1 00:00:18,360 --> 00:00:20,920 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:21,040 --> 00:00:23,520 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,760 --> 00:00:26,200 Speaker 1: This week, we're very pleased to welcome run Julius and 4 00:00:26,320 --> 00:00:27,160 Speaker 1: Arnold Kakuda. 5 00:00:27,280 --> 00:00:29,800 Speaker 2: How are you very well? Thank you James, thanks for 6 00:00:29,800 --> 00:00:30,520 Speaker 2: having us. 7 00:00:30,960 --> 00:00:32,519 Speaker 3: I'm doing great. Thanks for having us. 8 00:00:33,240 --> 00:00:36,840 Speaker 1: So both your own and Arnold cover financials at Bloomberg Intelligence. 9 00:00:36,840 --> 00:00:38,239 Speaker 1: It's great to have you back on the show. It 10 00:00:38,320 --> 00:00:41,120 Speaker 1: really is the a team of bank coverage from a 11 00:00:41,120 --> 00:00:43,960 Speaker 1: credit perspective. All we need to round off the global 12 00:00:44,000 --> 00:00:46,880 Speaker 1: perspective is pred Silver in Hong Kong. But sadly you 13 00:00:46,920 --> 00:00:48,320 Speaker 1: can't be will to say we'll have him back on 14 00:00:48,360 --> 00:00:52,080 Speaker 1: the show very soon. But banks, there is way too 15 00:00:52,120 --> 00:00:54,360 Speaker 1: many of them in the US, and the smaller ones 16 00:00:54,440 --> 00:00:56,640 Speaker 1: have a ton of problems like commercial real estate to 17 00:00:56,680 --> 00:00:59,840 Speaker 1: deal with. In Europe, loan books are shrinking, bank credit 18 00:01:00,200 --> 00:01:02,720 Speaker 1: outlooks are turning positive, and M and A is coming 19 00:01:02,720 --> 00:01:05,720 Speaker 1: back into focus. On both sides of the Atlantic, there 20 00:01:05,720 --> 00:01:09,520 Speaker 1: are some huge regulatory challenges and political risk is rising. 21 00:01:09,840 --> 00:01:12,240 Speaker 1: We will discuss all of that today, but first I 22 00:01:12,319 --> 00:01:13,880 Speaker 1: just want to ask you both to give us a 23 00:01:13,920 --> 00:01:17,640 Speaker 1: big picture of view the last time, we were still sorry. 24 00:01:17,720 --> 00:01:21,520 Speaker 1: This time last year, we were still reeling from a 25 00:01:21,560 --> 00:01:24,600 Speaker 1: regional banking crisis in the US and the demise of 26 00:01:24,600 --> 00:01:27,720 Speaker 1: Credits Swiss in Europe. Since then, we've had some wobbles 27 00:01:27,760 --> 00:01:30,800 Speaker 1: like NYCB in the States and some lingering negative impact 28 00:01:30,840 --> 00:01:34,400 Speaker 1: from SVB, specifically on First Citizens Bank, which brought it. 29 00:01:34,840 --> 00:01:38,080 Speaker 1: But I'll be out of the woods. What's the overall 30 00:01:38,080 --> 00:01:40,559 Speaker 1: state of the banking sector, What big risks are still 31 00:01:40,680 --> 00:01:43,160 Speaker 1: lurking out there in your view? Let's start with you, Arnold. 32 00:01:44,520 --> 00:01:47,160 Speaker 3: Okay, yeah, thanks for the question. And just for those 33 00:01:47,200 --> 00:01:49,960 Speaker 3: of you who don't know, Bloomberg Intelligence is a part 34 00:01:50,000 --> 00:01:53,680 Speaker 3: of Bloomberg's research department, with five hundred analysts and strategists 35 00:01:53,840 --> 00:01:57,920 Speaker 3: working across all major world markets. And so yeah, let's 36 00:01:58,000 --> 00:02:01,960 Speaker 3: delve in I think twenty twenty three. Last year it 37 00:02:02,040 --> 00:02:05,440 Speaker 3: was all about the unrealized losses on the bank balance sheets, 38 00:02:05,440 --> 00:02:08,720 Speaker 3: and the regionals were hit particularly hard given the regulation 39 00:02:08,880 --> 00:02:12,560 Speaker 3: that they could exclude those out of regulatory capital, right, 40 00:02:12,600 --> 00:02:14,680 Speaker 3: and so they've been working really hard of the past 41 00:02:14,760 --> 00:02:20,440 Speaker 3: year to increase their equity levels, and so they've done 42 00:02:20,480 --> 00:02:23,560 Speaker 3: a decent job with that, and I think the focus 43 00:02:23,560 --> 00:02:27,280 Speaker 3: for this year is NYCB is a name that pops up, 44 00:02:27,320 --> 00:02:31,480 Speaker 3: and it's really the CRE story, right, and so the 45 00:02:31,880 --> 00:02:38,200 Speaker 3: focus I think has shifted from capital to asequality and 46 00:02:38,320 --> 00:02:42,280 Speaker 3: CRE and so on that front. I think what helps 47 00:02:42,280 --> 00:02:45,160 Speaker 3: the big US banks, at the US banks and the 48 00:02:45,200 --> 00:02:49,440 Speaker 3: biggest in particular, is they're stress tested annually, right, And 49 00:02:49,520 --> 00:02:52,880 Speaker 3: so I think it's easier for banks that are you know, 50 00:02:53,280 --> 00:02:56,240 Speaker 3: prepared for things that they see from far away, right. 51 00:02:56,280 --> 00:02:58,600 Speaker 3: They're tested annually, So I think they're in a much 52 00:02:58,639 --> 00:03:01,480 Speaker 3: better position to kind of handle these things that will 53 00:03:01,480 --> 00:03:04,480 Speaker 3: come down the pipeline. And in terms of CRE, it 54 00:03:04,600 --> 00:03:08,920 Speaker 3: hits mostly kind of the smaller regional banks under one 55 00:03:08,960 --> 00:03:12,360 Speaker 3: hundred billion, under fifty billion, much more than those above, 56 00:03:12,520 --> 00:03:14,679 Speaker 3: and that universe is more. It's gonna hit more the 57 00:03:14,720 --> 00:03:19,800 Speaker 3: equities given you know, the benchmark those with benchmark bonds 58 00:03:20,200 --> 00:03:23,239 Speaker 3: typically are over one hundred billion in asset size, right, 59 00:03:23,280 --> 00:03:26,960 Speaker 3: So SIRI definitely an issue this year, But in terms 60 00:03:27,000 --> 00:03:30,360 Speaker 3: of magnitude of impact it's gonna hit, it's not gonna 61 00:03:30,360 --> 00:03:33,040 Speaker 3: be as much of a big story for bank bond 62 00:03:33,040 --> 00:03:34,120 Speaker 3: holders in the US. 63 00:03:34,560 --> 00:03:36,600 Speaker 1: We have had some people even on this show say 64 00:03:36,640 --> 00:03:40,480 Speaker 1: that it could cause bank failures, you know, hundreds of banks. 65 00:03:40,480 --> 00:03:43,720 Speaker 1: I mean, they're talking about the smaller ones obviously, and 66 00:03:43,760 --> 00:03:46,840 Speaker 1: I keep wondering that that must have some ripple effects 67 00:03:46,880 --> 00:03:49,760 Speaker 1: across the whole sector. I mean, do you worry about 68 00:03:49,760 --> 00:03:50,960 Speaker 1: that at all? 69 00:03:51,560 --> 00:03:54,800 Speaker 3: You know, of course, Right, It's it's you know, we 70 00:03:54,880 --> 00:03:58,360 Speaker 3: hear that, Oh yeah, we there's stuff out there. It's 71 00:03:58,360 --> 00:04:01,400 Speaker 3: gonna come, It's gonna take time, right, we hear that, 72 00:04:02,440 --> 00:04:04,960 Speaker 3: and then you know we do see that in you know, 73 00:04:05,040 --> 00:04:07,520 Speaker 3: let's say M and T, which which is a you know, 74 00:04:08,000 --> 00:04:13,440 Speaker 3: a regional bank that has more CRE exposure New York 75 00:04:13,480 --> 00:04:16,680 Speaker 3: office compared to peers, Right, but you know they they've 76 00:04:16,720 --> 00:04:19,880 Speaker 3: been bringing that down. We we think their spreads might 77 00:04:19,960 --> 00:04:21,880 Speaker 3: trade on the wider end. It's it's a triple B 78 00:04:21,960 --> 00:04:26,159 Speaker 3: plus name that trades you know in the Ballparker triple 79 00:04:26,200 --> 00:04:30,640 Speaker 3: B KeyCorp. Right, which and and you know we think 80 00:04:30,640 --> 00:04:34,360 Speaker 3: that volatily will remain right, but you know, I think 81 00:04:34,440 --> 00:04:38,120 Speaker 3: you know over time that that you know that that 82 00:04:38,120 --> 00:04:40,440 Speaker 3: that that will come down as as CRE has gotten 83 00:04:40,480 --> 00:04:43,240 Speaker 3: smaller and smaller for some of these names that that 84 00:04:43,320 --> 00:04:46,240 Speaker 3: were more exposed, right. And and it's again it's this 85 00:04:46,320 --> 00:04:49,719 Speaker 3: annual stress testing where where they do hit CRE pretty 86 00:04:49,720 --> 00:04:53,640 Speaker 3: hard right, and those the stress tested tested banks are 87 00:04:53,640 --> 00:04:56,880 Speaker 3: those above one hundred billion assets. So these banks have 88 00:04:57,279 --> 00:05:00,919 Speaker 3: been preparing or are prepared better to kind of you know, 89 00:05:00,960 --> 00:05:04,599 Speaker 3: handle this stuff going forward, given they've made changes to 90 00:05:04,760 --> 00:05:06,320 Speaker 3: their to their balance sheets. 91 00:05:06,760 --> 00:05:09,679 Speaker 1: Right, although Cres commercial real estate, as you keep saying, 92 00:05:10,279 --> 00:05:13,320 Speaker 1: you know, there's still out there. It's someone even even 93 00:05:13,400 --> 00:05:16,599 Speaker 1: yesterday on Bloomberg TV described it as a slow moving 94 00:05:16,680 --> 00:05:19,680 Speaker 1: train wreck. It's still a worry, right, I mean, it 95 00:05:19,680 --> 00:05:20,839 Speaker 1: hasn't completely gone away. 96 00:05:21,440 --> 00:05:23,240 Speaker 3: Absolutely totally agree. 97 00:05:23,520 --> 00:05:28,760 Speaker 1: So your own from from your perspective Europe, you know, 98 00:05:28,800 --> 00:05:30,720 Speaker 1: it seems like the political risk is the big one. 99 00:05:30,760 --> 00:05:35,240 Speaker 1: But but how solid are the banks? Should we expect 100 00:05:35,240 --> 00:05:37,839 Speaker 1: another credit Swiss situation anytime soon? 101 00:05:40,360 --> 00:05:45,880 Speaker 2: I don't think so. Based on you know, quarterly results 102 00:05:45,880 --> 00:05:51,000 Speaker 2: that we've had since since credits weez happened, you know, 103 00:05:51,040 --> 00:05:55,719 Speaker 2: the European banks seem to be in reasonable shape. Returnal 104 00:05:55,800 --> 00:05:58,920 Speaker 2: equity is generally healthy, clearly helped by that interesting come 105 00:05:59,440 --> 00:06:04,320 Speaker 2: reflecting high policy rates. Acid quality has held up quite nicely, 106 00:06:05,720 --> 00:06:09,599 Speaker 2: and capital levels capital buffs have been coming down a 107 00:06:09,600 --> 00:06:11,960 Speaker 2: little bit, but that was that's mainly due to high 108 00:06:12,040 --> 00:06:17,360 Speaker 2: capital requirements. They have sort of crept up but overall, yes, 109 00:06:17,400 --> 00:06:19,640 Speaker 2: buffers are down a bit, but they're still I would 110 00:06:19,680 --> 00:06:22,920 Speaker 2: say quite healthy on average. There's of course some dispersion 111 00:06:22,960 --> 00:06:26,120 Speaker 2: around that, but but yes, overall, the European banking sect 112 00:06:26,240 --> 00:06:30,880 Speaker 2: seems to be in reasonably good shape and that's also 113 00:06:30,920 --> 00:06:35,080 Speaker 2: reflected in spreads. They've been rallying for three quarters in 114 00:06:35,120 --> 00:06:39,160 Speaker 2: a row now, that started in October and that's still continuing. 