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Speaker 1: This is Bloomberg Surveillance. A lot of the European equities

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Speaker 1: we think are incredibly achieved, Eastern Europe, Emerging Europe we

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Speaker 1: think are wonderful buying opportunities. I think there are some signs,

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Speaker 1: some early signs that manufacturing is rebounding, including in the US,

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Speaker 1: and investment outlook beyond three or four years to me

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Speaker 1: is more like a religion or a philosophy than a forecast.

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Speaker 1: Bloomberg Surveillance your link to the world of economics, finance

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Speaker 1: and investment on Bloomberg Radio. Good morning everyone, Michael McKee

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Speaker 1: and Tom Keen. Good morning Global wall Street. In a moment,

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Speaker 1: the interview of the day for Global Wall Street, Churles

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Speaker 1: Peabody will join us on Fortalist Partners as we begin

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Speaker 1: a most ugly earning season. He has been way out

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Speaker 1: front coming up Peabody on the challenges of Global Wall Street.

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Speaker 1: Of course, for those of you listening to us in London,

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Speaker 1: UH Namura out with that announcement this morning City Group

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Speaker 1: playing off seventy people as well, many of them off

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Speaker 1: the London UH desk Bloomberg Surveillance. UH this morning brought

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Speaker 1: you by Cone Resineck Accounting, Tax advisory is economic policy changes,

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Speaker 1: So do business decisions. Speak to the experts at Cone

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Speaker 1: Resneck for forward thinking advice. You need find out more

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Speaker 1: at Cone Resnec dot com. C O h n are

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Speaker 1: easy and I c K cone Resnick dot com. Michael,

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Speaker 1: it's good to have Charles Peabody. Well, it's a particularly

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Speaker 1: an important week financials us all about it, right, there's

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Speaker 1: the headline Charles Peabody within all your wonderful perspective, and

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Speaker 1: you've been very cautious on the earnings capability. How ugly

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Speaker 1: will it be in the coming ten days for the banks? Well,

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Speaker 1: it's gonna be ugly, um, particularly for the large money

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Speaker 1: center banks and brokers. UM earnings will be down, you know,

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Speaker 1: certainly double digit levels. For the regional banks. Earnings are

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Speaker 1: also gonna beaten down a year over year, but it's

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Speaker 1: gonna be much more mixed and there will be a

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Speaker 1: scattering of some improvements UM at some of the regional banks.

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Speaker 1: Where is compensation right now? When they bring up their earnings,

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Speaker 1: they tried out a percentage for compensation. Are they overcompensating?

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Speaker 1: Are they right sizing? What's the dynamic on labor that

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Speaker 1: you see at the five or six major banks. Well,

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Speaker 1: they're they're in the process of constantly right sizing. It's

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Speaker 1: it's there's no longer a big major program, but it's

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Speaker 1: it's sort of hiding off pieces, mostly around the corporate

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Speaker 1: investment bank right now. Um. But um, this quarter you

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Speaker 1: will see some unusual charges for severance, probably both at

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Speaker 1: Bank American City for layoffs. UM. And you'll see some

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Speaker 1: unusual charges for equity and centup cam which are going

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Speaker 1: to depress the quarters as well at JP Morgan and

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Speaker 1: Bank America. The JP Morgan is going to kick things

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Speaker 1: off as they usually do. But Jamie Diamond usually surprises, Uh,

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Speaker 1: is there is there a rabbit up his sleeve or

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Speaker 1: in his hat this time? I don't think this quarter

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Speaker 1: there will be. Um. I think it will be a

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Speaker 1: depressing quarter or something in the dollar thirty range, um,

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Speaker 1: which will be you know, down from you know, the

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Speaker 1: dollar sixty one that they earned last year. Um. You know,

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Speaker 1: when you look at the businesses that these universal banks run,

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Speaker 1: there's not a lot of good. You know, capital markets

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Speaker 1: revenues are going to be down plus or minus. Mortgage

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Speaker 1: banking is going to be weak. UM. Asset management revenues

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Speaker 1: are probably gonna be flatted down. Even cards which are

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Speaker 1: showing some signs of life. Credit cards are going to

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Speaker 1: have some pressures from the competitive pricing them to amics

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Speaker 1: of um renewing these reward contracts. Um so. About the

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Speaker 1: only good news is going to be on the top

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Speaker 1: line revenues or the spread income because there is some

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Speaker 1: stability in margins and good loan growth developing. You but

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Speaker 1: you have an outperformance city. But let's make this clear, folks.

