What Bank Earnings Say About S&P Global and Moody’s Q3 Revenue: Oppenheimer (NYSE: MCO)
As two major debt underwriting banks released their third-quarter results on Friday, Oppenheimer analyst Owen Lau looked at what this means for two publicly traded U.S. credit rating firms – S&P Global (NYSE: SPGI) and Moody’s (NYSE: MCO).
“After unpacking JPMorgan (JPM) and Morgan Stanley (MRS) results, we maintain our cautious view of Q322 Ratings revenue for SPGI and MCO,” Lau wrote in a note.
On a Y/Y basis, debt capital market revenue fell 40% at JPMorgan and 35% at Morgan Stanley. Oppenheimer’s estimate for ratings revenue from S&P Global (SPGI) was down 32%, and for Moody’s (MCO) down 30%.
This is a bigger drop than consensus estimates of -28% for SPGI rating revenue and -27% for MCO rating revenue. These “seem to be a little bullish and there could be downside risk,” Lau said.
Both companies rate publicly traded debt issued by corporations, municipalities and governments. Ratings are important for debt issuers because the higher their rating, the lower their borrowing costs will be. But as most central banks raise interest rates to fight inflation, the cost of borrowing rises, reducing demand for new debt offerings.
Against the backdrop of reduced activity in debt issuance, spending control becomes particularly important for both companies, he said. Currently, he also does not expect their employee base to shrink, although he is focusing on other areas such as G&A and bonuses. “If SPGI and MCO can manage expenses better than expected, that can be an advantage for our estimates,” Lau said.
For the year to October 14, 2022, JPMorgan (JPM) ranked first among global banks for debt capital markets revenue, with $357.18 billion, and Morgan Stanley (MS) was at fourth place, with $340.81 billion, according to Dealogic data. .
Lau does not expect an optimistic near-term outlook from either company due to weak issuance and equity market weakness. “While we are still cautious in the short term, SPGI and MCO are high quality stocks supported by strong secular tailwinds,” he said.
It has outperform ratings on SPGI and MCO as their valuations have fallen to “attractive levels for long-term investors”.
Moody’s is expected to release its third quarter results on October 25 and S&P Global (SPGI) expects to release its third quarter results on October 27.
Looking at consensus estimates for Q3: MCO is expected to report revenue of approximately $1.37 billion vs. $1.53 billion reported in Q3 2021; SPGI is expected to record revenue of $2.93 billion in the third quarter compared to $2.09 billion in the third quarter of 2021.
The SA Quant system, which historically outperforms the broader market, has sell ratings on S&P Global (SPGI) and Moody’s (MCO).
SA contributor The Value Investor, with a Hold rating on Moody’s (MCO), explained that the company benefited from active markets in 2021 but is now suffering as it has reversed.