WEBVTT - Boeing in Talks To Buy Spirit Aero 0:00:02.920 --> 0:00:07.280 Bloomberg Audio Studios, Podcasts, radio news. 0:00:09.960 --> 0:00:13.840 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:00:13.920 --> 0:00:17.000 weekdays at ten am Eastern on Apple card playing Android 0:00:17.040 --> 0:00:20.120 Auto with the Bloomberg Business app. Listen on demand wherever 0:00:20.200 --> 0:00:25.079 you get your podcasts, or watch us live on YouTube again. 0:00:25.200 --> 0:00:26.800 M and A talk just kind of coming across the 0:00:26.920 --> 0:00:31.000 tape here Boeing and talks to buy supplier Spirit Aerosystem. 0:00:31.040 --> 0:00:33.120 Spirit air System stock is higher Boeing a little bit 0:00:33.159 --> 0:00:35.680 lower here. But you know, one could argue this is 0:00:35.680 --> 0:00:38.040 a transaction that probably needs to happen for Boeing to 0:00:38.320 --> 0:00:41.440 address some of their concerns. Let's bring on them. George Ferguson. 0:00:41.440 --> 0:00:44.400 George Ferguson covers the aerospace and airlines of business for 0:00:44.440 --> 0:00:49.000 Bloomberg Intelligence. George tell us why Boeing would want to 0:00:49.040 --> 0:00:51.160 do this transaction. 0:00:52.720 --> 0:00:57.160 Good morning, Paul. Quality control. It's absolutely quality control. They 0:00:57.240 --> 0:00:59.560 must be looking inside Spirit. I know they've been looking 0:00:59.560 --> 0:01:05.640 inside spe for months. My guess is they've looked inside 0:01:05.760 --> 0:01:09.240 and they just feel like they can't control quality well enough. 0:01:09.880 --> 0:01:13.640 As an outsider. They used to own Spirit, not as 0:01:13.680 --> 0:01:16.320 it looks exactly now, but they used to own you know, 0:01:16.680 --> 0:01:21.039 those facilities. It makes a majority of the seven thirty 0:01:21.040 --> 0:01:24.040 seven fuselage, it makes the front portion of the seven 0:01:24.080 --> 0:01:27.760 eight to seven, two extremely important products. I think they've 0:01:27.760 --> 0:01:31.240 looked inside and they said, we can't control quality well 0:01:31.360 --> 0:01:32.440 enough from the outside. 0:01:32.720 --> 0:01:33.920 We've got to buy this thing. 0:01:34.160 --> 0:01:36.880 Do we trust Boeing to have the kind of quality 0:01:36.880 --> 0:01:38.039 control that Spirit needs? 0:01:39.480 --> 0:01:40.600 Bowe doesn't have a choice. 0:01:40.600 --> 0:01:43.039 Boone's got to get quality control or they. 0:01:43.040 --> 0:01:46.280 Got a major problem on their hands. And so I. 0:01:46.160 --> 0:01:50.480 Guess I think as an owner, I think it is 0:01:50.480 --> 0:01:54.080 the path, probably a good path forward. I do think 0:01:54.080 --> 0:01:58.440 they will get the quality issues in hand, but it's 0:01:58.480 --> 0:02:00.880 going to take some time, but they have to. 0:02:00.640 --> 0:02:01.640 They have no choice. 0:02:01.680 --> 0:02:03.880 Yeah, I'm looking at the stock A bug is pretty 0:02:03.920 --> 0:02:06.600 much unchanged on the news here. I think if I 0:02:06.600 --> 0:02:09.799 were an investor in Boeing, I would think I may 0:02:09.840 --> 0:02:11.600 or may it, may or may not make financial sense 0:02:11.600 --> 0:02:14.079 to own this Spirit thing, but I would say it's 0:02:14.120 --> 0:02:17.600 probably the best way to move forward here. And when 0:02:17.639 --> 0:02:21.600 you talk to investors Georgia, did they think that way? 0:02:22.560 --> 0:02:22.760 You know? 0:02:23.800 --> 0:02:27.000 I think investors, you know, I don't know that you 0:02:27.000 --> 0:02:30.680 could say they all monololiithically think that way. I think 0:02:30.720 --> 0:02:32.200 if there if there could have been a way to 0:02:32.280 --> 0:02:37.000 keep it outside not have to buy it, you know, 0:02:37.160 --> 0:02:39.519 I think they that probably would have pleased people more. 0:02:39.560 --> 0:02:43.560 I mean, there will be an unwinding required in this transaction. Right, 