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Speaker 1: There's the pe and earning season as earnings, earnings, revenues, revenues,

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Speaker 1: but there's the balance sheet idea Charles of the book

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Speaker 1: the b I mean the very book centric. Is there

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Speaker 1: an investible case now based on rising balance sheet book

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Speaker 1: versus income statement agone? Yeah, And and that's the key

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Speaker 1: tom As. We do believe that there's an earnings recession

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Speaker 1: at the bank space this year and next year, so

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Speaker 1: earnings are going to be under pressure for the next

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Speaker 1: two years um so. But we think in this next

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Speaker 1: down economic downturn, the banks are going to show that

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Speaker 1: they have managed their balant sheets very well. They double

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Speaker 1: their capital base, they've significant improved their capital, and they

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Speaker 1: de risk their loan portfolios. So we don't think that

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Speaker 1: book value is going to be impaired in this next cycle,

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Speaker 1: and that the banks will be able to continue to

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Speaker 1: go with their book value. So we're aligning ourselves with

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Speaker 1: those stocks that are selling a deep discounts to book

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Speaker 1: on the belief that book value will prove to be

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Speaker 1: true and will grow through the next economic town turns.

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Speaker 1: One of the things that UM critics of the banks

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Speaker 1: have suggested we need to look at is not just

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Speaker 1: return on equity, but return on risk, And if the

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Speaker 1: banks have de risks significantly, then maybe the metric isn't

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Speaker 1: too bad. Yeah. I think that's a good point, Mike. UM.

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Speaker 1: You know, listen, the bulls will tell you that the

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Speaker 1: first quarter doesn't matter. We we all know the first

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Speaker 1: quarter is gonna be ugly, UM, and that the second

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Speaker 1: quarter will show incremental improvement and that's a stair step

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Speaker 1: to better earnings in the second half of the year. UM,

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Speaker 1: and therefore the stocks are all cheap and aggressive bond.

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Speaker 1: The bears will tell you, yeah, we're probably seen as

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Speaker 1: bad as we're going to see in the first quarter

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Speaker 1: for the short term, and the second quarter will show

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Speaker 1: a sequential improvement, but it will still be down year

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Speaker 1: a year and I still think that full year sixteen

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Speaker 1: earnings will be down from fifteen, So any kind of

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Speaker 1: rally is going to be capped by these declining earnings UM.

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Speaker 1: And it's hard to see where the fundamental earnings power

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Speaker 1: for a sustained rally is going to come because we

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Speaker 1: don't have any visibility to capital markets revenues yet. Mortgage

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Speaker 1: banking may seasonally improve in the second quarter, credit cards

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Speaker 1: are probably going to improve a little bit, Asset management

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Speaker 1: will give a function of the markets UM, and top

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Speaker 1: line revenues will be depending on the st hiking rates

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Speaker 1: and that's very uncertain. So there's not a lot of

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Speaker 1: earnings visibility. But you could make an argument things are

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Speaker 1: as bad as they're going to get in the first

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Speaker 1: quarter is going to show that where's the drama, where's

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Speaker 1: the m and A, where's the synergistic mergers? I mean,

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Speaker 1: does banking have a pass from the government. They can't

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Speaker 1: do that for the moment, yes, I mean all the

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Speaker 1: major banks like JP, Morgan, Bank, America, Wells Fargo there

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Speaker 1: at that ten percent deposit tap, so they can't do

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Speaker 1: acquisitions UM. Then there are a number of mid tier

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Speaker 1: banks that are still dealing with UM. Getting their anti moneery,

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Speaker 1: laundring and compliance issues in place so that they will

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Speaker 1: be allowed to do acquisitions. So the acquisitions we see

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Speaker 1: probably will be year end loaded, I mean back end

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Speaker 1: loaded or seventeen, and they're going to be more in

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Speaker 1: the mid small tier banks. Uh. The the description you

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Speaker 1: give of of um where we are looking for banks

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Speaker 1: to make money or or lose money, sounds very much

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Speaker 1: like traditional banking. I mean, like like it used to

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Speaker 1: be uh and uh instead of you know, the way

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Speaker 1: they managed to move things around on balance sheets over

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Speaker 1: the last how many years. Yeah, I think that's true, Mike.

