Speaker 1: Hello, and welcome to another edition of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal, Managing editor at Bloomberg Markets, and I'm
Speaker 1: Tracy Alloway, Executive editor at Bloomberg Markets. So, Joe, I'm
Speaker 1: really excited about our guest for today's show. He is
Speaker 1: one of my all time favorite banking analysts, a guy
Speaker 1: called David Hendler. Why do you like this, uh analysts
Speaker 1: so much? What is it about his work that separates
Speaker 1: him from other banking analysts? All right, Well, David was
Speaker 1: known for working at this research shop called Credit Sites.
Speaker 1: I don't know if you've heard of them. They have
Speaker 1: a bit of a Parish bias, some people would say.
Speaker 1: But what David did really well is in the run
Speaker 1: up to the financial crisis, he spotted a whole bunch
Speaker 1: of the risks in the banking system that not that
Speaker 1: many other people saw. And then after the financial crisis,
Speaker 1: he was one of the banking analysts putting out some
Speaker 1: really really interesting research out on the business of being
Speaker 1: a bank, what was permanently broken and what could be fixed. Yeah,
Speaker 1: this has become a really big topic. People have been
Speaker 1: talking for the about this for a while, but in
Speaker 1: the last several months, it seems like there's been this
Speaker 1: big surge in people talking about this question of is
Speaker 1: the traditional banking business model structurally flawed? In other words,
Speaker 1: not just a slow recovery from the financial crisis, but
Speaker 1: some sort of permanent impairment. Right, This is the classic
Speaker 1: structural versus cyclical debate. Are things like fixed income the
Speaker 1: bond trading business is going to come back or has
Speaker 1: something permanently changed that means they're basically dead forever? And
Speaker 1: we're definitely going to ask David how he feels about that. Well,
Speaker 1: this is a huge question because there's so much writing
Speaker 1: on the health of the bank, so much money is
Speaker 1: in the banking sector, so much wealth, and so this
Speaker 1: question of can the banks actually recover or they doomed
Speaker 1: to be much smaller than they were on the early
Speaker 1: part of the century is absolutely massive. So I'm looking
Speaker 1: forward to getting the answer. All right. Here is David Hendler.
Speaker 1: He is the former banking analyst at Credit Sites and
Speaker 1: he is now founder and principle at his own risk
Speaker 1: advisor of Viola. David, thanks so much for being with us.
Speaker 1: Thank you for your time. So I supposed to be
Speaker 1: begin You built this reputation as the guy who saw
Speaker 1: a lot of the risks coming before the financial crisis.
Speaker 1: How did you manage to do that? That's funny you
Speaker 1: should ask um. Basically, I started on the bye side
Speaker 1: at a conservative life insurance company, New York Life, and
Speaker 1: they taught me some very good old age investment principles,
Speaker 1: you know, where credit analysis was emphasized and uh, you know,
Speaker 1: being I guess cautionary or skeptical when uh, you know,
Speaker 1: new issue bonds were sold two investors as sucial investors
Speaker 1: or secondary bonds were sold to be you know, a
Speaker 1: little skeptical and not just take the up case, you know,
Speaker 1: stress tested for the down case and then if you
Speaker 1: felt comfortable and the spreads were and yields were you know, amenable,
Speaker 1: you you know, you would do the deal. So I
Speaker 1: think it's my early days on the by side in
Speaker 1: the early to mid eighties. So what did you see
Speaker 1: prior to the crisis, specifically that others were missing? Well,
Speaker 1: I had been doing UH bank and finance analysis probably
Speaker 1: for close to twenty years, So I saw a couple
Speaker 1: of cycles. I saw the nine eighties energy bust, in
Speaker 1: real estate bust and EXUS New England, California, and the
Speaker 1: SNL debacle of the nineteen eighties, and I and and
Speaker 1: then I saw, um, you know, the tech wreck of
Speaker 1: the early two thousand, so I kind of understood how
Speaker 1: things that look too good to be true usually were.