115 00:06:39,520 --> 00:06:44,560 Speaker 2: You know, primary markets, you know, have been open. You 116 00:06:44,640 --> 00:06:49,320 Speaker 2: mentioned credit squeeze as as you may remember, the additional 117 00:06:49,360 --> 00:06:52,200 Speaker 2: Tier one boons of credit squeze. They were wiped out 118 00:06:53,279 --> 00:06:58,159 Speaker 2: fully and permanently, so that caused some consternation in the 119 00:06:58,279 --> 00:07:01,440 Speaker 2: eighty one market last year. But you know, the primary 120 00:07:01,480 --> 00:07:05,000 Speaker 2: market reopened in the second half of last year, and 121 00:07:05,040 --> 00:07:07,720 Speaker 2: that has also allowed European banks to keep calling. There 122 00:07:07,600 --> 00:07:10,880 Speaker 2: are the eighty one bonds. So far we've had a 123 00:07:10,880 --> 00:07:15,480 Speaker 2: perfect call track record, including up yesterday with two bonds, 124 00:07:15,920 --> 00:07:19,880 Speaker 2: a Singapore dollar and Aussie dollar bond. So yeah, so overall, 125 00:07:19,920 --> 00:07:22,840 Speaker 2: the European banking sector seems to be in reasonable shape. 126 00:07:23,520 --> 00:07:25,400 Speaker 1: So I do want to come back to eighty ones. 127 00:07:25,480 --> 00:07:27,160 Speaker 1: I do think that's a that's a great theme and 128 00:07:27,200 --> 00:07:29,400 Speaker 1: it has been one that a lot of our guests 129 00:07:29,440 --> 00:07:31,480 Speaker 1: on the buy side, you know, the investors, they talk 130 00:07:31,520 --> 00:07:33,280 Speaker 1: about as being one of the big trades for this year. 131 00:07:33,320 --> 00:07:37,160 Speaker 1: But just in general around the banking sector. I mean, 132 00:07:37,240 --> 00:07:40,360 Speaker 1: every time there is a problem, everyone kind of points 133 00:07:40,360 --> 00:07:43,840 Speaker 1: the finger at Deutsche Bank as a potential you know, 134 00:07:43,920 --> 00:07:48,400 Speaker 1: weak link. Those concerns sit around or have they gone away? 135 00:07:50,520 --> 00:07:55,200 Speaker 2: Well, Look, Deutsche Bank had a slight warble last year 136 00:07:55,240 --> 00:08:01,240 Speaker 2: when Credits Sweeze imploded, but Deutsche Bank started restructuring and 137 00:08:01,360 --> 00:08:05,160 Speaker 2: de risking and turning his business around a few years 138 00:08:05,160 --> 00:08:09,480 Speaker 2: before Credits has happened, and that has meant that Deutsche 139 00:08:09,520 --> 00:08:12,360 Speaker 2: Bank is in a much stronger position today than it 140 00:08:12,440 --> 00:08:17,240 Speaker 2: was only a few years ago. So no, I wouldn't 141 00:08:18,160 --> 00:08:22,480 Speaker 2: put them in the same bracket at all. It is 142 00:08:22,520 --> 00:08:24,920 Speaker 2: true that Deutsche Bank has some exposure to a US 143 00:08:24,960 --> 00:08:30,240 Speaker 2: commercial real estate, but it seems to be a manageable 144 00:08:30,280 --> 00:08:32,040 Speaker 2: exposure from what we can see. 145 00:08:33,480 --> 00:08:35,480 Speaker 1: So you mentioned m and A. You're in in your 146 00:08:35,520 --> 00:08:39,000 Speaker 1: recent notes about European banking, and m and A always 147 00:08:39,040 --> 00:08:40,920 Speaker 1: comes up as a theme in the US, given that 148 00:08:40,920 --> 00:08:42,880 Speaker 1: there are thousands of banks and everyone says there are 149 00:08:42,920 --> 00:08:45,400 Speaker 1: too many. I just want to get a view from 150 00:08:45,440 --> 00:08:48,720 Speaker 1: you both on what the outlook is for consolidation in 151 00:08:48,760 --> 00:08:50,800 Speaker 1: this sector, maybe starting with Arnold. 152 00:08:51,480 --> 00:08:56,319 Speaker 3: Sure consolidation in the sector, I think it's still going 153 00:08:56,360 --> 00:09:01,439 Speaker 3: to be on a smaller end. It's really these banks. 154 00:09:01,840 --> 00:09:05,319 Speaker 3: Some of the issues that or or headwinds to M 155 00:09:05,360 --> 00:09:07,240 Speaker 3: and A at kind of the height of the regional 156 00:09:07,280 --> 00:09:10,880 Speaker 3: bank crisis are still here in terms of UH, these 157 00:09:10,960 --> 00:09:14,840 Speaker 3: unrealized losses still remain on bank balance sheets, and so 158 00:09:15,040 --> 00:09:19,760 Speaker 3: any acquirer would have to remark everything on on on 159 00:09:19,800 --> 00:09:23,080 Speaker 3: the bank's balance sheet, so they would hit, they would 160 00:09:23,120 --> 00:09:27,160 Speaker 3: have to take negative hits right to to to equity. 161 00:09:28,160 --> 00:09:33,200 Speaker 3: So these these losses that are hypothetical become actual right 162 00:09:33,240 --> 00:09:35,480 Speaker 3: when you do when you do M and A. We 163 00:09:35,559 --> 00:09:38,680 Speaker 3: did have a unique situation last year where let's say 164 00:09:38,840 --> 00:09:42,400 Speaker 3: a guty swallowed a minnow where you know, the bigger player, 165 00:09:43,600 --> 00:09:46,400 Speaker 3: you know, was more troubled, had a lot of unrealized losses, 166 00:09:46,440 --> 00:09:49,320 Speaker 3: but the but the smaller player had a relatively clean 167 00:09:49,360 --> 00:09:52,520 Speaker 3: balance sheet. So that was a creative way for you know, 168 00:09:53,240 --> 00:09:55,839 Speaker 3: you know, it was structured so that the the the 169 00:09:56,000 --> 00:09:59,640 Speaker 3: smaller acquired the larger right. Sorry, the way they structured 170 00:09:59,640 --> 00:10:03,000 Speaker 3: it was it was very creative because the smaller one 171 00:10:03,040 --> 00:10:04,720 Speaker 3: had a cleaner balance sheet, and so it looked like 172 00:10:04,720 --> 00:10:08,079 Speaker 3: that was getting taken over, but really the opposite was happening. 173 00:10:08,120 --> 00:10:11,000 Speaker 3: So again, you know, M and A, I think it's 174 00:10:11,040 --> 00:10:13,280 Speaker 3: just unless it's a you know, some of these smaller 175 00:10:13,320 --> 00:10:17,200 Speaker 3: guys failing, you know that, I think that'll be the case. 176 00:10:17,200 --> 00:10:21,160 Speaker 3: But then again, there's still this cap One Discover you know, 177 00:10:21,280 --> 00:10:25,760 Speaker 3: mega deal out there. And actually, you know, given you know, 178 00:10:25,800 --> 00:10:29,360 Speaker 3: the change in the political wins, a Republican government looking 179 00:10:29,400 --> 00:10:34,200 Speaker 3: more and more likely regulate you know, court rulings right where, 180 00:10:34,320 --> 00:10:36,400 Speaker 3: you know, getting rid of their chevround doctrine and just 181 00:10:36,679 --> 00:10:40,199 Speaker 3: you know a lot more friendly kind of FTC outlook, right, 182 00:10:40,280 --> 00:10:43,720 Speaker 3: less regulation. I think that may help drive some you know, 183 00:10:44,160 --> 00:10:48,079 Speaker 3: more bigger size stuff, maybe in the mid to longer term, right, 184 00:10:48,240 --> 00:10:50,360 Speaker 3: but I think in the near term, I think it's 185 00:10:50,400 --> 00:10:52,400 Speaker 3: it's really the small stuff. But then, you know, the 186 00:10:53,080 --> 00:10:56,640 Speaker 3: likelihood of this cap One and Discover mega deal going 187 00:10:56,679 --> 00:11:00,880 Speaker 3: through I think has has increased, right with with you know, 188 00:11:00,880 --> 00:11:04,600 Speaker 3: the potential change in government come in a selection cycle. 189 00:11:05,600 --> 00:11:07,640 Speaker 1: We will talk about the Trump trade a bit later. 190 00:11:07,720 --> 00:11:09,280 Speaker 1: I just took before that, I do want to talk 191 00:11:09,320 --> 00:11:12,720 Speaker 1: about the unrealized losses, though, as I understand it, it 192 00:11:12,840 --> 00:11:15,719 Speaker 1: is about rates, right, yeah, absolutely, can you kind of 193 00:11:15,760 --> 00:11:18,040 Speaker 1: break that down in simple terms, like what are the 194 00:11:18,080 --> 00:11:19,040 Speaker 1: unrealized losses? 195 00:11:19,920 --> 00:11:24,520 Speaker 3: So banks taken deposits and then ideally they'd like to 196 00:11:24,520 --> 00:11:29,920 Speaker 3: make loans. But in the US the deposits have ballooned 197 00:11:30,240 --> 00:11:34,440 Speaker 3: with the since twenty twenty and and loan growth has 198 00:11:34,480 --> 00:11:36,600 Speaker 3: been very tepid. So even though we're kind of in 199 00:11:36,640 --> 00:11:39,000 Speaker 3: the other way with QT right now, we still have 200 00:11:39,080 --> 00:11:44,160 Speaker 3: this big imbalance between deposits and loans. So where does 201 00:11:44,200 --> 00:11:49,360 Speaker 3: that access deposits go? Banks keep them in very safe 202 00:11:49,440 --> 00:11:54,040 Speaker 3: assets like treasuries and agency nbs, and you know the 203 00:11:54,160 --> 00:11:58,640 Speaker 3: quote unquote risk free asset, right, whereas loans are risky assets. 204 00:11:58,960 --> 00:12:01,200 Speaker 3: And so then that that's where the issue is is 205 00:12:01,840 --> 00:12:07,679 Speaker 3: when you when you park access deposits in treasuries and 206 00:12:07,720 --> 00:12:12,320 Speaker 3: depending on your duration, right when rates rise as as 207 00:12:12,400 --> 00:12:16,160 Speaker 3: all our bond investors know, you know, twenty twenty two, 208 00:12:16,920 --> 00:12:20,320 Speaker 3: right and twenty twenty three we're tough years, right. So 209 00:12:21,280 --> 00:12:23,520 Speaker 3: but the thing is, you know where where we can 210 00:12:23,559 --> 00:12:27,839 Speaker 3: see these market values declining on long dated treasuries, right, 211 00:12:27,880 --> 00:12:33,160 Speaker 3: those remain unrealized losses as long as the banks keep 212 00:12:33,200 --> 00:12:36,160 Speaker 3: them on their balance sheets and they do not sell them, right, 213 00:12:36,240 --> 00:12:39,400 Speaker 3: And the issue is for banks you could put them 214 00:12:39,400 --> 00:12:42,760 Speaker 3: in two buckets held to maturity, which are some of 215 00:12:42,800 --> 00:12:46,480 Speaker 3: these longer term securities that they never expect to sell, 216 00:12:46,960 --> 00:12:50,559 Speaker 3: and so these unrealized losses will kind of remain hypothetical. 