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Speaker 1: I mean, you know, if you look at the income

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Speaker 1: this quarter, fee income is gonna be very weak year

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Speaker 1: over year, and yet spread income lending money out at

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Speaker 1: a spread above your cost of deposits, it's probably gonna

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Speaker 1: show some growth. And what everyone's hoping for is that

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Speaker 1: we'll see another rate hikes from the FAD that will

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Speaker 1: further enhance margins going forward. Tom, imagine that you you

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Speaker 1: you take deposits and pay a low rate and you

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Speaker 1: lend the money out at a higher rate. How quaint?

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Speaker 1: What an interesting idea for a business. Yeah, but even

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Speaker 1: that kind of revenue growth this quarter we think is

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Speaker 1: going to be somewhere around one percent year over year,

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Speaker 1: so not robust. Are there too many banks? I mean

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Speaker 1: within the perspective or that, but but are there just

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Speaker 1: in this new Dad Frank post crisis distrust world, are

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Speaker 1: there just too many banks? Um? I think we're going

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Speaker 1: to continue to see a shrinkage in the number of banks,

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Speaker 1: as we have on a secular basis. But the real

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Speaker 1: problem right now is if you think of the three

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Speaker 1: major line items on a bank P and L, You've

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Speaker 1: got your revenues, You've got your loan lost provision or

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Speaker 1: your credit issues, and then you have operating expenses. On

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Speaker 1: the operating expense front, you still have to spend heavily

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Speaker 1: for cybersecurity, for building your delivery models, particularly through mobile banking,

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Speaker 1: and for compliance, and so your expense structure is hard

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Speaker 1: to shrink at this point unless you do some layoffs. Then,

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Speaker 1: if you look at the revenue picture, the fee income,

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Speaker 1: as I said in particularly in mortgage banking and capital markets,

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Speaker 1: is under pressure UM, and your top line revenues are growing,

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Speaker 1: but they're not growing rapidly because we don't have the

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Speaker 1: FED in rate hiking mode. So the the sort of

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Speaker 1: incremental material factors, what can happen to your credit provisioning.

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Speaker 1: And we've seen a definite inflection point towards credit deturation

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Speaker 1: in the corporate markets, obviously led by the material sector

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Speaker 1: and energy, but you're starting to see deturation in the

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Speaker 1: health care sector, in the information technology sector, and I

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Speaker 1: think by the end of the year we're gonna see

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Speaker 1: more reserves being added for commercial real estate as well.

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Speaker 1: Trust Pebody, we'll continue this discussion and talk about individual managements,

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Speaker 1: their stories in their banks will do that. Coming up,

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Speaker 1: Mr Pebody is with Portalis Partners, Futures Up six, Down,

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Speaker 1: Features up twenty nine, the Down closing seventeen thousand, five

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Speaker 1: fifty six, the VIX closing sixteen point to six, the

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Speaker 1: Euro one thirteen. Now, let's check out with Michael Barr

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Speaker 1: and get the latest world in national headlines. Mike Tom,

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Speaker 1: thank you very much. Brazilian lawmakers are a step closer

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Speaker 1: to impeaching President Dilma Russov. The committee in the lower

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Speaker 1: House voted for the impeachment process. Lawmakers could vote on

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Speaker 1: the floor of the lower House as early as Sunday.

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Speaker 1: Russef is accused of bypassing Congress to illegally finance a

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Speaker 1: budget deficit. Turkish artillery units are showing Islamic State Group

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Speaker 1: targets across the border in Syria, hours after rockets fired

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Speaker 1: from Syria struck a Turkish border town, wounding eight people.

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Speaker 1: Two more suspects have been charged in connection with last

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Speaker 1: month's terrorist bombings in Brussels. Global News twenty four hours

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Speaker 1: a day, powered by our twenty four hundred journalists and

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Speaker 1: more than one fifty news bureaus from around the world.

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Speaker 1: I'm Michael Barr, Mike Tom, Michael Barn, Thanks so much,

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Speaker 1: thanks to Jeffrey Curry of Golden Secs, very generous with

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Speaker 1: his time. Uh this morning is terminal value in oil

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Speaker 1: fifty five with a nudge to the downside right now

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Speaker 1: West Texas sixty one, Brent forty three, thirty two, both

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Speaker 1: up fractionally. With Charles Peabody, Partel's partners for Global Wall Street,

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Speaker 1: this is Bloomberg surveillance. Jeff Curry doesn't see a lot

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Speaker 1: of hope for copper in from the housing industry. We'll

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Speaker 1: get an update out of housing. Doug Duncan, the chief

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Speaker 1: economist at Fannie May, coming up on the Bloomberg surveillance

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Speaker 1: global business news twenty four hours a day. If Bloomberg

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Speaker 1: dot com the radio plus Mobile act and on your radio,

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Speaker 1: this is a Bloomberg Business Flash and I'm Karen Moscow.