Speaker 1: And you try to try to get ahead of the
Speaker 1: decline by you know, writing reports and warning your customers
Speaker 1: are investor base about the upcoming difficulties. Then as it
Speaker 1: plays out, try to figure out if there's a risk
Speaker 1: adjusted return opportunity on the on the upside. Once you know,
Speaker 1: most people see it and they sell out, and they're
Speaker 1: overly worried because you know, I just thought it never
Speaker 1: could be this way before. Kind of like, you know,
Speaker 1: the real estate markets are so strong in New York
Speaker 1: City in the luxury area and people think it will
Speaker 1: never go down. I think that's a negative signal there, David,
Speaker 1: did any of your report before the crisis get you
Speaker 1: into trouble? Because some of the stuff you were saying
Speaker 1: back then was really controversial. What do you mean by trouble?
Speaker 1: I mean I would say that at times at times, um,
Speaker 1: you know, companies they wouldn't like it, and they would
Speaker 1: call me about it or quote people that I worked
Speaker 1: for about it. And you know usually, um, you know,
Speaker 1: we just heard him out and that was it. Um.
Speaker 1: So you know there was there was some friction. You know,
Speaker 1: investors didn't do that. I would say, I say it
Speaker 1: was more you know, the companies I covered. Let's uh,
Speaker 1: let's spin it forward today. Right now, we're in this
Speaker 1: period where people aren't so much concerned about a banking
Speaker 1: collapse or anything like that, but concerned that the business
Speaker 1: model of the major banks is just sort of in
Speaker 1: either a permanently low state or a state of sort
Speaker 1: of long decline, and that the business model that was
Speaker 1: thriving pre crisis will never come back. What's your take
Speaker 1: on that? And why are we seeing such a difficult
Speaker 1: time for banks to hit goals of profitability? We see
Speaker 1: these continued layoffs. What's going on now right Well, you know,
Speaker 1: my thirty odd year career watching the bank sector in
Speaker 1: the US, primarily, I mean there there wasn't really many
Speaker 1: years that you would call normal. There's always like booms
Speaker 1: and busts and maybe some quiet periods in between. So
Speaker 1: I think what's happening is, you know, we have a
Speaker 1: demographic shift from the baby boom whars, who are on
Speaker 1: average fifty eight years old and they're retiring, and maybe
Speaker 1: they don't have enough money to retire, So what's going
Speaker 1: to happen with them? Can they put all their money
Speaker 1: in the stock market now because the bond market doesn't
Speaker 1: have enough interest yield to support their minimum living standards?
Speaker 1: I don't know. I think it's kind of risky. So
Speaker 1: I think you know you have that shift as well
Speaker 1: as the Millennias, who have a certain way of life
Speaker 1: that you know, favors urban dwellers, walkable commutes. But you
Speaker 1: know what, it's getting expensive. And they heard lately that
Speaker 1: on another media source that maybe the suburbs is a
Speaker 1: better deal. Um, And you're seeing in a lot of
Speaker 1: suburbs they're making little town centers that simulate sort of
Speaker 1: a Brooklyn, you know, parts of New York City experience,
Speaker 1: and you can get on the train and go into
Speaker 1: the real thing once in a while. So, um, I
Speaker 1: think you know that demographic shift is shifting how banking
Speaker 1: is pitched distributed. You know, people don't go into the
Speaker 1: branch anymore that these there are smartphones to make deposits,
Speaker 1: so nobody really knows the bank anymore except it's an
Speaker 1: app or something. So I think you know that's one
Speaker 1: change that's reducing employment. Um, I think it increases risk
Speaker 1: if you don't really know people on a humans fashion
Speaker 1: like face to face. I think there's a lot of
Speaker 1: threats like runs on the banks because you don't really
Speaker 1: know anybody. When you get panick, you need to talk
Speaker 1: to someone, but you never did, so how do you
Speaker 1: do it? You know? I think that's one trend. You know.