217 00:12:50,600 --> 00:12:53,719 Speaker 3: But then if they're in there available for sale, right 218 00:12:53,800 --> 00:12:59,360 Speaker 3: they you know, are they might you know, expect to 219 00:12:59,360 --> 00:13:02,199 Speaker 3: sell them and and then liquidate them, right. So, just 220 00:13:02,240 --> 00:13:05,280 Speaker 3: the regional banks had an exemption of not having to 221 00:13:05,320 --> 00:13:09,160 Speaker 3: recognize these unrealized losses in available for sale, and so 222 00:13:09,760 --> 00:13:12,200 Speaker 3: when when deposits did fly out the door as in 223 00:13:12,240 --> 00:13:16,560 Speaker 3: an SVB, it was just tough for the banks to 224 00:13:17,200 --> 00:13:21,200 Speaker 3: sell these AFS securities without kind of running into issues. 225 00:13:21,400 --> 00:13:26,000 Speaker 3: So yeah, that's I kind of got lost in my 226 00:13:26,000 --> 00:13:26,480 Speaker 3: train of thought. 227 00:13:26,480 --> 00:13:29,680 Speaker 1: But is that really for Let's say that the FED 228 00:13:29,760 --> 00:13:32,160 Speaker 1: does start easing, you know, some people saying it could 229 00:13:32,200 --> 00:13:36,000 Speaker 1: happen pretty soon. Does that not reverse and therefore those 230 00:13:36,040 --> 00:13:39,160 Speaker 1: losses unwind and then we're in better shape and then 231 00:13:39,400 --> 00:13:41,840 Speaker 1: maybe M and A begins for that reason? Is that 232 00:13:41,920 --> 00:13:43,280 Speaker 1: is that po central trigger on the horizon? 233 00:13:43,360 --> 00:13:43,440 Speaker 2: Oh? 234 00:13:43,520 --> 00:13:48,000 Speaker 3: Yes, absolutely right, But I think you know rate cuts 235 00:13:48,040 --> 00:13:49,880 Speaker 3: I mean, I don't think we're going back to zero. 236 00:13:50,240 --> 00:13:53,400 Speaker 3: I think we're talking one or two. Right, we had 237 00:13:53,440 --> 00:13:55,360 Speaker 3: two now, whereas at the beginning of the year where 238 00:13:55,360 --> 00:13:58,040 Speaker 3: we're at what six to eight? Right, And then but 239 00:13:58,200 --> 00:14:01,440 Speaker 3: just the the outlook for yes cuts, yes, but then 240 00:14:02,000 --> 00:14:04,840 Speaker 3: are we getting one into and done or right? It's 241 00:14:04,880 --> 00:14:06,920 Speaker 3: just where are we going longer term? And I think 242 00:14:06,960 --> 00:14:11,760 Speaker 3: for both candidates right now, both parties, it's you know, 243 00:14:12,480 --> 00:14:15,320 Speaker 3: inflation seems to be embedded, right, at least in a 244 00:14:15,360 --> 00:14:17,880 Speaker 3: higher level than we were accustomed to over the last 245 00:14:17,920 --> 00:14:21,400 Speaker 3: several years. So yeah, let's let's see how far rates 246 00:14:21,480 --> 00:14:25,040 Speaker 3: do go down. But and and any rate cuts I 247 00:14:25,040 --> 00:14:29,320 Speaker 3: think are helpful for you know, these unrealized losses. And 248 00:14:29,600 --> 00:14:32,640 Speaker 3: again with with the cre right like, it's it's it's 249 00:14:32,680 --> 00:14:35,560 Speaker 3: not just serie as equality issues, but you know, the 250 00:14:35,600 --> 00:14:39,000 Speaker 3: refinancing on that is just really difficult, right, and especially 251 00:14:39,080 --> 00:14:42,160 Speaker 3: if rates remain high, and as well as valuations right, like, 252 00:14:42,360 --> 00:14:44,520 Speaker 3: it's it's the inverse of you know, property values are 253 00:14:44,560 --> 00:14:46,880 Speaker 3: are better when rates are lower. Right. So a lot 254 00:14:46,880 --> 00:14:48,640 Speaker 3: of these things are I think tied in together. 255 00:14:50,080 --> 00:14:53,280 Speaker 1: But it sounds like the rate cuts won't be fast 256 00:14:53,360 --> 00:14:56,280 Speaker 1: enough or deep enough to fully reverse the damage. 257 00:14:57,440 --> 00:14:59,800 Speaker 3: Yeah, and plus it it just takes time, right, and 258 00:14:59,800 --> 00:15:05,360 Speaker 3: and for these unreal the these these uh securities on 259 00:15:05,920 --> 00:15:08,960 Speaker 3: the balance sheet, if it's in the a f S 260 00:15:09,240 --> 00:15:13,480 Speaker 3: available for sale portfolio, they're more shorter dated, so let's say, 261 00:15:13,680 --> 00:15:17,200 Speaker 3: you know, up up to three to five years, versus 262 00:15:17,200 --> 00:15:19,480 Speaker 3: on the health and maturity, you know, let's say five 263 00:15:19,520 --> 00:15:23,800 Speaker 3: to ten years. You know, as time passes, these things mature, right, 264 00:15:23,840 --> 00:15:26,360 Speaker 3: and so there's that rolldown effect, and of course they're 265 00:15:26,360 --> 00:15:29,600 Speaker 3: not playing it back into you know, uh, they're keeping 266 00:15:29,600 --> 00:15:32,680 Speaker 3: it more in overnight cash, right, which which gets you 267 00:15:32,720 --> 00:15:35,520 Speaker 3: the best bank for the buck, right, given the inverted curve, 268 00:15:35,560 --> 00:15:37,840 Speaker 3: and and where you know, SOFA is trading right now, 269 00:15:37,960 --> 00:15:41,880 Speaker 3: so you know that's what they're doing. And and you 270 00:15:41,920 --> 00:15:44,240 Speaker 3: know so so time heals, yes, but but you know 271 00:15:44,600 --> 00:15:47,360 Speaker 3: rate cuts would would make it heal a lot faster. 272 00:15:48,200 --> 00:15:50,360 Speaker 1: Is it the same story you're uned in Europe that 273 00:15:50,440 --> 00:15:53,560 Speaker 1: these unrealized losses is an issue, then well. 274 00:15:54,240 --> 00:15:59,600 Speaker 2: The I think the majority of banks in Europe accounts 275 00:16:00,320 --> 00:16:04,200 Speaker 2: for those bond portfolios as a health and maturity, So 276 00:16:04,360 --> 00:16:11,120 Speaker 2: any unrealized losses aren't resulting in in real losses unless 277 00:16:11,160 --> 00:16:14,080 Speaker 2: you do have those you know, the positive outflows that 278 00:16:14,120 --> 00:16:17,560 Speaker 2: you saw last year with some banks over in the 279 00:16:17,680 --> 00:16:21,240 Speaker 2: in the US, I suppose the key point to make 280 00:16:21,560 --> 00:16:25,520 Speaker 2: is that in Europe you've got positive insurance schemes, so 281 00:16:25,560 --> 00:16:30,440 Speaker 2: as a depositor, you are insured up to a certain level. 282 00:16:30,600 --> 00:16:33,280 Speaker 2: So even if you are, you know, reading headlines about 283 00:16:33,560 --> 00:16:37,280 Speaker 2: about your bank getting into trouble, if your deposits are 284 00:16:37,720 --> 00:16:43,080 Speaker 2: way below the or comfortably below the insurance limit, there's 285 00:16:43,120 --> 00:16:45,440 Speaker 2: not necessarily much of an incentive to take the positis out. 286 00:16:45,440 --> 00:16:48,080 Speaker 2: So that sort of acts as a as a as 287 00:16:48,120 --> 00:16:51,960 Speaker 2: a as a dampener on any any deposit run. So 288 00:16:52,320 --> 00:16:54,560 Speaker 2: I mean, last year there was a lot of focus 289 00:16:54,640 --> 00:16:58,800 Speaker 2: on the liquidity situation of all the banks in the 290 00:16:58,920 --> 00:17:01,800 Speaker 2: US and Europe elsewhere in Europe, at least this year 291 00:17:01,840 --> 00:17:05,560 Speaker 2: that that focus has diminished. And look, we keep tracking 292 00:17:06,000 --> 00:17:08,119 Speaker 2: liquidity metrics for all the banks in our converts on 293 00:17:08,160 --> 00:17:12,520 Speaker 2: a quarterly basis, and you know, all my efforts, they 294 00:17:12,520 --> 00:17:15,280 Speaker 2: are pretty healthy. Again, there's some some dispersion around the mean, 295 00:17:15,359 --> 00:17:21,440 Speaker 2: but liquidity metrics suggest that European banks seem to be 296 00:17:21,440 --> 00:17:24,080 Speaker 2: in a reasonably healthy, healthy state. 297 00:17:24,920 --> 00:17:27,680 Speaker 1: So we shouldn't expect either in the US or in 298 00:17:27,800 --> 00:17:30,040 Speaker 1: Europe a similar situation to what happened to not to 299 00:17:30,080 --> 00:17:33,119 Speaker 1: you in in Japan. You know, they've lost billions of 300 00:17:33,119 --> 00:17:36,359 Speaker 1: dollars pred silver in Hong Kong did some great work 301 00:17:36,400 --> 00:17:40,920 Speaker 1: on that. You know, they basically had to sell. We're 302 00:17:40,920 --> 00:17:43,080 Speaker 1: not expecting anything like that in the in in the 303 00:17:43,119 --> 00:17:43,600 Speaker 1: other market. 