0:02:43.720 --> 0:02:47.480 So Airbus is a three twenty. Some of the components 0:02:47.480 --> 0:02:50.799 are made at Spirit. I'm imagining that Airbus is not 0:02:50.840 --> 0:02:54.160 going to be interested in having you know, Boeing as 0:02:54.160 --> 0:02:57.720 a subcontractor on their airplane, you know, and their their 0:02:57.760 --> 0:03:00.760 other defense products, you know, for lockeed things like that. 0:03:01.160 --> 0:03:03.919 It's going to require some work I think to unwind 0:03:03.960 --> 0:03:06.960 this thing a little bit in order to you know, 0:03:07.000 --> 0:03:10.440 in order to pull it inside of Boeing. Probably energy 0:03:10.440 --> 0:03:13.480 you would prefer not Boeing to spend. But again I 0:03:13.520 --> 0:03:17.320 think it's their most important products are flowing through Spirit, 0:03:17.680 --> 0:03:20.400 and Spirit's been a source of the problems in some 0:03:20.480 --> 0:03:23.400 of those products lately. And if Boeing is going to 0:03:23.400 --> 0:03:25.320 a much higher production rate, which is where they're going 0:03:25.360 --> 0:03:28.560 to generate the cash flow they need, the profitability they need, 0:03:28.919 --> 0:03:31.480 they've got to stabilize production. And I think, you know, 0:03:31.560 --> 0:03:33.320 they must have looked at it and said we got 0:03:33.360 --> 0:03:35.360 to own it. And so if you're an investor, I 0:03:35.400 --> 0:03:39.440 think you're okay, Yeah, it's the way forward. I'd rather 0:03:39.520 --> 0:03:41.200 not have taken this path, but it's the way forward. 0:03:41.760 --> 0:03:44.040 This is the leading question, and it could be very wrong. 0:03:44.200 --> 0:03:47.200 But does this tell us anything about how bad things 0:03:47.320 --> 0:03:50.000 are at Spirit that this is the option? 0:03:51.480 --> 0:03:52.120 I think it does. 0:03:52.720 --> 0:03:54.200 So how bad are things at Spirit? 0:03:55.720 --> 0:03:57.600 To me, it sounds like it's so bad they got 0:03:57.600 --> 0:04:00.960 to buy it, And I think that's bad. Right, If 0:04:01.000 --> 0:04:03.960 you're Boeing, you do want to preserve cash, right, you 0:04:03.960 --> 0:04:05.880 don't want to go make an acquisition. You got plenty 0:04:05.920 --> 0:04:09.280 of other things to manage right now. But I think 0:04:09.360 --> 0:04:12.400 it means that, yes, the turnover at Spirit's been bad. 0:04:13.240 --> 0:04:16.080 The quality control, I think that's led it to the quality 0:04:16.080 --> 0:04:20.159 control problems. You want to have your hand in how 0:04:20.240 --> 0:04:23.360 those line workers are being managed, how the quality control 0:04:23.440 --> 0:04:27.000 is being handled. Yeah, it means it was really bad 0:04:27.040 --> 0:04:27.920 at Spirit, all right. 0:04:27.920 --> 0:04:30.640 The shares of Spirit Error Systems SPR is a ticker 0:04:30.640 --> 0:04:33.760 for your Bloomberg terminal, up fourteen percent a year today. 0:04:33.800 --> 0:04:38.359 Trading has resumed here, so obviously the market signing pretty 0:04:38.400 --> 0:04:40.840 high probability that something will get done here. So George, 0:04:40.960 --> 0:04:44.560 just looking at Boeing holistically, you know, as you've told 0:04:44.640 --> 0:04:46.840 us in the past. You know, this is a scale business. 0:04:46.839 --> 0:04:48.560 You've got to make as many planes as you can 0:04:48.640 --> 0:04:51.479 for that over that fixed cost base. You have talk 0:04:51.480 --> 0:04:53.479 to us about the production goals, but taught to us 0:04:53.520 --> 0:04:56.160 where they are in production today and where do they 0:04:56.160 --> 0:04:57.880 want to get to and do you think that's a 0:04:57.880 --> 0:04:59.880 reasonable glidepath. 0:05:01.480 --> 0:05:05.200 So they are at thirty eight today, although they'll tell 0:05:05.240 --> 0:05:08.440 you even though their suppliers are building at thirty eight 0:05:08.800 --> 0:05:11.159 and delivering the Boeing at thirty eight, Boeing is not 0:05:11.200 --> 0:05:12.880 putting thirty eight out. 0:05:13.120 --> 0:05:14.920 So I don't know. There's somewhere between. 