Speaker 1: The other trend is big data disintermediating back of offices UM,
Speaker 1: computer type systems types as well as you know, different
Speaker 1: types of loan officers UM. So you know, big data, cloud, bitcoin, blockchain.
Speaker 1: You know, that's all reducing So it's like a human
Speaker 1: thud cuts everywhere you look, there's some sort of threat
Speaker 1: change and um, you know. Then there's a lot of
Speaker 1: credit building up again in credit cards. We just pierced
Speaker 1: one trillion and outstandings for the first time. I think
Speaker 1: it's gonna double in size as the millennials use the
Speaker 1: credit cards to realize their dreams by borrowing money, and
Speaker 1: a lot of them are gonna get into trouble. They're
Speaker 1: just humans like everybody other generations. So, um, commercial real
Speaker 1: estate I think is gonna have some problems multi family,
Speaker 1: which everyone thinks is a ticket to gold. It's I've
Speaker 1: seen it in my own buying and selling in different
Speaker 1: craze periods in the eighties and nineties and two thousands.
Speaker 1: So you know, trees don't grow to the sky, and
Speaker 1: you have to see when it's overdone and try to
Speaker 1: get people to focus on it, because when they have
Speaker 1: a house and it's going up at price, they don't
Speaker 1: want to hear a story that housing is going down.
Speaker 1: It hurts their own personal pocketbook. They just don't want
Speaker 1: to face the reality. What about interest rate risk, David,
Speaker 1: I remember this is something you talked a lot about
Speaker 1: a few years ago, and since then, you know, rates
Speaker 1: have stayed pretty low. We had one rate hike from
Speaker 1: the Fed. We're talking about another one possibly this month
Speaker 1: or next. Is that a risk for the banks? Well,
Speaker 1: I think what's happened is rates have stayed low so
Speaker 1: long that some of the things I talked about a
Speaker 1: few years ago, they kind of um the yields rolled
Speaker 1: into a lower environment, whether it was the investment securities,
Speaker 1: the cash securities like MBS mortgage backed securities, or you know,
Speaker 1: different types of derivatives that simulate you know, investment views
Speaker 1: or mbs, So I think, uh, you know, rates banks
Speaker 1: maybe you know, take a little bit more risk on
Speaker 1: the on the cash side, it's hard to simulate it
Speaker 1: as much on the synthetic derivative side. It's kind of
Speaker 1: played out in a way. But you know, when rates rise,
Speaker 1: you know, nobody really knows how sensitive deposits are to
Speaker 1: hire rates. So far, with the basis point move, that
Speaker 1: has not been you know, a huge outmigration from bank deposits.
Speaker 1: But we'll see how it goes, if how gradual the
Speaker 1: fet is um the pace and how you know deposits
Speaker 1: react as deposits could read price faster than bank loans
Speaker 1: could be or securities yields. What about the decline of
Speaker 1: these trading businesses, So we continue to see the major
Speaker 1: Wall Street banks slim the ranks of their trading. They
Speaker 1: always talk this was a bad quarter for trading and
Speaker 1: there wasn't a volatility. Is that business ever going to
Speaker 1: thrive in a big way again? It's going back to
Speaker 1: its core purpose, which is capital creation to grow businesses
Speaker 1: or consumer asset classes less speculative by far less speculative.
