With two big debt underwriting banks posting Q3 results on Friday, Oppenheimer analyst Owen Lau looked at what that means for two publicly traded U.S. credit ratings firms — S&P Global (NYSE:SPGI) and Moody’s (NYSE:MCO).
On a Y/Y basis, debt capital market revenue fell 40% at JPMorgan and 35% at Morgan Stanley. Oppenheimer’s estimate for S&P Global’s (SPGI) Ratings revenue was for a 32% decline, and for Moody’s (MCO), a 30% drop.
That’s a bigger decline than the consensus estimates of -28% for SPGI’s Ratings revenue and -27% for MCO’s Ratings revenue. Those “appear to be a bit optimistic, and there could be a downside risk,” Lau said.
Both companies rate publicly traded debt issued by corporations,, municipalities, and governments. The ratings are important for the debt issuers because the higher their rating, the lower their borrowing costs will be. But as most central banks hike interest rates to combat inflation, the cost of borrowing increases, reducing demand for new debt offerings.
Against the background of reduced activity in debt issuance, expense control becomes especially important for both companies, he said. Currently, he doesn’t expect either to shrink their employee base, even as it focuses on other areas like SG&A and bonuses. “If SPGI and MCO can manage the expense better than expected, it can be an upside to our estimates,” Lau said.
For the year through Oct. 14, 2022, JPMorgan (JPM) held the top spot among global banks in debt capital markets revenue, with $357.18B, and Morgan Stanley (MS) was in fourth place, with $340.81B, according to Dealogic data.
Lau doesn’t expect upbeat outlooks in the near term from either company due to the weak issuance and soft equity market. “While we are still cautious for the near term, SPGI and MCO are high-quality stock supported by strong secular tailwinds,” he said.
He has Outperform ratings on SPGI and MCO as their valuations have declined to “attractive levels for long-term investors.”
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