0:05:14.960 --> 0:05:16.200 They's somewhere in the high thirties. 0:05:16.240 --> 0:05:17.560 Let's say it depends what month it is. 0:05:18.160 --> 0:05:20.520 That that's you know, their mother base is just in general. 0:05:21.480 --> 0:05:23.680 Sorry, and that's on the seven thirty seven. Yep, that's 0:05:23.680 --> 0:05:27.719 the most important product. On the seven eight seven. You know, 0:05:27.800 --> 0:05:30.560 we're in the in the I think five is six 0:05:30.720 --> 0:05:35.760 ish area right now on seven thirty seven. You know, 0:05:35.760 --> 0:05:39.960 they've got goals to be into the fifties. They've and 0:05:40.160 --> 0:05:44.240 at the end of the last expansion phase before the pandemic, 0:05:44.600 --> 0:05:48.280 before the max crashes and groundings, you know they were 0:05:48.520 --> 0:05:50.320 they were in the sixties. They're not going to go 0:05:50.360 --> 0:05:53.560 in the sixties airbuses, you know, for the seven thirty seven. 0:05:53.640 --> 0:05:57.039 Airbus is talking about going to seventy five for the 0:05:57.080 --> 0:05:59.360 eight three twenty. So I think if you and I 0:05:59.400 --> 0:06:01.880 were inside the Boeing management meetings and they told you 0:06:01.920 --> 0:06:04.680 where they really wanted to go, they want to be 0:06:04.800 --> 0:06:05.880 up there near. 0:06:07.600 --> 0:06:08.040 Airbus. 0:06:08.560 --> 0:06:11.640 They're taking a fifty to fifty complement of this market. 0:06:12.000 --> 0:06:14.840 Is that the right place to go? Yes, they're talking 0:06:14.920 --> 0:06:19.840 mid decade. Yes, probably pulling Spirit inside. Timing probably had 0:06:19.839 --> 0:06:21.560 a lot to do with that too. They thought, look, 0:06:21.800 --> 0:06:25.240 how can we stabilize this the fastest, because we don't 0:06:25.279 --> 0:06:28.040 want to keep giving away share to air Bus. 0:06:28.720 --> 0:06:30.760 Going to Spirit back to just for one second. We're 0:06:30.760 --> 0:06:34.080 also reporting that Spirit is exploring strategic options. So that 0:06:34.279 --> 0:06:36.799 leads me to believe that if the Boeing thing doesn't happen, 0:06:36.920 --> 0:06:39.000 they're still in deep trouble and they got to get 0:06:39.040 --> 0:06:41.919 a buyer or do something else. What would be Plan B. 0:06:44.240 --> 0:06:44.760 For Spirit? 0:06:45.160 --> 0:06:45.360 Yeah? 0:06:46.520 --> 0:06:49.720 Yeah, I mean when we look at Spirit spirits, you know, 0:06:49.800 --> 0:06:51.600 you know, Spirit has has a bunch of debt coming 0:06:51.720 --> 0:06:54.800 do the capital markets haven't loved them as much. I 0:06:54.839 --> 0:06:57.279 think they've they you know that some of the debt 0:06:57.279 --> 0:06:59.920 they've placed has been up in the nine percent ish level. 0:07:00.520 --> 0:07:03.359 I think the capital markets, the debt capital markets especially, 0:07:03.839 --> 0:07:06.200 have looked at the Boeing relationship and that's given them 0:07:06.279 --> 0:07:09.000 more comfort probably to give them rates that perhaps were 0:07:09.040 --> 0:07:13.240 better than what Spirit should have got. I think it, frankly, 0:07:13.280 --> 0:07:17.400 would be strategic options, you know, away from Boeing are 0:07:17.440 --> 0:07:21.640 really difficult because again some you know, some fifty to 0:07:21.680 --> 0:07:23.440 sixty I'm talking off the Kuffey I have to go 0:07:23.520 --> 0:07:27.160 pull the exact number of their revenues flow through Boeing. 