BlackRock (NYSE:BLK) released its Q1 2023 earnings report on 14 April 2023. One of the first major financials to report since the collapse of Silicon Valley Bank (SVB), the market eagerly awaited the results as guidance for the banking sector.
Here’s what we learned from the earnings call.
Market forces prompt a hit on revenues
Martin Small Senior MD, CFO and Global Head of Corporate Strategy began by describing how the “financial cracks and economic damage from this rapid rate hiking cycle burst into view over the last few weeks, 20 years of easy money is definitely behind us.”
Small described how lower performance fees, lower markets, and dollar depreciation had driven a fall of 10% in revenues year-on-year, to $4.2 billion for the quarter.
“First quarter base fees and securities lending revenue of $3.5 billion was down 9% year-over-year,” said Small, before telling us that its Aladdin platform delivered record net sales – though when offset against foreign exchange headwinds and one-off fees, this worked through to an approximately flat sales revenue.
Performance fees were down almost 40% on hedge funds and other alternative investment products.
Costs fall overall
Total expenses fell 5% compared to the same quarter a year earlier, primarily because of reduced employee compensation and benefits, which decreased by 6% because of the impact of lower operating income and performance fees on incentive compensation.
However, general and administrative expenses increased by 6% as the cost of marketing and promotional efforts filtered through – though these were down by 10% sequentially.
Squeezed margins squash income
The overall effect of the fall in revenues and expenses delivered a fall of 380 basis points in operating margin to 40.4% compared to a year ago, resulting in a 19% year-on-year fall in net income. This translates to $7.93 per share on an adjusted basis, compared to $9.55 in the first quarter of 2022. However, this was higher than consensus analysts’ expectations of $7.67.
However, inflows and assets under management grow strongly
On the earnings call, Chairman and CEO Laurence Douglas Fink discussed BlackRock’s assets under management. Here was where the good news really started to flow. In 2022, BlackRock captured more than a third of long-term industry inflows. This momentum has continued into 2023, with an industry-leading $110 billion of inflows in the first quarter compared to around $86 billion in the same quarter a year earlier.
Assets under management increased by $500 billion to $9.1 trillion compared to the $8.59 trillion in the fourth quarter of 2022. Though this is still some way below the $10 trillion under management a year earlier, it is a big step in the right direction.
Tech business exceeds expectations
BlackRock has made significant investment in its strategy to develop and deliver a diversified and resilient technology platform to institutional and private clients. Its Aladdin technology and asset management platform helps clients to measure and understand portfolio risks and manage exposures.
The company has positioned itself to be a partner of choice, and this is demonstrated in the performance of its technology sector, where revenues of around £340 billion in the quarter were only 0.3% lower than a year earlier.
Leadership walking the walk
Sometimes it’s not only about the numbers, but about the perception of management. Since the financial crisis of 2008, we’ve read much about C-suite earnings being unaffected by collapsing company earnings.
It’s refreshing to note that BlackRock’s leadership team has taken pay cuts to reflect reduced profits and the squeeze on their employees’ pay packets. Fink took a 30% cut. Other members of the board saw their packages reduced similarly.
Hunting transformational opportunities
There is no doubt that BlackRock has benefited from the SVB debacle. After the regional bank’s collapse, the banking sector has been under pressure. Depositors have rushed to reduce exposure to smaller, under-capitalized banks and moved money to larger financial institutions. BlackRock has undoubtedly benefited from this.
BlackRock has sounded the intention to seek out transformational opportunities. They looked at Credit Suisse before it merged with UBS recently. Fink said, “I said to be in the game, we must play the game. And so, we’re in the game.”
He added, “Recent market volatility and stress in the regional banking sector are the consequences of prolonged periods of aggressive fiscal and monetary policy coming to an end. I look at the issues that we are seeing today, the market dislocations, as enormous opportunities for BlackRock.”
“If there is an opportunity to do something transformational, we are going to be prepared to do it.”
Short-term pain, long-term gain
Yes, BlackRock’s revenues and earnings have fallen year-on-year. But BlackRock’s business is in money management. Markets continually ebb and flow. They go up and down. Portfolio values and performance never move in an unbroken upward trajectory.
What is important is to focus on the long-term. To take advantage of the opportunity. To assess, manage, and grow. BlackRock has demonstrated its ability to do this in the past:
- Fink was instrumental in BlackRock’s purchase of Barclays’ iShare business when Barclays needed cash in the 2008 financial crisis.
- Its technology business has been built on a series of small deals that have expanded the reach of the Aladdin platform.
“We founded BlackRock based on our belief in the long-term growth of the capital markets, and the importance of being invested in them BlackRock has grown as the role of the capital markets has grown over the past 35 years,” Fink told analysts on the earnings call.
“I believe the current crisis of confidence in the regional banking sector will ultimately fuel another round of growth in the capital markets.
“BlackRock will be an important player, and there are going to be more opportunities for clients as people, companies and countries increasingly turn to markets to finance their retirement, their businesses, and the entire economies. BlackRock operates from a position of strength. While others may be consumed by near-term pressures, we are at the forefront of trends and opportunities that will shape our growth as a firm and deliver the best outcomes for our clients.”
As Fink remarked, BlackRock has a powerful business model, rooted in simplicity: to deliver value for clients. By doing so, the company delivers greater value for shareholders.
The growth in assets under management, and the strength of its finances will surely allow it to deliver value for clients, take advantage of market opportunities, and continue to deliver increasing value for shareholders. With a dividend yield of 3% and a payout ratio of 57%, and shares trading in a PE of around 20, BlackRock could make a useful addition to an income investor’s long-term portfolio