304 00:17:43,720 --> 00:17:48,840 Speaker 3: So I well, I mean, yeah, I think, don't you 305 00:17:48,840 --> 00:17:51,000 Speaker 3: you never want to say one off because we've been 306 00:17:51,000 --> 00:17:54,160 Speaker 3: burning out by that multiple times, right, But I think 307 00:17:54,160 --> 00:17:56,400 Speaker 3: it's an extreme example. I guess you can say that 308 00:17:56,840 --> 00:18:01,400 Speaker 3: where it's not often where you find a bank that 309 00:18:01,560 --> 00:18:06,000 Speaker 3: has a negative net interest margin, right, which is where 310 00:18:06,080 --> 00:18:07,880 Speaker 3: note you is and and I think you know what's 311 00:18:07,880 --> 00:18:11,560 Speaker 3: what's helping there is with the stable deposits, right, Like 312 00:18:11,600 --> 00:18:14,720 Speaker 3: you have a farming Japanese farming community that that's not 313 00:18:14,880 --> 00:18:17,560 Speaker 3: in a rush to you know, pull their depart like 314 00:18:17,720 --> 00:18:21,160 Speaker 3: they're kind of wetted to that, right. So but yeah, 315 00:18:21,240 --> 00:18:23,439 Speaker 3: so I think it's just that's what happens in an 316 00:18:23,520 --> 00:18:26,920 Speaker 3: extreme environment when you when when you're you're funding costs 317 00:18:27,000 --> 00:18:29,600 Speaker 3: rise a lot more than kind of the the the 318 00:18:29,600 --> 00:18:36,640 Speaker 3: the treasuries, you plow everything into treasuries and and longer term, 319 00:18:36,760 --> 00:18:38,879 Speaker 3: you know, long term treasuries and then you're stuck with that, 320 00:18:39,320 --> 00:18:42,359 Speaker 3: and you're stuck with low yield yielding assets and a 321 00:18:42,359 --> 00:18:45,440 Speaker 3: lot of unrealized losses. Right. And in order to fix 322 00:18:45,480 --> 00:18:48,440 Speaker 3: that situation, you have to sell these things at a loss, right, 323 00:18:48,840 --> 00:18:51,280 Speaker 3: and then go to your your your shareholders and then 324 00:18:51,280 --> 00:18:53,760 Speaker 3: say like, hey, well we're taking this loss, so we 325 00:18:53,800 --> 00:18:57,520 Speaker 3: need to raise some more capital. Right. And and ironically, 326 00:18:57,600 --> 00:18:59,840 Speaker 3: you know, they're known as the c l O whale, right, 327 00:18:59,880 --> 00:19:02,119 Speaker 3: and you know that got them in trouble in the 328 00:19:02,119 --> 00:19:05,919 Speaker 3: financial crisis. Ironically, if they would have stuck to clos 329 00:19:06,000 --> 00:19:10,880 Speaker 3: which are a floating rate, right, you know, their net 330 00:19:10,880 --> 00:19:14,760 Speaker 3: interest margin would have looked a lot more better. But 331 00:19:14,760 --> 00:19:16,800 Speaker 3: but you know, in terms of you know, I think 332 00:19:16,800 --> 00:19:19,840 Speaker 3: that's a bit unique. And in terms of you know, again, 333 00:19:20,240 --> 00:19:23,680 Speaker 3: banks take in deposits and and ideally they make loans, right, 334 00:19:23,760 --> 00:19:27,600 Speaker 3: And so it's these models that have a lot of 335 00:19:27,640 --> 00:19:30,640 Speaker 3: excess deposits, and it's like, okay, you know, the things 336 00:19:30,680 --> 00:19:33,560 Speaker 3: that got into trouble last year were all right, what 337 00:19:33,560 --> 00:19:35,960 Speaker 3: do we do with all these excess deposits. Let's plowed 338 00:19:36,000 --> 00:19:40,040 Speaker 3: into treasuries, let's plowed into agency nbs and and you 339 00:19:40,080 --> 00:19:43,880 Speaker 3: know duration we call it risk free but obviously right, 340 00:19:44,119 --> 00:19:47,920 Speaker 3: you know, with the bond math when rates rise suddenly, right, 341 00:19:48,119 --> 00:19:51,280 Speaker 3: it doesn't look so good, right, And so you know, yes, 342 00:19:51,720 --> 00:19:56,560 Speaker 3: there there are you know banks like SVB right, which 343 00:19:56,600 --> 00:19:58,760 Speaker 3: which did a lot of this less lending and a 344 00:19:58,760 --> 00:20:03,919 Speaker 3: lot of parked asset in the treasuries and maybe agency nbs. 345 00:20:04,040 --> 00:20:06,639 Speaker 3: Yes that ran into trouble. But it takes the the 346 00:20:06,680 --> 00:20:10,440 Speaker 3: other hand of Okay, how about your deposits, right, how 347 00:20:10,480 --> 00:20:14,199 Speaker 3: sticky are they? How you know how many have you 348 00:20:14,240 --> 00:20:16,879 Speaker 3: know are under that two hundred and fifty thousand you 349 00:20:16,880 --> 00:20:20,720 Speaker 3: know guarantee level? Right? So so that matters too. So 350 00:20:21,600 --> 00:20:23,840 Speaker 3: in terms of you know that that stuff's still happening 351 00:20:23,880 --> 00:20:26,680 Speaker 3: in the US, I think less and less at least, 352 00:20:26,760 --> 00:20:29,800 Speaker 3: you know, for the biggest banks, uh, for for what 353 00:20:29,840 --> 00:20:33,080 Speaker 3: the bondholders care about banks above one hundred billion in assets, 354 00:20:33,200 --> 00:20:37,000 Speaker 3: I think it's looking pretty decent, right, never say never, 355 00:20:38,080 --> 00:20:40,560 Speaker 3: But you know I think for those again below one 356 00:20:40,640 --> 00:20:43,480 Speaker 3: hundred billion, fifty billion, ten billion, you know, with with 357 00:20:43,560 --> 00:20:47,960 Speaker 3: some CIRE heavy CRE exposure, yeah, that that could be 358 00:20:48,000 --> 00:20:48,520 Speaker 3: an issue. 359 00:20:48,800 --> 00:20:51,640 Speaker 2: You know, Look the banks in our coverage, they tend 360 00:20:51,640 --> 00:20:56,680 Speaker 2: to be the larger banks atomotic thirty two largest banks 361 00:20:56,680 --> 00:20:59,080 Speaker 2: in Europe on the coverage, but there are lots of 362 00:20:59,119 --> 00:21:02,239 Speaker 2: smaller banks that we don't focus on so much, and 363 00:21:02,280 --> 00:21:05,040 Speaker 2: it is it's always a possibility that one or a 364 00:21:05,040 --> 00:21:10,040 Speaker 2: few of them get into difficulty because of mismanagement, mismanaging 365 00:21:10,520 --> 00:21:17,000 Speaker 2: their liquidity position, mismanaging their their capital or their business model. 366 00:21:18,240 --> 00:21:20,280 Speaker 2: That's always a possibility. At the start of the year. 367 00:21:20,640 --> 00:21:22,680 Speaker 2: Just to bring it back slightly to commercial real estate, 368 00:21:22,680 --> 00:21:24,840 Speaker 2: at the start of the year, we had two more 369 00:21:25,280 --> 00:21:31,840 Speaker 2: small banks but specialized business models that are going to focus. 370 00:21:32,440 --> 00:21:38,200 Speaker 2: R L Bank and Deutsche Pumpi Bank both are specialists 371 00:21:39,000 --> 00:21:42,399 Speaker 2: real estate landers and when concerns over the health of 372 00:21:42,440 --> 00:21:47,399 Speaker 2: commercial real state went through the roof, inevitably concerns over 373 00:21:47,560 --> 00:21:53,280 Speaker 2: the health of those two banks also skyrocketed. But they're 374 00:21:53,280 --> 00:21:59,680 Speaker 2: still around, and they have sort of diminished, not removed, 375 00:21:59,720 --> 00:22:04,919 Speaker 2: but the minished anxiety about the business mall about their 376 00:22:04,920 --> 00:22:08,440 Speaker 2: futures and independ identity spreads have come in a little bit. 377 00:22:09,359 --> 00:22:12,840 Speaker 2: They're still treading well wide of everything else, but you know, 378 00:22:12,880 --> 00:22:17,720 Speaker 2: they're still with us. And so look, there are examples 379 00:22:17,800 --> 00:22:21,480 Speaker 2: like that or smaller banks that for whatever reason, either 380 00:22:21,480 --> 00:22:25,720 Speaker 2: because they're too undiversified or because of mismanagement, may find 381 00:22:25,760 --> 00:22:29,280 Speaker 2: themselves in focus. Shall we say? 382 00:22:29,640 --> 00:22:33,359 Speaker 1: Okay, so let's talk about the relative value in the 383 00:22:33,359 --> 00:22:36,600 Speaker 1: banking set. A lot of I guess again from the 384 00:22:36,640 --> 00:22:40,720 Speaker 1: investor side, big portfolio as they're running, they really like banks. 385 00:22:41,240 --> 00:22:44,080 Speaker 1: They think it offers relative value. They think it's still 386 00:22:44,200 --> 00:22:49,080 Speaker 1: cheap versus non banks, non financials, because it hasn't fully 387 00:22:49,160 --> 00:22:52,960 Speaker 1: corrected back from last year's blowout when everyone was worried 388 00:22:53,000 --> 00:22:56,560 Speaker 1: about financials in general. Is there still that gap? Is 389 00:22:56,560 --> 00:22:58,960 Speaker 1: there still that kind of arbitrage id in terms of 390 00:22:59,000 --> 00:23:02,119 Speaker 1: the banking bonds versus non banking bonds. 391 00:23:02,720 --> 00:23:08,800 Speaker 3: Yes, I still think, you know, the the there is 392 00:23:08,880 --> 00:23:15,240 Speaker 3: opportunity for you know, bank compression basically financial bond Like 393 00:23:15,320 --> 00:23:17,320 Speaker 3: I'm going to use the financials index as a proxy, 394 00:23:17,359 --> 00:23:20,760 Speaker 3: given you know, banks are about seventy percent of the 395 00:23:20,760 --> 00:23:24,240 Speaker 3: financials index, but the financial bonds are still about three 396 00:23:24,240 --> 00:23:28,000 Speaker 3: basis points wider than the overall index. But if you 397 00:23:28,040 --> 00:23:33,240 Speaker 3: go back to twenty twenty one, right, they were ten tighter, right, 398 00:23:33,280 --> 00:23:36,000 Speaker 3: And if you look at kind of a more normalized 399 00:23:36,040 --> 00:23:39,080 Speaker 3: period that you know, five to ten tighter than the 400 00:23:39,119 --> 00:23:41,880 Speaker 3: overall index has been kind of the average. And then 401 00:23:41,920 --> 00:23:44,480 Speaker 3: but of course we've had in twenty twenty two we 402 00:23:44,520 --> 00:23:47,160 Speaker 3: had all the rate hikes, you know, twenty twenty three 403 00:23:47,280 --> 00:23:50,520 Speaker 3: we've had their regional bank you know, failures and stuff 404 00:23:50,560 --> 00:23:54,600 Speaker 3: like that. So right, it's the you know, the regionals 405 00:23:54,640 --> 00:23:58,320 Speaker 3: still trade wide. There are still some concerns, but you know, 406 00:23:58,400 --> 00:24:01,119 Speaker 3: time heals, and I think if we do get a 407 00:24:01,160 --> 00:24:05,639 Speaker 3: soft landing, you know, this trade can still continue. 408 00:24:06,200 --> 00:24:07,960 Speaker 1: So how much wider are they right now? 409 00:24:08,720 --> 00:24:11,199 Speaker 3: Three wider? But you know, if you go back to 410 00:24:11,200 --> 00:24:13,359 Speaker 3: twenty twenty one and twenty twenty one, they were ten tighter. 411 00:24:13,560 --> 00:24:17,600 Speaker 1: Okay, And you specifically like the preferred debt of banks, 412 00:24:17,600 --> 00:24:19,359 Speaker 1: can you tell me what that is? You know, for 413 00:24:19,400 --> 00:24:22,800 Speaker 1: the for the you know, general listener and why it's 414 00:24:22,960 --> 00:24:23,840 Speaker 1: so hot right now? 415 00:24:24,359 --> 00:24:29,000 Speaker 3: Yeah? Absolutely so, I think just overall preferreds get no respect. Man. 416 00:24:29,480 --> 00:24:33,600 Speaker 3: It's it's the Rodney danger field of securities. You know 417 00:24:33,600 --> 00:24:36,399 Speaker 3: what is it. It's taking twenty seven minutes to come in. 418 00:24:36,560 --> 00:24:38,720 Speaker 3: It's you know, what can I say about it? I 419 00:24:38,720 --> 00:24:41,480 Speaker 3: can't say enough. It's it's you get IG you know, 420 00:24:41,720 --> 00:24:45,879 Speaker 3: high yield returns for IG risk, right, and you know, 421 00:24:46,040 --> 00:24:49,240 Speaker 3: just no respect. I mean I had an investor tell me, hey, 422 00:24:49,600 --> 00:24:51,640 Speaker 3: you know, I was trying to spell check my doc 423 00:24:51,680 --> 00:24:53,600 Speaker 3: and the only reason I got prefers. I hit F 424 00:24:53,680 --> 00:24:56,359 Speaker 3: seven and these prefers came up. Right, So like if 425 00:24:56,440 --> 00:24:58,720 Speaker 3: F seven is the preferred key on the on the 426 00:24:58,720 --> 00:25:02,080 Speaker 3: Bloomberg sweadsheet, on the Bloomberg terminal, so it's you know, 427 00:25:02,119 --> 00:25:04,600 Speaker 3: it gets no respect. It doesn't have all the fancy 428 00:25:04,600 --> 00:25:08,560 Speaker 3: stuff that the at ones have given. You know, it 429 00:25:08,600 --> 00:25:11,119 Speaker 3: doesn't always get called in five years, and so you 430 00:25:11,119 --> 00:25:14,320 Speaker 3: don't have this issuance ahead of call, you know, situation. 