Monday Musings: September 21, 2020

Sep 21, 2020

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Public Trust Credit Team
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What does TikTok tell us about the future of data?

The potential upcoming partnership between TikTok, Oracle, and Walmart might seem like a strange union, especially when compared to the early front runner in the deal (Microsoft), but the partnership sheds light on what the future of data could be in the technology space. In looking at the sale in general, the push from the U.S. to require the parent company, Bytedance, to divest TikTok’s U.S. operations follows a broad trend of western governments beginning to view their citizen’s data as a national security issue. While the U.S. was the first country that had companies harness the value of user data for advertising, China was one of the first countries to treat that data as a national security threat when it set up the “Great Firewall.” Now, the tables have turned and the U.S. is curbing other country’s access, but compared to the E.U., the U.S. is late to the game. The TikTok sale shows that governments across the world are more cognizant than ever about where their citizen’s data could end up, potentially leading to issues for U.S. tech companies that rely on that data to operate.
 
Turning our attention to TikTok’s suitors, Microsoft was the obvious frontrunner but ultimately lost to Oracle and Walmart. But what do Walmart and Oracle even want with a social media company? The answer implicates just how important user data has become to the strategy of the U.S.’s largest companies. Oracle wants to migrate TikTok to its cloud platform to showcase that it can compete with the largest players in the space as well as wanting to sell TikTok’s treasure trove of data. On the other hand, Walmart wants access to the data for further targeted advertising and crafting product strategy. The unlikely winners of this deal showcase that data has become so important in corporate strategy that companies are willing to shell out for partnerships that do not fit their traditional operating model as long as those partnerships can continue to supply high-quality demographic and user data.

Global banking trends

Last week, a few members of the Public Trust Credit Team virtually attended the annual Barclays Global Financial Services Conference and Yankee Bank Credit Forum; this forum gives buy-side analysts a unique opportunity to hear from management teams as well as the opportunity to hold one-on-one discussions with investor relations at some of the largest global financial institutions. Takeaways from the meetings served as additional confirmation that the domestic and international financial sector, specifically with respect to the largest global players, remains on solid financial footing and that their highly diversified business models and robust balance sheets have positioned them well to navigate today’s challenging environment.
 
In general, capital metrics for both domestic and international banks remain well in excess of regulatory minimums and internal targets, providing flexibility in the face of risk-weighted asset inflation and subsequent volatility in regulatory capital. Strong deposit inflows through the first half of the year have left the sector flush with liquidity, while banks were able to leverage their liquidity reserves to secure stable funding at the onset of the crisis when capital market conditions were more volatile. A significant uptick in non-performing loans (NPL) has yet to materialize thanks to the unprecedented fiscal and monetary stimulus programs seen worldwide and the many payment deferral programs that were put in place by the banking sectors around the globe. As a result, most banks expect NPLs to materially worsen in 2021 once the effects of the stimulus and relief programs start to fade. At present, the sector appears adequately provisioned for loan losses; however, future provision levels will remain dependent on the outlook for the macroeconomy. For instance, the recent rise in daily COVID-19 cases across Europe could prompt a recalibration of the economic recovery assumptions that banks use in their provisioning models, especially if the trend in rising cases leads to additional lockdown measures.
 
Positively, most of the large banks were able to generate profits over the past two quarters and are expected to remain profitable in the foreseeable future despite revenue pressures stemming from the lower-for-longer rate environment. At this time, merger and acquisition activity remains muted for the banking sector and is likely to pick up once the economic landscape looks clearer. Interestingly, the global pandemic had the notable effect of accelerating the digital transformation of the banking sector across the world, likely speeding up the pace of branch closures and helping reduce expenses going forward.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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