0:07:28.160 --> 0:07:32.840 What I'm guessing, and that's that strategic comment, is that 0:07:33.080 --> 0:07:36.640 Spirit is probably looking at how they would spin off 0:07:36.840 --> 0:07:42.000 portions of the business that are not Boeing focused, so that, 0:07:42.320 --> 0:07:45.360 you know, so that it could continue, you know, to 0:07:45.520 --> 0:07:49.560 serve those customers. Like I said, Airbus, Lockheed, other defense 0:07:50.320 --> 0:07:53.560 companies have products that are being built by Spirit. I 0:07:53.600 --> 0:07:56.320 think They're probably looking at ways to continue to service 0:07:56.440 --> 0:07:58.680 them in an entity that would be. 0:07:59.000 --> 0:08:01.280 Outside of Boeing. 0:08:01.600 --> 0:08:05.320 You know, the fuselage building business, which is largely what 0:08:05.640 --> 0:08:08.800 Spirit does, isn't one of the great money makers in 0:08:08.920 --> 0:08:12.240 the industry. And you know, we've seen it go to 0:08:12.400 --> 0:08:16.720 some you know, to go offshore. You know, the Koreans 0:08:16.760 --> 0:08:19.040 want to be in this business, the Japanese are in 0:08:19.120 --> 0:08:22.080 this business, the Chinese are in this business. There's a 0:08:22.160 --> 0:08:25.200 lot of competition in that space, and so I think 0:08:25.240 --> 0:08:27.720 it makes it a really hard part of the business 0:08:28.240 --> 0:08:32.360 to be in to make very good returns and looks 0:08:32.720 --> 0:08:34.720 it's a space, the fuselage building space that I think 0:08:34.840 --> 0:08:37.959 Airbus has kept more inside because again they want to 0:08:37.960 --> 0:08:42.360 control their quality. So, you know, I guess that's a 0:08:42.400 --> 0:08:44.199 lot a long way of saying, I don't know that 0:08:44.400 --> 0:08:47.880 options as a complete entity away from Boeing. I don't 0:08:47.920 --> 0:08:50.079 know the great ones exist and I don't see that. 0:08:50.400 --> 0:08:53.000 My guess is they're trying to spend parts of it away, 0:08:53.600 --> 0:08:53.840 all right. 0:08:53.880 --> 0:08:55.720 George, thanks so much for joining us on short notice. 0:08:55.760 --> 0:08:59.040 Really appreciate it. George Ferguson, he covers the airspace business 0:08:59.240 --> 0:09:01.560 was the airlines is the whole complex over there, including 0:09:01.600 --> 0:09:05.440 the defense manufacturers. Again, Wall Street Journal first reported, now 0:09:05.480 --> 0:09:10.440 Bloomberg News matching that Boeing is in talks to acquire 0:09:10.480 --> 0:09:13.040 Spirit Aerosystems Holdings SPRS. 0:09:13.160 --> 0:09:14.959 The ticker Spirit is. 0:09:15.120 --> 0:09:17.400 The stock is up fifteen and a half percent today 0:09:17.600 --> 0:09:20.319 right now, So suggesting to the market believes that there 0:09:20.440 --> 0:09:22.920 is something there in s George was suggesting, Alex, it's 0:09:22.960 --> 0:09:24.040 probably something they gotta do. 0:09:24.520 --> 0:09:29.199 George was awesome, Like that was great, that was great perspective, etc. Yeah, 0:09:29.240 --> 0:09:31.240 And I thought that it was really interesting that it's 0:09:31.280 --> 0:09:34.360 the fuselage business. So if you can spin off other stuff, 0:09:34.559 --> 0:09:37.000 maybe that's the profitable money maker. You can still keep 0:09:37.040 --> 0:09:39.920 the contracts with Airbus and Boeing, but it's the fuselage business. Like, 0:09:40.000 --> 0:09:42.640 that's the part that Boeing just has to basically absorb 0:09:42.720 --> 0:09:46.640 and suck up within its within its company. We'll see 0:09:46.679 --> 0:09:47.080 if that works. 0:09:48.640 --> 0:09:52.480 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:09:52.600 --> 0:09:56.120 weekdays at ten am Eastern on applecar Play and Android 0:09:56.160 --> 0:09:58.880 Auto with the Bloomberg Business app. You can also listen 0:09:59.040 --> 0:10:01.800 live on Amazon on Alexa from our flagship New York 0:10:01.880 --> 0:10:05.160 station Just say Alexa playing Bloomberg eleven. 