431 00:25:14,480 --> 00:25:17,639 Speaker 3: And I think that's created a lot of interesting dynamics 432 00:25:17,640 --> 00:25:21,280 Speaker 3: this year. Right, We've had these preferreds jump up to 433 00:25:21,880 --> 00:25:26,160 Speaker 3: you know, nine eight, nine ten percent coupons and then 434 00:25:26,359 --> 00:25:30,560 Speaker 3: you know they floaty ray coupons, and you know there's duration, 435 00:25:30,760 --> 00:25:34,399 Speaker 3: right like some some preferreds are are are are you know, 436 00:25:34,400 --> 00:25:36,639 Speaker 3: fixed for life and they're going to remain outstanding forever. 437 00:25:36,720 --> 00:25:39,320 Speaker 1: Right, But before you do, what are they just tell 438 00:25:39,359 --> 00:25:41,280 Speaker 1: me in really general terms, what what are we talking about? 439 00:25:41,320 --> 00:25:45,200 Speaker 1: Is it subordinated debt? Is it equity like debt? I mean, 440 00:25:45,200 --> 00:25:46,720 Speaker 1: what what is it? In basic terms? 441 00:25:47,119 --> 00:25:51,959 Speaker 3: Yeah, it is it is it is more equity like 442 00:25:52,160 --> 00:25:55,760 Speaker 3: given their perpetual securities that count for you know, and 443 00:25:55,800 --> 00:26:00,199 Speaker 3: we say eighty one they count for additional tier one capital. Right, 444 00:26:00,240 --> 00:26:04,760 Speaker 3: It's it's uh, banks have capital requirements and that that's 445 00:26:04,800 --> 00:26:07,400 Speaker 3: generally the equity requirements, and then on top of that 446 00:26:07,440 --> 00:26:12,400 Speaker 3: they can add a little bucket for additional tier one capital. 447 00:26:12,720 --> 00:26:15,359 Speaker 3: In the US, it's preferreds. In Europe it's these eighty 448 00:26:15,400 --> 00:26:18,560 Speaker 3: one cocoas that your your own you know, loves talking about. 449 00:26:18,920 --> 00:26:21,560 Speaker 3: And then what sits about that is subordinated debt and 450 00:26:21,600 --> 00:26:25,720 Speaker 3: subdet right, so it sits between sub debt and equity, 451 00:26:26,400 --> 00:26:30,560 Speaker 3: and that that's this uh uh middle layer eighty one 452 00:26:30,720 --> 00:26:33,760 Speaker 3: at preferreds are the eighty one in the US. And 453 00:26:34,880 --> 00:26:38,399 Speaker 3: the technicals had been really good in in in preferred 454 00:26:38,480 --> 00:26:42,879 Speaker 3: land up until recently. We think, right, you've you've heard 455 00:26:42,920 --> 00:26:46,320 Speaker 3: of basle endgame, big banks. Uh, they're holding tons and 456 00:26:46,359 --> 00:26:51,160 Speaker 3: tons of more excess uh common equity in anticipation of 457 00:26:51,160 --> 00:26:54,040 Speaker 3: of basle end game regulation. So what have they been doing. 458 00:26:54,600 --> 00:26:59,360 Speaker 3: They've been calling preferreds. They've been calling more preferreds rather 459 00:26:59,400 --> 00:27:03,680 Speaker 3: than issuing, right, So the preferred bucket has been shrinking. 460 00:27:04,040 --> 00:27:06,760 Speaker 3: And and it's because these banks have been holding more 461 00:27:06,840 --> 00:27:10,480 Speaker 3: and more and more uh common equity, right, And and 462 00:27:10,680 --> 00:27:13,879 Speaker 3: the new regulation will kick in over the next few years. 463 00:27:13,920 --> 00:27:16,480 Speaker 3: So we think that you know, the technicals and in 464 00:27:16,520 --> 00:27:21,040 Speaker 3: the preferred space will remain pretty good, right as as 465 00:27:21,080 --> 00:27:26,000 Speaker 3: supply goes out. So, but the thing is recently what 466 00:27:26,040 --> 00:27:29,400 Speaker 3: we've had is, you know, the odds of Republican government 467 00:27:29,480 --> 00:27:33,240 Speaker 3: have changed, have has increased, right, And I think the 468 00:27:33,280 --> 00:27:35,320 Speaker 3: cell side out there is saying that, you know, that 469 00:27:35,400 --> 00:27:38,000 Speaker 3: might lead to a steeper curve, right with with higher 470 00:27:38,040 --> 00:27:42,800 Speaker 3: long term rates and embedded inflation and so preferreds many 471 00:27:42,840 --> 00:27:47,600 Speaker 3: preferreds have a longer duration, right, And so it's basically 472 00:27:47,640 --> 00:27:50,359 Speaker 3: if if the thirty year treasure yield rises, you know, 473 00:27:50,760 --> 00:27:53,760 Speaker 3: and so yeah, as an opportunity cost, right, that that 474 00:27:53,800 --> 00:27:56,920 Speaker 3: goes up for these preferreds. So yeah, that might be 475 00:27:56,960 --> 00:28:00,520 Speaker 3: a headwind to to to some long duration fers, but 476 00:28:00,800 --> 00:28:02,920 Speaker 3: you know they're there. There's like a prefer for every 477 00:28:02,920 --> 00:28:06,240 Speaker 3: season every person almost right, you have these preferreds that 478 00:28:07,880 --> 00:28:11,040 Speaker 3: like a well stargo three point nine that you get 479 00:28:11,040 --> 00:28:13,280 Speaker 3: a three point nine percent coupon now, but then it's 480 00:28:13,280 --> 00:28:16,800 Speaker 3: gonna jump up to five year treasury plus uh like 481 00:28:16,920 --> 00:28:20,560 Speaker 3: three forty in in in like a couple of years, right, 482 00:28:20,600 --> 00:28:24,240 Speaker 3: So you're protected that way, right. The odds of a 483 00:28:24,280 --> 00:28:26,720 Speaker 3: call will go up, you know, because it's it's gonna 484 00:28:26,720 --> 00:28:29,560 Speaker 3: float to high. The coupon might double, right when when 485 00:28:29,560 --> 00:28:31,680 Speaker 3: this when this occurs, So even if you don't get 486 00:28:31,680 --> 00:28:35,040 Speaker 3: called away, you'll be protected with a high coupon. So 487 00:28:35,440 --> 00:28:37,680 Speaker 3: you know, there's a prefer for all seasons. We get 488 00:28:37,720 --> 00:28:41,240 Speaker 3: no respect, but you know, you know it provides you know, 489 00:28:41,360 --> 00:28:46,800 Speaker 3: high yield returns for I g risk And yeah, like 490 00:28:47,120 --> 00:28:50,920 Speaker 3: another thing that's not well understood. A JPM six percent 491 00:28:51,120 --> 00:28:55,000 Speaker 3: is similar to an eight percent corporate bond. Why it's 492 00:28:55,000 --> 00:28:58,880 Speaker 3: it's the tax, right, So prefers paid dividends, right, and 493 00:28:59,280 --> 00:29:03,360 Speaker 3: no dividends, you get taxed, you know, much more favorably. Right. 494 00:29:03,600 --> 00:29:06,520 Speaker 3: Let's say at the capital gains rate of like let's 495 00:29:06,520 --> 00:29:10,760 Speaker 3: say twenty percent versus on corporate bonds, that's like more 496 00:29:10,800 --> 00:29:14,000 Speaker 3: of a your individual tax rate, right, which you know 497 00:29:14,040 --> 00:29:16,719 Speaker 3: for wealthy folks it's like forty percent. So so on 498 00:29:16,760 --> 00:29:21,640 Speaker 3: a net basis, a six percent preferred is the same 499 00:29:21,680 --> 00:29:25,080 Speaker 3: as an eight percent high yield bond. Right, and and 500 00:29:25,120 --> 00:29:27,120 Speaker 3: look at look at okay, so I'm gonna rant a 501 00:29:27,160 --> 00:29:33,840 Speaker 3: little more. Pff is is the preferred index? Right? The 502 00:29:33,880 --> 00:29:38,000 Speaker 3: market cap on that versus an HyG the high yield 503 00:29:38,200 --> 00:29:42,520 Speaker 3: it's it's eighty percent, right, so right, the preferred the 504 00:29:42,800 --> 00:29:45,840 Speaker 3: money is flowing to where there's interest. It's eighty percent, 505 00:29:45,960 --> 00:29:49,400 Speaker 3: you know, preferred indexes eighty percent of HyG high yo 506 00:29:49,480 --> 00:29:52,080 Speaker 3: corporate bonds. Hey, James, when's the last time you had 507 00:29:52,640 --> 00:29:54,200 Speaker 3: a preferred guy on the show. 508 00:29:54,840 --> 00:29:56,560 Speaker 1: Why does it get no respect for him? Is it 509 00:29:56,640 --> 00:29:58,280 Speaker 1: just a tiny market that no one cares about? Well, 510 00:29:58,320 --> 00:30:00,520 Speaker 1: no one understands. What's the what's the disconnect? 511 00:30:01,360 --> 00:30:03,360 Speaker 3: It's it's not covered the media. So yeah, that that's 512 00:30:03,400 --> 00:30:06,280 Speaker 3: that's the issue, is that we don't have this. It's 513 00:30:07,280 --> 00:30:09,520 Speaker 3: we don't have this. Oh, they're going to call it 514 00:30:09,520 --> 00:30:11,960 Speaker 3: in five years, So it's not in the news flow, right, 515 00:30:12,320 --> 00:30:15,680 Speaker 3: It's not oh, oh somebody is issuing an at one 516 00:30:16,040 --> 00:30:18,040 Speaker 3: because they're going to call it. Right. That that's certainty, 517 00:30:18,240 --> 00:30:20,960 Speaker 3: that uncertainty is there, right, So it's not if you 518 00:30:20,960 --> 00:30:23,360 Speaker 3: don't have this call and then issue, Right, it's not 519 00:30:23,400 --> 00:30:26,600 Speaker 3: in the news as much, right, But is it is it? 520 00:30:26,600 --> 00:30:27,840 Speaker 1: It's how big is the market? 