Speaker 1: So I you know, under the current regime, Dot Frank
Speaker 1: BOSEL three and all the implementations. And know what we
Speaker 1: saw in the you know two thousands. You know, you're
Speaker 1: not going to see for a while whether that gets
Speaker 1: rolled back with different political movements, whether it's Bernie Sanders
Speaker 1: or Donald Trump or even Hillary Clinton. You know, we'll
Speaker 1: see um. But for the time being, you know, trading
Speaker 1: desks have been derisked. Um. You know, if you want to,
Speaker 1: you know, gamble, you know, you gotta do it in
Speaker 1: non regulated markets or sports fantasy leagues or so you
Speaker 1: would say. The main problem, the reason those desks aren't
Speaker 1: as profitable, essentially they've been stripped of their ability to gamble. Correct, David,
Speaker 1: give us a snapshot of what the Bank of the
Speaker 1: future is going to look like, say in ten or
Speaker 1: twenty years, is it going to be recognizable to what
Speaker 1: we have today. Well, it's gonna I was just anticipating
Speaker 1: that question. I think it's gonna be a little like
Speaker 1: you know, you know, Johnson Space Control, Mission control. You're
Speaker 1: gonna have you know, a few dozen really smart guys
Speaker 1: and women running the bank, and then a lot of
Speaker 1: it's going to be automated and cloud distributed. You're not
Speaker 1: gonna have you know, you're gonna have you may have
Speaker 1: more robotic investment management. I mean the by sides really
Speaker 1: at risk. I think there was a story about Fink
Speaker 1: at black Rock saying there's would be a wave of
Speaker 1: consolidation and asset management. UM. So you know, people the
Speaker 1: younger generation is more comfortable doing businesses on a smartphone
Speaker 1: or Skype or whatever. So it's gonna be a lot
Speaker 1: less people pushing out even more credit. Um. But there's
Speaker 1: risks because you know, the best way to you do
Speaker 1: credit businesses is to look at someone's eye and decided
Speaker 1: that person really gonna pay me back. And I'm not
Speaker 1: sure if fintech has solved that. Yeah, it doesn't sound
Speaker 1: like then you're very optimistic about some of they's new
Speaker 1: marketplace lenders or other attempts to make lending more efficient.
Speaker 1: If you think there's still a value in looking at
Speaker 1: someone in the eye, yeah, I would agree, or being
Speaker 1: in the same room and having a context about what's
Speaker 1: going on. So you know, fintech is going to go
Speaker 1: through an evolution of fits and starts of discovery of
Speaker 1: what sort of works and maybe it being overdone and
Speaker 1: it doesn't work. And I think we're starting to see
Speaker 1: some models, you know, break down a little, even though
Speaker 1: there was a lot of fanfare for things like lending
Speaker 1: club UM and others, you know, where the algorithms don't
Speaker 1: capture the human element precisely, and uh, they get carried
Speaker 1: away standing credit automatically. Are there any technologies you mentioned
Speaker 1: mobile it's going to be a key avenue banking. You
Speaker 1: mentioned the cloud. Are there any technology other technologies that
Speaker 1: you are actually quite bullish on or that you think
Speaker 1: will be really important? I mean maybe yeah, some of
Speaker 1: the lending clubs won't live up to the hype. But
Speaker 1: are there areas that you think right now are being
Speaker 1: underestimated that are going to change the nature of finance? Well,
Speaker 1: I think you know, where you can make mundane practices
Speaker 1: more efficient and less intrusive on somebody's lifestyle, like you know,
Speaker 1: quick pay or Venmo or PayPal. You know, I think
Speaker 1: things like that have been I think successful, Like more
Speaker 1: on the transaction process s side, where going to the
Speaker 1: bank and getting your past book stamped with interest, which
Speaker 1: is what I did when I as a kid, you know,
Speaker 1: on my paper route, say, um, depositing that check. You know,
Speaker 1: you just don't need to do that anymore, so I
Speaker 1: think there's you know, lifestyle efficiency, productivity applications and activities
Speaker 1: that you know, make banking just easier on everybody. What
Speaker 1: about blockchain you mentioned that earlier. Do you think I mean,
Speaker 1: there's a lot of hype about that, but I haven't
Speaker 1: really grasped how that's going to change things. Do you
Speaker 1: see a significant role for that technology in finance? I mean,
Speaker 1: I'm not an expert in it, but you know it's
Speaker 1: trying to make things more transparent for the ledger of
Speaker 1: different activities, whether it's trading or you know, payment systems.