0:10:05.000 --> 0:10:09.120 Thirty New York Community Bank down twenty percent. All right, 0:10:09.120 --> 0:10:12.920 you know the story. It has discovered quote material weaknesses 0:10:13.120 --> 0:10:16.199 in how it tracks loan risks. They wrote down the 0:10:16.280 --> 0:10:18.600 value of the company that acquired years ago and replace 0:10:18.679 --> 0:10:21.800 its leadership to help grapple with the turmoil, there was 0:10:21.840 --> 0:10:25.200 a theory that maybe this kind of risk was idiosyncratic. 0:10:25.320 --> 0:10:27.760 They are one of the big exposures to rent control 0:10:27.840 --> 0:10:30.600 departments here in New York City that has been hurt 0:10:31.440 --> 0:10:34.880 by a revamp of some of those rent control laws. 0:10:35.280 --> 0:10:37.520 So when there's a banking potential crisis, we go to 0:10:37.640 --> 0:10:42.319 one guy, Herman cham Lumberg, Intelligence Senior analyst for US 0:10:42.440 --> 0:10:46.280 Regional banks. Herman, can we still call this idiosyncratic? 0:10:48.240 --> 0:10:51.480 It is a good question. I think it's the appropriate question. 0:10:51.760 --> 0:10:56.360 What's idiosyncratic is you mentioned the exposures to commercial real estate, 0:10:56.400 --> 0:11:02.120 specifically apartment lending in office. But what's also idiosyncratic is 0:11:02.240 --> 0:11:06.240 that it recently cleared the one hundred billion dollar asset mark, 0:11:06.400 --> 0:11:11.880 which ushers in higher capital liquidity regulatory issues. 0:11:11.600 --> 0:11:12.160 For the bank. 0:11:12.320 --> 0:11:16.680 And what's happening in our view is that it's easy 0:11:16.920 --> 0:11:19.160 to reach the big leagues of one hundred billion dollars, 0:11:19.400 --> 0:11:22.199 it looks like it's harder to stay there, right And 0:11:22.640 --> 0:11:25.480 what we're seeing is that they're facing growing pains and 0:11:25.679 --> 0:11:30.280 becoming such a bigger company, and these lack of material 0:11:30.320 --> 0:11:32.840 weakness and internal controls just reflects. 0:11:32.480 --> 0:11:37.040 That change in management. Is that usually doesn't look good, right, 0:11:37.240 --> 0:11:39.079 I guess that's contributing to the stock here today. But 0:11:39.320 --> 0:11:39.880 tell us about that. 0:11:40.200 --> 0:11:40.360 Yeah. 0:11:40.480 --> 0:11:40.720 Sure. 0:11:40.840 --> 0:11:47.040 So a few years back, the bank acquired another institution 0:11:47.120 --> 0:11:50.040 called Flagstar Bank, and the CEO of Flagstar Bank is 0:11:50.160 --> 0:11:55.520 now the CEO of NYCB. He was named the executive 0:11:55.600 --> 0:12:02.320 chairman back earlier in February once these issues became apparent, 0:12:02.640 --> 0:12:05.760 and it looks like the former CEO it just has 0:12:05.840 --> 0:12:07.080 been sidelined because of. 0:12:08.840 --> 0:12:10.920 The need for new management. 0:12:11.840 --> 0:12:15.079 Okay, So what's interesting is that if we rewind to 0:12:15.320 --> 0:12:18.360 when they were able to buy with a signature correct, 0:12:18.400 --> 0:12:20.840 some signature assets, right, it was like, oh, look, yay, 0:12:20.960 --> 0:12:24.720 they were the savior, et cetera. Is that gonna are 0:12:24.840 --> 0:12:28.199 regulator is going to rethink what being a bank savior 0:12:28.480 --> 0:12:29.800 is in that circumstance. 0:12:30.000 --> 0:12:33.199 Yeah, that's a great question, and I think it really 0:12:35.280 --> 0:12:39.680 poses a different question. Was New Your Community the right 0:12:39.920 --> 0:12:45.080 bank to acquire the signature assets and deposits if we knew, 0:12:45.200 --> 0:12:49.600 if the regulators should have known, that New Community wasn't 0:12:49.720 --> 0:12:53.120 really up to snuff up the speed on a number 0:12:53.160 --> 0:13:00.440 of these internal issues, capital issues, liquidity issues, and reserve issues. So, uh, 0:13:01.559 --> 0:13:06.400 does do the bank layers need to be more cognizant 0:13:06.520 --> 0:13:11.360 of what they're doing and anointing of potential savior and 0:13:12.280 --> 0:13:14.960 a year later, now this bank is in the crossairs. 