521 00:30:28,240 --> 00:30:31,040 Speaker 3: Oh, it's it's huge, right And and right now even 522 00:30:31,160 --> 00:30:34,040 Speaker 3: I mentioned the F seven, that's the retail prefers, that's 523 00:30:34,080 --> 00:30:36,360 Speaker 3: the stuff that you know, Mom and Pops, you and 524 00:30:36,400 --> 00:30:39,160 Speaker 3: I can even buy right on the n Y I 525 00:30:39,240 --> 00:30:40,840 Speaker 3: s we can go in our PA and and buy 526 00:30:40,840 --> 00:30:44,000 Speaker 3: it twenty five dollars par securities. Then there's the corporate 527 00:30:44,120 --> 00:30:46,800 Speaker 3: you know, institutional market, which is typically the fixed you 528 00:30:46,840 --> 00:30:49,480 Speaker 3: know it just fixed, the floating right, And and so 529 00:30:49,880 --> 00:30:52,320 Speaker 3: it's it's it's a huge market, but just doesn't get 530 00:30:52,360 --> 00:30:55,320 Speaker 3: as much coverage given it's not in the newsflow. Right. 531 00:30:55,840 --> 00:30:58,560 Speaker 3: But and and then you know you've had people comparing 532 00:30:58,640 --> 00:31:01,720 Speaker 3: I remember that they're comparing the like a synchrony. You know, 533 00:31:01,840 --> 00:31:04,360 Speaker 3: why would I buy a synchrony you know eight and 534 00:31:04,400 --> 00:31:06,320 Speaker 3: a quarter versus a B M P eight and a 535 00:31:06,320 --> 00:31:09,600 Speaker 3: half or whatever. And it's like, dudes, like it's it's 536 00:31:09,640 --> 00:31:13,200 Speaker 3: it's a different you know, it's different credits obviously, but 537 00:31:13,200 --> 00:31:16,400 Speaker 3: but but but that eight percent on the synchrony preferred 538 00:31:16,560 --> 00:31:19,800 Speaker 3: is you know, your tax advantage, you know more than 539 00:31:19,880 --> 00:31:22,160 Speaker 3: let's say, you know, the the B A P eight 540 00:31:22,160 --> 00:31:25,280 Speaker 3: and a half. So yeah, a lot of misunderstanding, not 541 00:31:25,320 --> 00:31:27,640 Speaker 3: a lot of coverage. But I think for the players 542 00:31:27,640 --> 00:31:32,000 Speaker 3: that are involved, I think that that, right, it helps them, right, 543 00:31:32,040 --> 00:31:34,480 Speaker 3: maybe I think maybe they like that, you know, misunderstanding 544 00:31:34,520 --> 00:31:36,960 Speaker 3: and then only when yields get tight you'll have some 545 00:31:36,960 --> 00:31:39,760 Speaker 3: some more tourists coming in looking for extra yield. It's 546 00:31:39,760 --> 00:31:42,480 Speaker 3: just all about and stuff like that. So you know, 547 00:31:42,760 --> 00:31:44,360 Speaker 3: from our end, we're trying to write more and more 548 00:31:44,400 --> 00:31:47,840 Speaker 3: about it, you know, given given the eyeballs and the 549 00:31:47,880 --> 00:31:51,000 Speaker 3: interest that we're saying. But yeah, hopefully we can get 550 00:31:51,040 --> 00:31:53,400 Speaker 3: some more folks on preferreds out here, you know, talk 551 00:31:53,520 --> 00:31:54,280 Speaker 3: talking their stuff. 552 00:31:54,880 --> 00:31:56,440 Speaker 1: Yes, if there's anyone out there that wants to come 553 00:31:56,480 --> 00:31:58,960 Speaker 1: on the talks Preferred, let's have them. Sounds like we 554 00:31:59,080 --> 00:32:00,600 Speaker 1: touched a nerve there on al, I'm going to move 555 00:32:00,600 --> 00:32:04,400 Speaker 1: on to eighty ones with your oun. Eighty one's it's 556 00:32:04,400 --> 00:32:06,080 Speaker 1: the trade of the year for some of our big 557 00:32:06,120 --> 00:32:08,600 Speaker 1: investors that we have on the show. Again. This time 558 00:32:08,680 --> 00:32:10,479 Speaker 1: last year we were talking about the end of the 559 00:32:10,480 --> 00:32:12,800 Speaker 1: eighty one market and you know, the credit Swiss had 560 00:32:12,880 --> 00:32:15,160 Speaker 1: killed it, but it's made a big comeback. It's basically 561 00:32:15,200 --> 00:32:18,280 Speaker 1: the riskiest type of bank and those who bought it 562 00:32:18,280 --> 00:32:20,400 Speaker 1: did extremely well, especially if you bought it at the lows. 563 00:32:20,640 --> 00:32:22,280 Speaker 1: Can you give us a rundown ruin? I mean, what 564 00:32:22,640 --> 00:32:25,040 Speaker 1: is the eighty one market and why is it hot? 565 00:32:26,080 --> 00:32:28,920 Speaker 2: So it's it's similarly places as that prefers over in 566 00:32:28,920 --> 00:32:31,719 Speaker 2: the US. So it's the most junior type of bonds 567 00:32:31,760 --> 00:32:35,440 Speaker 2: that a bank in Europe can issue, So it's more 568 00:32:35,520 --> 00:32:39,520 Speaker 2: junior to Tier two bonds, and it's just above common equity. 569 00:32:40,480 --> 00:32:43,840 Speaker 2: The overall size for the European banking eighty one market 570 00:32:44,360 --> 00:32:47,760 Speaker 2: is around two hundred and fifty billion dollar equivalent. The 571 00:32:47,800 --> 00:32:53,200 Speaker 2: majority of bonds are actually in dollars, with euros coming 572 00:32:53,280 --> 00:32:57,040 Speaker 2: in second, and then there's a sliver of sterling issue 573 00:32:57,040 --> 00:33:04,800 Speaker 2: and Swiss francs and even some Scandinavian occurrencies. But yeah, 574 00:33:04,840 --> 00:33:08,360 Speaker 2: the most most bonds are dullar denominated or euro denominated, 575 00:33:09,240 --> 00:33:13,400 Speaker 2: and as you say, they've performed very well, particularly the 576 00:33:13,400 --> 00:33:17,720 Speaker 2: euro denominated ones. You know, it's been an almost constant 577 00:33:18,720 --> 00:33:23,800 Speaker 2: rally since since October, and again fueled by generally healthy 578 00:33:23,880 --> 00:33:29,960 Speaker 2: quarterly results, the reopening of the primary market, and you know, 579 00:33:30,000 --> 00:33:34,840 Speaker 2: the near perfect call track record perfect actually in the 580 00:33:34,880 --> 00:33:37,480 Speaker 2: twenty twenty four and even in twenty twenty three we 581 00:33:37,560 --> 00:33:42,040 Speaker 2: only saw two or three eighty ones not getting called, 582 00:33:42,480 --> 00:33:46,920 Speaker 2: So you're absolutely right. A year ago questions were being 583 00:33:46,920 --> 00:33:50,480 Speaker 2: asked about the future of the eighty one market. Today 584 00:33:50,760 --> 00:33:53,080 Speaker 2: it is it seems to be very healthy, but there 585 00:33:53,120 --> 00:33:58,680 Speaker 2: are a number of questions that actually remain unanswered and 586 00:33:58,720 --> 00:34:03,320 Speaker 2: that regulates are thinking about whether or not to try 587 00:34:03,320 --> 00:34:07,600 Speaker 2: and rectify or whether to just leave the situation as 588 00:34:07,640 --> 00:34:11,600 Speaker 2: it is. And the crucial aspect is this the Credit 589 00:34:11,640 --> 00:34:15,560 Speaker 2: Sweeze eighty one bonds. They were written down and canceled, 590 00:34:17,480 --> 00:34:22,920 Speaker 2: but that happened outside of what's called resolution regulates outside 591 00:34:23,080 --> 00:34:29,560 Speaker 2: of Switzerland. They made very strong statements the following days 592 00:34:30,440 --> 00:34:32,440 Speaker 2: saying well, first of all, thank you very much Switzerland 593 00:34:32,480 --> 00:34:36,800 Speaker 2: for preventing another great financial crisis, but also being quite 594 00:34:36,880 --> 00:34:40,560 Speaker 2: clear that what happened with Credit swees that that would 595 00:34:40,600 --> 00:34:45,840 Speaker 2: never happen in their jurisdiction, that the claims hierarchy would 596 00:34:45,840 --> 00:34:49,680 Speaker 2: be respected, because that's not what happened with Credit Switez. 597 00:34:49,800 --> 00:34:53,560 Speaker 2: With the Credit Sweeze, shareholders actually got a slight recovery 598 00:34:53,600 --> 00:34:58,560 Speaker 2: of three billion dollars thereabout, so regulates outside of Switzerland's. 599 00:34:59,239 --> 00:35:02,080 Speaker 2: They were saying, it's not going to happen in our jurisdiction. 600 00:35:02,920 --> 00:35:06,720 Speaker 2: The claims hierarchy is going to be respected. That seemed 601 00:35:06,719 --> 00:35:10,360 Speaker 2: to suggest that eighty ones would only trigger in resolution, 602 00:35:10,800 --> 00:35:17,319 Speaker 2: and that contradicts the go and concern capital purpose of 603 00:35:17,400 --> 00:35:19,960 Speaker 2: eighty one s that's that's you know, how they know 604 00:35:20,000 --> 00:35:25,680 Speaker 2: when they were created coincidentally by regulators, they were meant 605 00:35:25,840 --> 00:35:30,120 Speaker 2: to be go and concern capital. Now, with those statements 606 00:35:30,160 --> 00:35:34,040 Speaker 2: that followed, what you know, after the Credit Swiez implosion, 607 00:35:35,120 --> 00:35:38,680 Speaker 2: the statements that were made then seem to suggest that actually, 608 00:35:38,800 --> 00:35:42,960 Speaker 2: in practice, the go and concern nature of eighty ones 609 00:35:43,440 --> 00:35:47,160 Speaker 2: is in doubt. So we have we don't know we 610 00:35:47,239 --> 00:35:53,200 Speaker 2: are what's going to happen. Regulators may actually come with 611 00:35:53,400 --> 00:35:57,960 Speaker 2: proposals at some point to amend the structure, but the 612 00:35:58,000 --> 00:36:00,279 Speaker 2: market itself has sort of forgotten all about it and 613 00:36:00,360 --> 00:36:03,480 Speaker 2: has rawed ahead. It performs us me very very strongly. 614 00:36:03,560 --> 00:36:06,440 Speaker 1: You sat, is there still room to go in that 615 00:36:06,680 --> 00:36:08,640 Speaker 1: rally or we just hit the same level as we 616 00:36:08,680 --> 00:36:10,320 Speaker 1: were at pre Credit Swiss. 617 00:36:10,800 --> 00:36:15,960 Speaker 2: Well here, today's positive access returns are seven percent, and 618 00:36:16,080 --> 00:36:20,080 Speaker 2: that's for the Euro denominated eighty one index. And that's 619 00:36:20,120 --> 00:36:23,040 Speaker 2: the best year except for twenty nineteen. I think for 620 00:36:23,160 --> 00:36:27,279 Speaker 2: this time of year, so early July, to have seven 621 00:36:27,280 --> 00:36:32,120 Speaker 2: percent access returns in the books, that's pretty extraordinary. I 622 00:36:32,160 --> 00:36:36,120 Speaker 2: think the second half could bring further access returns positive 623 00:36:36,120 --> 00:36:39,799 Speaker 2: access returns, but that's going to be driven more by 624 00:36:41,120 --> 00:36:43,640 Speaker 2: the carry rather than for the tightening, because I do 625 00:36:43,680 --> 00:36:47,239 Speaker 2: think that we are sort of done with the tightening. 