BlackRock: 2023 Will Be An Interesting Year

In August of last year I believed that shares of BlackRock (NYSE:BLK) found themselves between a rock and a hard place. BlackRock is a serial outperformer, which is a bit of a contradiction as it has embraced the concept of passive investments through low-cost ETFs, fueling a massive boom in recent years.

Despite a setback in the AUM, it was a strong balance sheet and positioning which made the long term outlook for BlackRock looking quite bright.

A Recap

Shares of BlackRock have really come to life after the 2009 recession, as it took decisive M&A action which laid the foundation for the shares in the decade which followed. The continued rise of ETFs and rising AUMs made that BlackRock has been a massive outperformer as the 2021 peak brought shares to a high of nearly $1,000 per share.

The pullback in technology names in 2022, and a general setback in the valuations of the market at large, made that shares have largely traded in a $550-$750 range over the past year.

Early in 2022, BlackRock posted its 2021 results, a year in which the company posted assets under management of more than $10 trillion, supported by rising valuations and $540 billion in asset inflows for the year, trending in excess of $1.5 billion per calendar day.

The company generated $19.4 billion in revenues on this (equal to less than 0.2% of the assets under management). The business is very profitable, posting operating profits of $7.5 billion and net earnings of $5.9 billion, equal to $38 per share.

Despite a $114 billion asset inflow in the first quarter of 2022 and $90 billion number for the second quarter, assets under management fell to $8.5 trillion, as I believed that the company should be able to replicate its 2021 results. This made that shares looked fairly valued in the high $600s, which made me a continued holder of the shares.

Softer Conditions

As markets at large saw a big dip in the fall of last year, this was evident in the third quarter results. The company did see inflows fall to $65 billion, as assets under management fell just below the $8 trillion mark. This made that revenues fell 15%, amidst lower assets under management and also lower incentive payments, hurting earnings as well.

Fourth quarter net inflows of $113 billion were very good, as this and a small recovery in markets made that assets under management rose to $8.6 trillion. With the second half of the year being a bit weaker than I anticipated in August, full year sales fell from $19.4 billion to $17.9 billion as operating profits fell by a billion to $6.4 billion. With net debt down to $5.2 billion, earnings of $34 per share came in a bit softer than I believed in August, but the market was looking through this as shares traded in excess of $700 at the start of the year, in part because equity markets started on a very strong note as well.

Inflows continued despite the market turmoil as the hike in interest rates made that BlackRock is catering another group of investors as well, those are savings accounts and investors which have typically invested in deposits, but now find themselves being paid to hold interest rate products, even risk-free alternatives, to the extent that these exist. It is exactly this trend which hurt the banking sector here.

The 152 million shares have fallen to $636 at this point in time amidst the carnage in the banking sector, valuing equity of the business at around $97 billion as the company has a small net cash position on its balance sheet.

The Banking Opportunity?

While BlackRock is a great long term performer and 2023 looked to start on a strong note, it has been the issues in the (regional) banking sector which created concerns. The issue is that unlike its transformational purchase of Barclays Global Investors in 2009, it now feels a bit early for the bank to look to play a role as consolidator here.

This comes as the bank actually believes that more financial institutions will run into troubles in the coming period, and given this expectation it is somewhat alarming that the bank is reportedly interested to acquire (parts of) Credit Suisse, although the potential deal structure (a complete takeover, or purchase of some divisions) can make a huge difference of course.

Press coverage suggests that Swiss-based bank UBS might be more in the front lead here, and/or that the government might even nationalize the bank. Both UBS and BlackRock likely would be interested in the wealth management business and the asset base of the bank, rather than acquiring the other banking activities, but it is mere speculation to see who ends out on top.

And Now?

For me BlackRock stock remains a top long-term holding on the back of the continued positioning and asset inflows, as the latter confirms the continued strong positioning of the business.

The timing and volatility in financial markets will dominate the short term financial performance. With regard to the M&A speculation with regard to Credit Suisse, perhaps a ¨clean¨ deal, or cautious approach with M&A seems to make sense, although that BlackRock has a great track record in this, and a very strong balance sheet to pull such deals off.

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