0:13:15.600 --> 0:13:17.520 What one of the lessons I'd take away from this 0:13:17.600 --> 0:13:21.560 story is I think a basic fundamental investing lesson, which 0:13:21.640 --> 0:13:26.559 is kind of concentration risk. Look like, had so much 0:13:26.640 --> 0:13:30.880 exposure to this type of loan class i e. Loans 0:13:30.920 --> 0:13:35.280 to rent controlled apartments, that presents a whole level of risk. 0:13:35.400 --> 0:13:38.000 I either not diversified in their portfolio as much as 0:13:38.040 --> 0:13:40.720 maybe we would like. But I guess if you were 0:13:40.720 --> 0:13:43.760 investor in YCV, you knew that going in, right, Yes, 0:13:43.960 --> 0:13:44.760 you knew that. 0:13:44.880 --> 0:13:47.600 Going in that this was the bank that has historically 0:13:47.640 --> 0:13:53.600 focused on the rent regulated apartment lending sector. There they're 0:13:53.640 --> 0:13:55.960 the big ahuna in this niche business and they've been 0:13:56.040 --> 0:13:57.080 doing it for decades. 0:13:57.240 --> 0:13:58.600 So that's not new. 0:13:59.240 --> 0:14:02.640 And you should have known that a few years back 0:14:02.679 --> 0:14:07.240 when when New York imposed tougher regulations, that this was 0:14:07.360 --> 0:14:10.280 going to hurt their their main business. 0:14:10.600 --> 0:14:13.760 So it's taken a few years for just to really 0:14:14.000 --> 0:14:14.760 bore itself out. 0:14:14.880 --> 0:14:17.680 Also, maybe an investor should know, but the company also 0:14:17.760 --> 0:14:20.240 should have known, Like that part couldn't have come as 0:14:20.240 --> 0:14:21.360 a surprise from that end. 0:14:21.520 --> 0:14:24.720 No, but they're risking controls. That's a real problem exactly. 0:14:24.800 --> 0:14:26.760 And now they're trying to do what is this risk, 0:14:27.160 --> 0:14:33.160 synthetic risk something something. So basically the aesthetics sounds. 0:14:32.880 --> 0:14:37.240 Not great, but synthetic the rid of a transaction to 0:14:37.720 --> 0:14:42.400 help reduce their their loan exposures and improve their capital. 0:14:42.480 --> 0:14:46.120 So that's one way to get rid of or improve 0:14:46.200 --> 0:14:48.200 their capital without actually selling the loans. 0:14:48.360 --> 0:14:51.560 All right, for our listeners and viewers that are not 0:14:51.680 --> 0:14:53.880 exposed to New York RAN controlled real estate, talk to 0:14:53.960 --> 0:14:56.360 us about the regional banks in general. What's kind of 0:14:56.360 --> 0:14:59.160 the feeling. And you talk to investors today, are they 0:14:59.200 --> 0:15:01.440 warming up to this? I know it's bounced off that 0:15:01.480 --> 0:15:04.040 October low, right, but I'm not sure if that's a 0:15:04.080 --> 0:15:06.040 market bouncer. People are saying, I think I've seen the 0:15:06.080 --> 0:15:07.000 worst in regional banks. 0:15:07.800 --> 0:15:11.760 It's it's an interesting question. You're right that they've bounced. 0:15:11.840 --> 0:15:16.120 But now a number of folks in the market are 0:15:16.160 --> 0:15:20.320 saying potentially no rate cuts this year, which would be 0:15:20.440 --> 0:15:23.720 viewed as negative for the regional banks, just because the 0:15:23.760 --> 0:15:25.480 positive costs have risen. 0:15:25.880 --> 0:15:30.840 Yeah, cuts because the economy is good and accelerating, So wouldn't. 0:15:30.440 --> 0:15:30.960 That be good? 0:15:31.280 --> 0:15:33.560 There's two things that that weigh on that. 0:15:33.960 --> 0:15:36.400 Number One, there's not a lot of loan growth and 0:15:36.840 --> 0:15:41.680 rate cuts would improve loan demand. And number two, elevated 0:15:41.760 --> 0:15:44.720 interest rates is bad for credit quality and being able 0:15:44.840 --> 0:15:46.840 to refinance the existing loans. 0:15:46.960 --> 0:15:49.080 And the decline and value. 0:15:49.320 --> 0:15:53.480 In areas like office commercial real estate could hamper banks 0:15:53.560 --> 0:15:54.320 credit quality. 