626 00:36:47,640 --> 00:36:50,520 Speaker 2: If you compare where eighty one to trade relative to 627 00:36:50,560 --> 00:36:53,040 Speaker 2: tier two, so the layer above it in the capital structure, 628 00:36:53,760 --> 00:36:57,200 Speaker 2: it is at the tights compared with five year averages, 629 00:36:57,800 --> 00:37:01,680 Speaker 2: and equally, if you compared with equity, so with European 630 00:37:01,800 --> 00:37:07,000 Speaker 2: bank equity in disease, diffident in disease, it is also 631 00:37:08,800 --> 00:37:13,000 Speaker 2: the eighty one yields are also relatively tight, so I 632 00:37:13,000 --> 00:37:16,000 Speaker 2: don't think that you're going to see further further spread 633 00:37:16,000 --> 00:37:19,640 Speaker 2: tightening or yield tightening, whatever you got to look at. 634 00:37:20,400 --> 00:37:23,239 Speaker 2: But the yields are such that even if you aren't 635 00:37:23,280 --> 00:37:27,160 Speaker 2: going to see any further tightening, you know, seven percent 636 00:37:27,239 --> 00:37:29,080 Speaker 2: yield or six point nine percent, I think it is 637 00:37:29,160 --> 00:37:33,120 Speaker 2: at the moment that should still ensure that excess returns 638 00:37:33,120 --> 00:37:35,279 Speaker 2: into your rent are going to be positive for eighty 639 00:37:35,320 --> 00:37:36,680 Speaker 2: one holes, do. 640 00:37:36,680 --> 00:37:37,880 Speaker 1: We expect a lot more issuance. 641 00:37:39,360 --> 00:37:42,680 Speaker 2: I think issuance will keep track with the core calendar. 642 00:37:43,480 --> 00:37:46,600 Speaker 2: So I think as a market, eighty one's has sort 643 00:37:46,600 --> 00:37:51,440 Speaker 2: of topped out. That happens maybe one or two years ago, 644 00:37:51,960 --> 00:37:54,120 Speaker 2: so it's it reached that two hundred and fifty billion 645 00:37:54,160 --> 00:37:57,040 Speaker 2: dollar equivalent size one or two years ago, and that's 646 00:37:57,080 --> 00:38:01,399 Speaker 2: I think what it will stay. So, but if every 647 00:38:01,840 --> 00:38:05,719 Speaker 2: you know, with a core calendar as it is, issuers 648 00:38:05,760 --> 00:38:10,319 Speaker 2: will issue ahead of ahead of course generally speaking, so 649 00:38:10,360 --> 00:38:13,279 Speaker 2: the core calendar sort of dictates the issuance calendar more 650 00:38:13,360 --> 00:38:13,880 Speaker 2: or less. 651 00:38:14,120 --> 00:38:17,600 Speaker 1: Okay, what about issuance more generally arnold in the US? 652 00:38:17,640 --> 00:38:20,160 Speaker 1: I mean, every time we actually at earnings blackout period, 653 00:38:20,160 --> 00:38:23,080 Speaker 1: which we're about to do, there's a big rush of issuance. 654 00:38:23,160 --> 00:38:26,000 Speaker 1: You know, obviously there's a summer slowdown in the calendar 655 00:38:26,239 --> 00:38:29,600 Speaker 1: for the primary market, but we're rushing to get ahead 656 00:38:29,600 --> 00:38:34,319 Speaker 1: of a particularly choppy election cycle this year. So do 657 00:38:34,360 --> 00:38:37,200 Speaker 1: you do you expect a big boost of issuance from 658 00:38:37,239 --> 00:38:38,640 Speaker 1: banks coming soon? 659 00:38:39,840 --> 00:38:41,680 Speaker 3: I mean, I mean last year in terms of like 660 00:38:41,680 --> 00:38:45,200 Speaker 3: the senior aside, last year was just a really down year, 661 00:38:46,160 --> 00:38:49,000 Speaker 3: and then this year we expected I think last year 662 00:38:49,080 --> 00:38:53,120 Speaker 3: was down about half versus the prior year, which was 663 00:38:53,200 --> 00:38:57,839 Speaker 3: more active. This year we expected a normalization, so I think, right, 664 00:38:57,840 --> 00:39:00,400 Speaker 3: which is still like a normalization you know, to to 665 00:39:00,480 --> 00:39:03,799 Speaker 3: let's say, pre pre uh pandemic levels, and we're we're 666 00:39:04,080 --> 00:39:06,880 Speaker 3: tracking on that level, So I think we'll keep our forecast. 667 00:39:06,920 --> 00:39:09,360 Speaker 3: In terms of the senior side, we expect about twenty 668 00:39:09,400 --> 00:39:12,800 Speaker 3: to twenty five billion for July, which is you know, 669 00:39:12,880 --> 00:39:16,680 Speaker 3: July is typically you know, after January and April, kind 670 00:39:16,719 --> 00:39:18,719 Speaker 3: of the third busiest month of the year, given they 671 00:39:18,800 --> 00:39:21,880 Speaker 3: you know, banks exit the you know, the blackouts and stuff. 672 00:39:21,880 --> 00:39:26,640 Speaker 3: But in terms of preferred issuance, as I said, like 673 00:39:27,400 --> 00:39:30,719 Speaker 3: the big banks have been just holding massive equity buffers, right, 674 00:39:30,800 --> 00:39:33,319 Speaker 3: and then you know, because of that, they have less 675 00:39:33,320 --> 00:39:36,760 Speaker 3: of a need for preferreds. So actually we've been seeing 676 00:39:36,920 --> 00:39:40,279 Speaker 3: you know, more preferred calls and and kind of less issuance, right, 677 00:39:40,320 --> 00:39:43,279 Speaker 3: so that that that's been coming down. But what we 678 00:39:43,320 --> 00:39:45,160 Speaker 3: had recently at the end of June is the stress 679 00:39:45,200 --> 00:39:49,400 Speaker 3: test results and then that dictates UH banks as capital requrements. 680 00:39:49,880 --> 00:39:52,560 Speaker 3: And two names that we thought would would would like 681 00:39:52,560 --> 00:39:57,319 Speaker 3: like JP has been you know, massively reducing their preferred bucket, right. 682 00:39:57,800 --> 00:39:59,719 Speaker 3: We thought b of A and Wells Wargo would also 683 00:39:59,760 --> 00:40:02,200 Speaker 3: do this aim. But those are two names where their 684 00:40:02,239 --> 00:40:07,040 Speaker 3: capital requirements will jump up sixty to ninety BIPs in October, right, 685 00:40:07,080 --> 00:40:10,120 Speaker 3: and so you know, and they've been reducing their preferred bucket. 686 00:40:10,120 --> 00:40:12,640 Speaker 3: But you know, maybe you know, they might have to 687 00:40:12,680 --> 00:40:14,960 Speaker 3: come to market if they continue to call preferreds, or 688 00:40:15,360 --> 00:40:17,400 Speaker 3: you know, they might have to reduce their share buybacks 689 00:40:17,400 --> 00:40:20,560 Speaker 3: to kind of boost their equity buffer backup. But you know, unlike, 690 00:40:20,920 --> 00:40:24,399 Speaker 3: unlike in the eight one space, we think that there's 691 00:40:24,560 --> 00:40:28,200 Speaker 3: more of a continued like net preferred redemption, so more 692 00:40:28,280 --> 00:40:32,080 Speaker 3: more calls than than issuance. And then one thing, one 693 00:40:32,080 --> 00:40:35,000 Speaker 3: more thing. Because I have a handy dandy, you know, 694 00:40:35,120 --> 00:40:37,719 Speaker 3: awesome Bloomberg terminal, I was able to quickly figure out, 695 00:40:38,000 --> 00:40:40,479 Speaker 3: you know, the kind of market size, right, and you don't. 696 00:40:40,520 --> 00:40:42,319 Speaker 3: I think you talked about like a you know, two 697 00:40:42,360 --> 00:40:45,000 Speaker 3: hundred and fifty billion market size, But in the US 698 00:40:45,520 --> 00:40:47,879 Speaker 3: I did a quick calc and it's it's about two 699 00:40:47,920 --> 00:40:52,200 Speaker 3: hundred and fifteen billion for the US bank preferreds, one 700 00:40:52,280 --> 00:40:57,960 Speaker 3: hundred and twenty billion on the institutional preferreds. Whereas it's like, 701 00:40:58,120 --> 00:41:00,799 Speaker 3: you know whatever, you know, ninety five I've on the 702 00:41:00,920 --> 00:41:04,560 Speaker 3: on the retail twenty five dollars part side. So you know, 703 00:41:04,680 --> 00:41:08,240 Speaker 3: different markets you can play, you know, longer duration retail 704 00:41:08,239 --> 00:41:12,359 Speaker 3: preferreds or the fix the floating institutional. So sorry, James, 705 00:41:12,400 --> 00:41:12,959 Speaker 3: I cut you off. 706 00:41:13,360 --> 00:41:15,120 Speaker 1: Oh got it, Thank you. So I just wanted to 707 00:41:15,120 --> 00:41:17,480 Speaker 1: close by asking you both about the big risks that 708 00:41:17,520 --> 00:41:20,919 Speaker 1: you see ahead for the next you know, let's say, 709 00:41:20,960 --> 00:41:24,680 Speaker 1: through through year end. Obviously, top of mind is the politics. 710 00:41:24,719 --> 00:41:28,440 Speaker 1: We've had big elections in the UK and France already 711 00:41:28,480 --> 00:41:31,279 Speaker 1: in Europe, and a big one coming up in the 712 00:41:31,400 --> 00:41:36,840 Speaker 1: US which will change things potentially dramatically. But when you 713 00:41:36,840 --> 00:41:40,440 Speaker 1: think about banks, you know you can you can talk 714 00:41:40,440 --> 00:41:42,759 Speaker 1: about politics if you like, or other risks that you see. 715 00:41:42,800 --> 00:41:44,880 Speaker 1: But but you know, starting with your ruin, what are 716 00:41:44,880 --> 00:41:47,960 Speaker 1: the big things that really concern you right now? For 717 00:41:48,040 --> 00:41:49,520 Speaker 1: the financials? 