Speaker 1: We have massive amounts of payments going one way or another. Um,
Speaker 1: so I think it's going to help on the efficiency side.
Speaker 1: And uh, you know what's happening with banking, and I
Speaker 1: said this in different reports and different talks, is that
Speaker 1: it's really becoming a commoditized business. We have to brand
Speaker 1: it to get loyalty so that you could reuse the product,
Speaker 1: the investment the product across more users and people. So
Speaker 1: you know, you need a strong brand. And when you
Speaker 1: have brands, you have to deliver on the brand concepts.
Speaker 1: So you know, banks like Chase should continue to do well.
Speaker 1: Banks like City self to prove themselves again, even though
Speaker 1: they kind of with the first big bank to do
Speaker 1: mass marketing of credit cards back in the seventies and eighties,
Speaker 1: Bank of America's trying to get that brand of you know,
Speaker 1: reliability across mortgages and credit cards and you know other activities.
Speaker 1: So um, I think that's the key. Do you have
Speaker 1: a brand and then you leverage the efficiency that technology
Speaker 1: presents to your customer base. So it's brand and human element.
Speaker 1: David Hendler, thank you very much for joining us. I
Speaker 1: think there's gonna be a fascinating debate and conversation to
Speaker 1: track in the coming years, and we hope you'll come
Speaker 1: back at some point for a update on how things evolved.
Speaker 1: Thanks so much, Thank you, Tracy. I think this is
Speaker 1: going to be a really interesting topic that we're going
Speaker 1: to be talking about from many years. And I feel
Speaker 1: like this is an area the future of the bank
Speaker 1: that everyone is sort of clawing around for an answer,
Speaker 1: and I just don't feel like, uh, I just feel
Speaker 1: like there's gonna be like a huge mystery we're all
Speaker 1: gonna be talking about. Well, I suppose in ten or
Speaker 1: twenty years we'll have to reconvene all thoughts and figure
Speaker 1: out where we've come out. But I do like the
Speaker 1: idea from David of having bankers sort of like pilot
Speaker 1: the Starship bank, right, like everyone, you just have a
Speaker 1: couple of people who are sitting in front of a
Speaker 1: computer and they sort of control it and direct this
Speaker 1: massive organization, and you don't need as many people anymore.
Speaker 1: But the other interesting thing he brought up was the
Speaker 1: trade off. Right, if everything is electronic and you're not
Speaker 1: really interacting with people in person anymore, is that bad
Speaker 1: for credit management? Yeah? Yeah, exactly. It seems like there's
Speaker 1: kind of a contradiction. So on the one hand, you
Speaker 1: have the person sitting behind the Starship enterprise with all
Speaker 1: this technology around them, But on the other hand, as
Speaker 1: you pointed out, there's still no better way to assess
Speaker 1: someone's credit viability that talking to them and actually getting
Speaker 1: to know them. So it feels like this is something
Speaker 1: we're going to be wrestling with for a while. I mean,
Speaker 1: we talked about a couple episodes ago what's going on
Speaker 1: with Lending Club and the attempts to use big data
Speaker 1: or whatever to assist credit worthiness, But it doesn't sound
Speaker 1: like that issue has been solved yet. It still sounds
Speaker 1: like there's a contradiction here. No, I don't think anyone's
Speaker 1: cracked it just yet. So we'll have plenty of stuff
Speaker 1: to have plenty of talk about, and I look forward
Speaker 1: to Odd Lots episodes in the year twenty thirty six
Speaker 1: where we see how this all developed. All right, I'll
Speaker 1: see you then. Thanks everyone for listening to the latest
Speaker 1: episode of the Odd Lots Podcast. I'm Joe Wisn't All.
Speaker 1: You could follow me on Twitter at the Stalwart and
Speaker 1: I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. Thanks
Speaker 1: for listening.