0:15:54.840 --> 0:15:56.800 So where are we all on that commercial real estate risk? 0:15:56.960 --> 0:15:59.080 I kind of feel like it's a time bombs still 0:15:59.160 --> 0:16:01.840 out there, and at any time over the next two 0:16:01.960 --> 0:16:04.960 or three or four years, maybe multiple times over that timeframe, 0:16:05.240 --> 0:16:08.080 we're gonna have bank a or group of banks are 0:16:08.160 --> 0:16:10.280 going to call out CIRI is a reason why they 0:16:10.960 --> 0:16:13.880 really missed or they have to really up their reserves or. 0:16:13.840 --> 0:16:15.000 Something like that. Where are we on that? 0:16:15.280 --> 0:16:19.680 Yeah, that continues to play out. We saw that with 0:16:19.840 --> 0:16:22.480 your community in the fourth quarter. We'd expect more of 0:16:22.560 --> 0:16:27.840 that going ahead in the coming quarters. That being said, 0:16:28.400 --> 0:16:31.440 the risk in our view is really relegated to the 0:16:31.560 --> 0:16:33.160 smaller banking institutions. 0:16:33.200 --> 0:16:35.400 We just looked at some data which I think was 0:16:35.480 --> 0:16:37.280 pretty interesting. Since the. 0:16:40.360 --> 0:16:44.880 COVID era starting in twenty nineteen, the top twenty five 0:16:45.320 --> 0:16:48.000 US banks have grown their commercial real estate loans by 0:16:48.040 --> 0:16:51.360 only two percent, and then the large the smallest banks 0:16:51.400 --> 0:16:54.200 have grown their commercial real estate by forty three percent. 0:16:54.400 --> 0:17:00.520 So that shows me that really the risk is comprised 0:17:00.640 --> 0:17:02.440 largely in the smaller bank cohort. 0:17:02.760 --> 0:17:05.239 That's interesting. So let me ask a question. Went back 0:17:05.240 --> 0:17:07.680 to the FED cut, So if we don't get a 0:17:07.800 --> 0:17:10.120 cut for this year, let's just pretend game out. 0:17:10.200 --> 0:17:12.760 Did that just Torton wor other people know it's just Torston? 0:17:12.800 --> 0:17:13.040 I think. 0:17:13.359 --> 0:17:14.960 I think a couple of weeks ago people were talking 0:17:14.960 --> 0:17:17.160 about the worry that we may have to have another 0:17:17.280 --> 0:17:20.359 hike because inflation was reaccelerating. But this is maybe the 0:17:20.400 --> 0:17:22.720 first I've heard of no cuts at all. So if 0:17:22.760 --> 0:17:25.800 that happens and there's no cuts, who's going to be 0:17:25.920 --> 0:17:28.800 under pressure? I mean, you mentioned the fact that a 0:17:28.920 --> 0:17:32.600 cut would help loan demand, So who's already seeing sketchy 0:17:32.680 --> 0:17:33.160 loan demand? 0:17:33.359 --> 0:17:33.520 Right? 0:17:33.640 --> 0:17:37.000 So that's an industry phenomenon where where we're not seeing 0:17:37.040 --> 0:17:41.560 loan growth across the group. The FED puts out weekly 0:17:41.680 --> 0:17:44.680 data and it shows that loans are down quarter to 0:17:44.760 --> 0:17:48.280 day in commercial loans, so that's a big driver of 0:17:48.840 --> 0:17:51.720 the regional bank the large region on bank balance. 0:17:51.400 --> 0:17:57.280 Sheets, so that's hampered. It's going to affect. 0:17:57.000 --> 0:18:00.800 Banks like probably New York community the most because any 0:18:01.440 --> 0:18:05.719 potential rate cuts review as a savior for them because 0:18:05.880 --> 0:18:08.760 then their borrowers could refinance at rates. 0:18:08.760 --> 0:18:10.640 All right, Herman, thanks so much for joining us. Hermy Chands, 0:18:10.640 --> 0:18:12.280 senior analysts for the banks, joining us here in our 0:18:12.280 --> 0:18:13.639 Bloomberg Interactive Broker Studio. 0:18:15.520 --> 0:18:19.359 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:18:19.480 --> 0:18:22.800 weekdays at ten am Eastern on Affocarplay and Android Auto 0:18:22.920 --> 0:18:25.760 with the Bloomberg Business App. Listen on demand wherever you 0:18:25.880 --> 0:18:28.880 get your podcasts, or watch us live on YouTube. 