718 00:41:50,400 --> 00:41:52,560 Speaker 2: Yeah, I think it is a soul from risk. I 719 00:41:52,600 --> 00:41:54,719 Speaker 2: think that is the biggest tail risk that we are 720 00:41:54,760 --> 00:41:59,239 Speaker 2: seeing at the moment, particularly in France. So everyone rejoiced, 721 00:41:59,760 --> 00:42:04,440 Speaker 2: well most people rejoiced when the far Ride did not 722 00:42:05,719 --> 00:42:11,040 Speaker 2: do as well as expected. But you know, France now 723 00:42:11,520 --> 00:42:15,400 Speaker 2: is confronted with an uncertain political situation whether the left 724 00:42:15,520 --> 00:42:20,799 Speaker 2: leaning or the far left I should say, is likely 725 00:42:20,920 --> 00:42:25,520 Speaker 2: to form a government or at least take the take 726 00:42:25,560 --> 00:42:28,880 Speaker 2: the initiative in trying to do that. And look, my 727 00:42:29,680 --> 00:42:34,440 Speaker 2: colleague Hugh Worthington, who is the European rates analyst, he 728 00:42:34,520 --> 00:42:39,239 Speaker 2: is much knowledgeable about this than I am. But you 729 00:42:39,280 --> 00:42:43,920 Speaker 2: know that will put into focus the debt sustainability of France, 730 00:42:43,960 --> 00:42:52,600 Speaker 2: the fiscal trajectory under a new government, and inevitably, if 731 00:42:52,760 --> 00:43:00,480 Speaker 2: the focus is on sovereign risk, inevitably focus will shift 732 00:43:00,560 --> 00:43:02,440 Speaker 2: towards the banking sector as well. And there are a 733 00:43:02,480 --> 00:43:09,920 Speaker 2: number of contagion channels. One is the credit ratings and 734 00:43:09,960 --> 00:43:12,320 Speaker 2: bond ratings, So if the sovereign rating comes down or 735 00:43:12,440 --> 00:43:17,760 Speaker 2: is put a negative outlook, you know the banking sector 736 00:43:18,120 --> 00:43:20,920 Speaker 2: bank bank ratings are are likely to follow. And the 737 00:43:20,920 --> 00:43:25,680 Speaker 2: second one is sovereign bond sovereign bond holdings. You know, 738 00:43:26,040 --> 00:43:30,440 Speaker 2: all French banks have large positions in French sovereign bonds, 739 00:43:31,440 --> 00:43:34,560 Speaker 2: which you know, which is something that you would expect 740 00:43:35,080 --> 00:43:38,040 Speaker 2: French banks as banks as where they do need to 741 00:43:38,040 --> 00:43:41,919 Speaker 2: maintain large liquidity buffers. Sovereign bonds in normal times tend 742 00:43:41,920 --> 00:43:45,920 Speaker 2: to be the most liquid instruments out there, and you 743 00:43:45,960 --> 00:43:48,600 Speaker 2: know they also are able to use as bonds to 744 00:43:48,640 --> 00:43:52,000 Speaker 2: repaild with the ECB. So it is very natural that 745 00:43:52,040 --> 00:43:55,920 Speaker 2: French banks have large positions in French sovereign bonds, but 746 00:43:56,080 --> 00:43:59,480 Speaker 2: that it is still a contagent channel. So yeah, that 747 00:43:59,600 --> 00:44:03,680 Speaker 2: is the number one risk for European banks. A second one. 748 00:44:04,280 --> 00:44:07,520 Speaker 2: You know, commercial real estate hasn't gone away. It is 749 00:44:07,520 --> 00:44:11,480 Speaker 2: a slow burner, so it's still possible that you are 750 00:44:11,520 --> 00:44:14,240 Speaker 2: going to a curveball from from that angle. 751 00:44:15,040 --> 00:44:18,120 Speaker 1: And on the politics, to expect significant changes to the 752 00:44:18,200 --> 00:44:21,560 Speaker 1: laws regarding banking in these countries, No. 753 00:44:21,680 --> 00:44:25,680 Speaker 2: I don't think. I don't think so TEX is more 754 00:44:26,440 --> 00:44:31,040 Speaker 2: of concern. But the regulator framework has been going through 755 00:44:31,080 --> 00:44:33,440 Speaker 2: a number of iterations since the Great Financial Crisis in 756 00:44:33,440 --> 00:44:37,920 Speaker 2: two thousand and eight, and I would say it's not 757 00:44:37,960 --> 00:44:40,400 Speaker 2: pretty pretty well anchored Arnold. 758 00:44:40,480 --> 00:44:44,640 Speaker 1: So you're worried about the politics, and. 759 00:44:44,400 --> 00:44:47,879 Speaker 3: Yeah, I think so, yes, I am. But I think 760 00:44:47,920 --> 00:44:50,319 Speaker 3: more in terms of the macro, right, Like I think 761 00:44:50,360 --> 00:44:53,319 Speaker 3: the base case now is a soft landing. Imagine that, 762 00:44:53,400 --> 00:44:56,000 Speaker 3: like you inflate the bound sheet so much with Q 763 00:44:56,320 --> 00:44:59,440 Speaker 3: and now we're rewinding with QT and the FED, you know, 764 00:45:00,040 --> 00:45:03,319 Speaker 3: manufacturing a soft landing. Like who'd have thought, right, what 765 00:45:03,440 --> 00:45:06,520 Speaker 3: if that doesn't you know, come to transpire? What if 766 00:45:06,520 --> 00:45:09,680 Speaker 3: it's not so smooth? Right? And you know, I think 767 00:45:09,680 --> 00:45:13,840 Speaker 3: stagflation comes to mind, where what if we are continue 768 00:45:13,840 --> 00:45:16,640 Speaker 3: to be in in a high inflation rate environment and 769 00:45:16,800 --> 00:45:19,239 Speaker 3: growth slows, right, and and like and you can't, so 770 00:45:19,280 --> 00:45:23,040 Speaker 3: you can't. The FED has no tools right to to 771 00:45:22,800 --> 00:45:26,279 Speaker 3: to to fix that, right and and so and and 772 00:45:26,360 --> 00:45:29,600 Speaker 3: then you know, what are the implications for you know, 773 00:45:29,680 --> 00:45:33,239 Speaker 3: asequality and and and on private credit? Right? Like, you know, 774 00:45:33,680 --> 00:45:36,000 Speaker 3: the US is spending like a drunken sailor, right, We're 775 00:45:36,080 --> 00:45:38,759 Speaker 3: we're you know, outspending our means. And so what that 776 00:45:38,840 --> 00:45:41,920 Speaker 3: means is I think, you know, it's propping up the economy, 777 00:45:41,960 --> 00:45:44,759 Speaker 3: it's propping up companies. But you know, if we do 778 00:45:44,840 --> 00:45:49,160 Speaker 3: get discipline on the budget and whatnot, and well, if 779 00:45:49,160 --> 00:45:52,040 Speaker 3: we don't right that, then I think what happened in 780 00:45:52,040 --> 00:45:54,600 Speaker 3: the UK? Like, can that happen right with with thirty 781 00:45:54,680 --> 00:45:57,520 Speaker 3: year treasuries? And oh my gosh, you know, you know 782 00:45:57,640 --> 00:46:00,520 Speaker 3: we're gonna have tax cuts and and tax and this 783 00:46:00,600 --> 00:46:02,680 Speaker 3: and that and then okay, well then what's the what's 784 00:46:02,719 --> 00:46:05,440 Speaker 3: the right you know with bigger deficits, what's the right 785 00:46:05,480 --> 00:46:06,680 Speaker 3: yield on a third year treasury? 786 00:46:06,760 --> 00:46:06,880 Speaker 2: Right? 787 00:46:06,920 --> 00:46:10,080 Speaker 3: And so you know, I think those kind of things 788 00:46:11,280 --> 00:46:14,040 Speaker 3: worry me. And then right, and then the kind of 789 00:46:14,120 --> 00:46:16,880 Speaker 3: knock on effects of okay, what about these acid classes 790 00:46:16,920 --> 00:46:20,000 Speaker 3: that have just grown so massively private credit right. Every week, 791 00:46:20,520 --> 00:46:22,560 Speaker 3: you know, James, we have a guest on talking about 792 00:46:22,560 --> 00:46:25,840 Speaker 3: the the the the the awesomeness of private credit is growing. 793 00:46:25,880 --> 00:46:28,400 Speaker 3: It's conquering the world. It's it's even you know, buying 794 00:46:28,680 --> 00:46:30,960 Speaker 3: buying a bank risk right, s R T S this 795 00:46:31,040 --> 00:46:33,640 Speaker 3: and that. But then you know, but we've been in 796 00:46:33,680 --> 00:46:37,239 Speaker 3: a pretty benign cycle, right, and so just with you know, yeah, 797 00:46:37,280 --> 00:46:40,120 Speaker 3: it's it's an awesome you know these you know, uh, 798 00:46:40,280 --> 00:46:43,200 Speaker 3: private loans are great when you know, higher yielding and 799 00:46:43,239 --> 00:46:46,920 Speaker 3: stuff like that. But right, like, if we continue to 800 00:46:46,960 --> 00:46:50,400 Speaker 3: be in a high rate environment, right, for some of 801 00:46:50,440 --> 00:46:52,759 Speaker 3: these companies that that are that just that have been 802 00:46:53,000 --> 00:46:55,560 Speaker 3: you know, on the cusp in the low rate world, right, 803 00:46:55,600 --> 00:46:58,640 Speaker 3: how are they going to refinance and continue to be okay? Right? 804 00:46:58,920 --> 00:47:01,680 Speaker 3: And in that situation, So you know, those kind of 805 00:47:01,719 --> 00:47:03,359 Speaker 3: things were in me and then what are the knock 806 00:47:03,400 --> 00:47:07,440 Speaker 3: on effects to the banking system. But I think you know, 807 00:47:08,200 --> 00:47:13,920 Speaker 3: the biggest banks that are diversified, right, something will be 808 00:47:13,960 --> 00:47:16,480 Speaker 3: an offset to to anything else that's going on. So 809 00:47:17,080 --> 00:47:20,760 Speaker 3: I think that that's what kind of gives me comfort, 810 00:47:21,000 --> 00:47:23,719 Speaker 3: and so that again I think that's why what might 811 00:47:23,760 --> 00:47:28,320 Speaker 3: I think help continue this grind tighter of these biggest 812 00:47:28,320 --> 00:47:32,439 Speaker 3: banks right to you know, versus non financials. But but again, 813 00:47:32,480 --> 00:47:36,560 Speaker 3: if we do get some kind of uh distress, it's 814 00:47:36,600 --> 00:47:39,400 Speaker 3: it's the you know, it's it's the escalator in, you know, 815 00:47:39,560 --> 00:47:43,040 Speaker 3: tighter and then elevator up wider, right kind of situation. 816 00:47:43,239 --> 00:47:45,200 Speaker 1: And we should all be giving the preferred a lot 817 00:47:45,239 --> 00:47:47,680 Speaker 1: more respect that too. 818 00:47:47,800 --> 00:47:50,280 Speaker 3: Yeah, there you go, they get no respect, but hopefully 819 00:47:50,400 --> 00:47:52,359 Speaker 3: you know, more and more they will. 820 00:47:53,040 --> 00:47:56,280 Speaker 1: Great stuff. You're Julius and anod Cokudo with Bloomberg Intelligence 821 00:47:56,320 --> 00:47:57,759 Speaker 1: has been a pleasure having on the credit edge. 822 00:47:57,760 --> 00:47:59,440 Speaker 3: Many thanks, thanks James. 823 00:48:00,520 --> 00:48:03,080 Speaker 1: Check out all of the excellent analysis by Arnold and 824 00:48:03,120 --> 00:48:05,880 Speaker 1: Iron on the Bloomberg terminal. It's really great and everyone 825 00:48:05,880 --> 00:48:08,000 Speaker 1: should be paying more attention to the banks right now. 826 00:48:08,400 --> 00:48:11,120 Speaker 1: And for those who don't know, Bloomberg Intelligence is our 827 00:48:11,160 --> 00:48:14,400 Speaker 1: research department with five hundred analysts and strategists working across 828 00:48:14,440 --> 00:48:17,680 Speaker 1: all major world markets. Coverage includes more than two thousand 829 00:48:17,719 --> 00:48:21,000 Speaker 1: equities and credits, as well as outlooks on ninety industries 830 00:48:21,040 --> 00:48:25,520 Speaker 1: and one hundred market industries, currencies and commodities. Please do 831 00:48:25,600 --> 00:48:28,480 Speaker 1: subscribe wherever you get your podcasts. We're on Apple, Spotify, 832 00:48:28,560 --> 00:48:31,840 Speaker 1: and all other good podcast providers. Including the Bloomberg terminal 833 00:48:31,880 --> 00:48:35,200 Speaker 1: at bpod Go. Give us a review, tell your friends, 834 00:48:35,280 --> 00:48:39,319 Speaker 1: or email me directly at Jcrombeight at Bloomberg dot net. 835 00:48:39,880 --> 00:48:42,200 Speaker 1: I'm James Cromby. It's been a pleasure having you join 836 00:48:42,280 --> 00:49:04,680 Speaker 1: us again next week on the Credit Edge