market. I'm Betsy Graseck, Morgan Stanley's U.S. 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 annual U.S. 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, Manan Gosalia, U.S. Midcap Banks Analyst, and Ryan Kenny, U.S. Midcaps 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. Manan, ahead of the conference, what key themes do you expect mid-cap banks will highlight?

Manan 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 percent year-on-year, and the tone from bank management teams has been fairly mixed in the April earning season that followed the tariff announcements on April 2nd. 

Some banks were starting to see the uncertainty weigh on corporate decision making and borrowing activity, while others were only seeing a slow down 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 Graseck: So, is the long end of the curve going up a good thing?

Manan Gosalia: Yes, for net interest margins. But on the flip side, the tenure 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, and we don't expect the recent shift in the tenure will have a meaningful impact on bank capital plans.

Betsy Graseck: So, the increase in the 10-year pulls down capital a little bit, but not enough to trip any regulatory minimums?

Manan Gosalia: Correct.

Betsy Graseck: So, all in the 10-year yield going up is a good thing?

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

Betsy Graseck: Okay. All in, what's the message from mid-cap banks?

Manan Gosalia: All in, I would expect the tone to be a little more positive than the banks had at April earnings.

Betsy Graseck: Excellent. Thanks so much, Manan. Ryan, what about you? What are you expecting mid-cap advisors will say?

Ryan Kenny: So, I think we'll hear a lot about the trends in M&A. And when we last heard from investment bank management teams during April earnings, the messaging was more cautious. We heard about M&A deals being paused as companies processed the Liberation 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 U.S. 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 percent below three-decade averages. Equity capital markets volumes 50 to 60 percent 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 a cycle gets going.

So, I think for this group, the message will likely be: April and May – more challenged from a deal flow perspective; but back up of the year, you should start to expect some improvement.

Betsy Graseck: So slightly improved tone…

Ryan Kenny: 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 clients 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 Graseck: How big of a sleeve do you think this could become – as big as M&A outright?

Ryan Kenny: Probably not as big as M&A outright, but significant. And it helps give the investment banks’ relationships with financial sponsors who are active on the M&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 Graseck: 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 Kenny: Yeah, green shoots and more positive than in April.

Betsy Graseck: And Manan on your side? Same?

Manan Gosalia: A little bit more of a positive than April earnings, but more of the same as we heard at the start of the year.

Betsy Graseck: 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&A, you have to finance it, and that financing comes from either the bond market or banks or private credit. M&A financing is a key driver of CNI loan growth. A lot of people don't know that. And CNI loan growth, we do think will be moving from current levels of about 2 percent year-on-year, as per the most recent Fed H.8 data to 5 percent as M&A comes through over the next year plus. 

And then the other major driver of CNI 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 CNI loan risk, and we will dig into that outlook with managements 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, Manan, Ryan, it's been great speaking with you today.

Manan Gosalia: Should be an exciting conference.

Ryan Kenny: Thanks for having us on.

Betsy Graseck: 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.