0:18:30.160 --> 0:18:30.439 This is the. 0:18:30.440 --> 0:18:34.159 Bloomberg Intelligence Radio Show. We bring you great analysis with 0:18:34.440 --> 0:18:38.040 all our Bloomberg Intelligence folks. Two thousand companies, one hundred 0:18:38.040 --> 0:18:40.399 and thirty industries. You want to know about it, they 0:18:40.520 --> 0:18:42.320 cover it. We also like to give you a perspective 0:18:42.359 --> 0:18:44.520 of how to invest on a broader level, particularly on 0:18:44.560 --> 0:18:46.960 a day where the data My point to, maybe we're 0:18:46.960 --> 0:18:48.879 going to get some fed cuts, but then Tauris and 0:18:48.880 --> 0:18:51.040 Slackowapaula said, you're not going to get any cuts this 0:18:51.160 --> 0:18:54.520 year because the economy is just actually accelerating. Things are 0:18:54.560 --> 0:18:57.440 too strong. So Anna Rappern joins us now she is 0:18:57.520 --> 0:19:00.960 CIO at CBIZ Investment Advisory Service. Says Anna, do you 0:19:01.080 --> 0:19:03.879 agree with Torsten Slock maybe or what's the case for 0:19:04.119 --> 0:19:05.280 no cuts at all this year? 0:19:06.480 --> 0:19:08.840 I don't know about no cuts, but I think it's 0:19:08.880 --> 0:19:11.560 certainly difficult for the FED to raise rates at this 0:19:11.800 --> 0:19:15.240 time or at least looking out into twenty twenty four. 0:19:15.400 --> 0:19:17.520 And it's not just the inflation, it's their target of 0:19:17.600 --> 0:19:21.199 two percent. It has been really sticky. Sticky doesn't mean 0:19:21.240 --> 0:19:23.960 it's not falling sticky me that's falling very slowly and 0:19:24.040 --> 0:19:26.840 that it's very very bumpy. So either the FED is 0:19:26.880 --> 0:19:30.440 going to have to accept a higher than two percent 0:19:30.520 --> 0:19:33.440 inflation rate and call it maybe the momentum is heading 0:19:33.520 --> 0:19:37.280 down and start to normalize rates, or they may have 0:19:37.440 --> 0:19:40.000 to be higher for longer. That may be one cut, 0:19:40.240 --> 0:19:42.639 maybe two cuts, maybe no cuts. But I think no 0:19:42.800 --> 0:19:45.399 cuts is that's a pretty hockey shew. 0:19:47.040 --> 0:19:50.880 He's certainly got some airtime if nothing else today, Anna, 0:19:51.200 --> 0:19:54.080 what do you think about this kind of soft landing 0:19:54.760 --> 0:19:56.840 scenario that seems to be out there? People kind of 0:19:56.880 --> 0:19:58.560 feel like I think the Fed's doing a pretty good 0:19:58.600 --> 0:20:02.040 job here negotiating a soft landing. You buy into that, well, 0:20:03.359 --> 0:20:03.800 I think. 0:20:03.720 --> 0:20:07.199 You have to look at the underlying risks that are 0:20:07.240 --> 0:20:09.520 in the markets. I mean, there's the labor market. You know, 0:20:09.880 --> 0:20:12.720 weakness in the fringes that we've seen, and this is 0:20:12.800 --> 0:20:15.720 sort of like, you know, what would a recession look 0:20:15.920 --> 0:20:19.000 like if we didn't have external shocks? If you think 0:20:19.040 --> 0:20:22.760 about the last three recessions that we had, they all 0:20:22.880 --> 0:20:25.720 came from crazy external shocks. How often do you have 0:20:25.760 --> 0:20:28.240 a pandemic? How do you often do you have a 0:20:28.320 --> 0:20:32.159 global financial crisis? Maybe there's a tech bubble. I don't know, 0:20:32.240 --> 0:20:33.879 depends on who you asked, but that was in the 0:20:34.000 --> 0:20:39.040 late nineties. These are sort of triggered by outside factors. 0:20:39.600 --> 0:20:42.560 If you have a normal economic cycle where you really 0:20:42.720 --> 0:20:45.320 have like a natural boom and bust, you're going to 0:20:45.359 --> 0:20:47.679 see weakness around the fringes. And I think we're starting 0:20:47.760 --> 0:20:50.959 to see that and in the consumers labor market as 0:20:51.000 --> 0:20:54.040 well as delinquency rates, et cetera. And you're starting to 0:20:54.119 --> 0:20:58.160 see some cracks in the markets, especially with New York 0:20:58.640 --> 0:21:01.200