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Speaker 1: US dot index futures are arriving this morning. Let's go

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Speaker 1: to the first Word breaking news desk for today's morning call,

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Speaker 1: and here's Bill Maloney. Good morning, Bill, Good morning Karen.

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Speaker 1: That's right. US stock future are point to a modestly

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Speaker 1: higher open death You just currently hired by thirty four

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Speaker 1: point says to me, S gain six and Nazi futures

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Speaker 1: rise by thirteen US ten yell at one point seven

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Speaker 1: six percent, and Europan markets are trading mixed this morning.

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Speaker 1: On the US Economic Frinday eight thirty, Import pricing next

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Speaker 1: and at two o'clock monthly budget statement. In other news,

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Speaker 1: Fitch downgraded Saudi Rabit to double A minus and after

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Speaker 1: the bell last night, i'll colla Q one revenue missed

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Speaker 1: estimates also cut your aluminium demand outlook. Juniper preliminary Q

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Speaker 1: one at just dps and revenue trailed estimates shares her

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Speaker 1: down eight percent pre market, and regarding earnings this morning,

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Speaker 1: fast and all missed. Finally, some of your early Wallstreet

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Speaker 1: upgrades and downgrades, Hurts cut to neutral over our credit suites,

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Speaker 1: Starbucks cut the whole versus by a Deutsche Bank Avon

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Speaker 1: cut to neutral at Piper Corning raised to buy a

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Speaker 1: Goldman Sachs and Juniper cut to neutral versus by over

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Speaker 1: at ubs. Live from the first Breaking News Desk com

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Speaker 1: Bill Maloney, Karen very thanks Bill to hear live breaking

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Speaker 1: news over your Bloomberg type squawk go on your terminal.

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Speaker 1: That's squ a w K go and that's a Bloomberg

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Speaker 1: business flash. Tom and Mike Karen, thanks so much. Bloomberg

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Speaker 1: Surveillance this morning brought you by Investco. Marcus may be volatile,

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Speaker 1: but invest goes value managers are finding high conviction opportunities.

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Speaker 1: Find out where and Investco dot com slash Interactive. We're

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Speaker 1: thrilled to bring you to get things going on Earning

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Speaker 1: season for big banks. Charles Peabody Portalis Partners Charles, before

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Speaker 1: we dive into Bank of America, my pet peeve among

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Speaker 1: all that analyzes except grizzled pros like you, is we

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Speaker 1: don't have an understanding of how big these entities are.

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Speaker 1: I literally can see the CEO's eyes glaze over when

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Speaker 1: they realize a person they're talking to has no clue

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Speaker 1: that net revenue for Bank of America is some eighty billion,

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Speaker 1: that they bring twenty four billion down to the bottom

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Speaker 1: line with a twenty nine percent margin, And then you

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Speaker 1: go to the balance sheet and the numbers are even

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Speaker 1: more ginormous. What metrics do you use to explain the

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Speaker 1: ginormous nous of these banks? Um, that's a good question, Tom.

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Speaker 1: I mean, I'm not sure there's any single metric, but

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Speaker 1: but certainly you know, the capital structure, the asset base,

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Speaker 1: the revenue base, you know all of the above. But

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Speaker 1: it's it's also the complexity of the businesses that they run.

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Speaker 1: I mean, they're they're you know, in auto finance, student lending,

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Speaker 1: credit cards, UM, mortgage banking. You know, they're in middle

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Speaker 1: market banking, small business lending, you know, large corporate banking,

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Speaker 1: investment banking, equity and debt, on running, trading. I mean,

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Speaker 1: it's it's a it's a huge task to manage all

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Speaker 1: of these different businesses. Total assets Bank of America, just

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Speaker 1: to pick on them, two trillion dollars of the US

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Speaker 1: economy is about seventeen trillion. Do you know what's on

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Speaker 1: the balance sheet of fortress pointing an UM. You know,

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Speaker 1: the answer is yes, we do. I'll tell you I've

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Speaker 1: been in this business for thirty years, and the one

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Speaker 1: thing that is still perplexing in terms of being able

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Speaker 1: to analyze the risk is the are these derivative portfolios?

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Speaker 1: I think, as an analyst who has tried and tried

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Speaker 1: and tried, you just don't know the risk of these

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Speaker 1: derivative portfolios. And that's, you know, the kind of structure

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Speaker 1: that's going to be tested in the next economic downturn

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Speaker 1: because of the growing illiquidity of these markets. I wonder

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Speaker 1: when you look at the earnings reports from these various banks,

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Speaker 1: if you can unpack and make the connections that the

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Speaker 1: synergies that they all promised us as they got so big,

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Speaker 1: does it really show up or is it just still

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Speaker 1: a collection of disparate businesses that all contribute to what

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Speaker 1: they what they can to the bottom line. Well, you know,

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Speaker 1: as you know, there is pressure to break up these

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Speaker 1: big banks. UM. I personally I doubt that that's going

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Speaker 1: to happen. I understand the political rhetoric, UM, But from

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Speaker 1: a regulatory point of view, the regular areas have asked

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Speaker 1: these banks to improve their capital, and they've doubled their

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Speaker 1: capital positions. The regulators asked them to improve their liquidity.

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Speaker 1: They significantly improve their liquidity. They've been de risking their

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Speaker 1: loan portfolios. So they've done, from a risk management point

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Speaker 1: of view, a lot of what the regulators have demanded

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Speaker 1: of them. UM. The problem is that from a shareholder

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Speaker 1: point of view, they're not earning their cost to capital.

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Speaker 1: I mean, maybe Goldman and JP Morgan are, but some

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Speaker 1: of the other banks aren't. And that's where the pressure

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Speaker 1: is coming to break up the big banks is the

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Speaker 1: belief that a simplified structure will will improve their cost capital.

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Speaker 1: But you if you do that, you're gonna lose a

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Speaker 1: lot of the synergies that you're referring to, Mike, and

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Speaker 1: they run in the tens of billions of dollars. So

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Speaker 1: we do see, uh synergies. What what works the best,

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Speaker 1: I mean, what things that banks do work best together

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Speaker 1: where they can do the cross selling well. For example, UM,

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Speaker 1: the asset management and the corporate and investment bank have

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Speaker 1: opportunities for cross selling. Old market banking really feeds off

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Speaker 1: of the investment banking products these days, much more so

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Speaker 1: than it used to. UM so you know there there is,

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Speaker 1: you know, from the private banking business, opportunities for consumer

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Speaker 1: products to be cross sold, such as jumbo mortgages. So

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Speaker 1: there are cross selling. I mean, they're real, the cross

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Speaker 1: selling opportunities and the synergies. I look at this and

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Speaker 1: I guess we could devolve in a final minute down

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Speaker 1: to signal best buy. Where's the greatest opportunity five years

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Speaker 1: out for Charles Peabody, Well, I think given today's price

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Speaker 1: and price is important in picking stocks, um. I think

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Speaker 1: City Group is my number one pick. But the one

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Speaker 1: thing I will emphasize, tom if you look at the

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Speaker 1: last six bowl markets, not once, not once to banks

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Speaker 1: outperform in the last twelve months of a bull market.

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Speaker 1: So I think banks are gonna have a very tough

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Speaker 1: go of it, um, and the only way you're gonna

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Speaker 1: make money over the next twelve months is to trade them.

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Speaker 1: But I think if you look out five years, the

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Speaker 1: banks are going to have proven themselves to the regulators

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Speaker 1: that they've managed their balance sheets much better than in

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Speaker 1: past cycles. And at the end of seventeen or maybe eighteen,

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Speaker 1: the banks are going to be unleashed and they're going

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Speaker 1: to be a return massive amounts of CAPPA the shareholders.

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Speaker 1: They're gonna be investing in businesses because their CAPA won't

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Speaker 1: be impaired. And I think you know, starting in eighteen

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Speaker 1: nine these talks could double or triple from current levels.

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Speaker 1: It's quite a statement, but we have to get through

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Speaker 1: the oaring's recession first. Okay, Well that's a good trust.

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Speaker 1: People here always valuable. Thank you. That's quite a statement

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Speaker 1: from Portel's partners with a view. You know, that's what

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Speaker 1: we love to do here, folks, try to get away

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Speaker 1: from you know what's gonna happen tomorrow with a yen

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Speaker 1: and actually say what do you want to do with

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Speaker 1: the financials and your retirement plan? Not we would we

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Speaker 1: exa economic data. We do that is well at Bloomberg Surveillance.

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