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Speaker 1: One of the most listened to analysts on the street.

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Speaker 1: Mike Mayo joins US Wells Fargo ahead of US large.

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Speaker 2: Cap bank research. Mike, great to get you in studio.

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Speaker 2: Thanks so much for coming in.

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Speaker 1: What's your take now that we've seen for the most part,

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Speaker 1: all of the big banks and Goldman Sachs seemingly the

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Speaker 1: worst among them, how does it look to you?

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Speaker 3: Well, let's go from the big picture to the specific.

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Speaker 3: This idea that banks are going to have a big

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Speaker 3: liquidity capital or solveigncy issue is off the table. With

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Speaker 3: the bank earnings, the industry has turned a page. There's

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Speaker 3: still earnings issues. I've still taken my estimates lower. But

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Speaker 3: as far as those big picture issues, you had all

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Speaker 3: sorts of hocus pocus math accounting, financial analysis after Silicon

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Speaker 3: Valley and First Republic failed and they said look out

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Speaker 3: for all.

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Speaker 2: These other banks. It's not happening.

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Speaker 3: So this bank crisis discount without a crisis creates an

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Speaker 3: opportunity for the banks in jem. Having said that, Goldman

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Speaker 3: Sachs in particular, they're in a unique stage of their

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Speaker 3: corporate life cycle. This was the worst quarter under David Solomon,

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Speaker 3: aside from one quarter during the pandemic, and this is

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Speaker 3: a big strategic pivot, so you have short term pain

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Speaker 3: for potential long term gain.

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Speaker 2: The question is how long term? How many years?

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Speaker 1: Solomon was saying, as Shanelli pointed out, you know, investment

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Speaker 1: banking is part of their DNA, it's part of their

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Speaker 1: corporate economy, right, and he said, it's been bad for

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Speaker 1: a couple of quarters, but it's going to come back

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Speaker 1: and it's going to look much better on the.

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Speaker 2: Other side of this cycle. How soon do you think

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Speaker 2: that is?

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Speaker 3: You know, our ask bits for capital markets and investment

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Speaker 3: banking for coming back in a major way is delayed

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Speaker 3: for a bit longer.

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Speaker 2: I mean you were coming.

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Speaker 3: Back and then you had the FED increase rates, and

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Speaker 3: then you were coming back again, and you had a

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Speaker 3: few regional banks fail. So there certainly is a lot

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Speaker 3: of pent up demand, and you are hearing about green

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Speaker 3: shoots from any bank that you talk to, But we

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Speaker 3: still think it's stay subdued for most of the rest

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Speaker 3: of the year. So really talk about twenty twenty four

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Speaker 3: sort of pick up in capital markets activity.

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Speaker 4: You know, it's interesting in this bank earning season, you've

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Speaker 4: had two days in a row. KBW Bank index, every

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Speaker 4: single stock back in the green after steep cell offs.

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Speaker 4: Yet you still see even with the jump today, US

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Speaker 4: Bank or still down almost twelve percent on the year.

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Speaker 4: Bank of America is negative on the year. It's trading

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Speaker 4: still today under book value. Do they deserve that?

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Speaker 3: I mean, I think these are ridiculous valuations.

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Speaker 2: These are some of the least.

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Speaker 3: Expensive valuations aside from a crisis or recession, that I've

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Speaker 3: seen in over my thirty years of doing this. You

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Speaker 3: certainly have a bank and repeat that.

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Speaker 1: In your thirty years of covering these banks, These are

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Speaker 1: the worst valuations, and you think the furthest away from reality.

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Speaker 3: These are the worst non crisis, non recession valuations that

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Speaker 3: I've seen. So certainly during the global financial crisis, certainly

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Speaker 3: during the pandemic, you know they were cheaper than But

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Speaker 3: right now, you don't have an impending hard landing recession,

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Speaker 3: you don't have a crisis that's happening right now. You

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Speaker 3: have resiliency of balance sheets, and you have as bit

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Speaker 3: revisions lower. But you have relative to the stock market

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Speaker 3: as a whole, price to earnings ratios that are like

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Speaker 3: eight or nine times versus twenty times, so on a

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Speaker 3: relative valuation basis.

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Speaker 2: It's crazy. There's three discounts.

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Speaker 3: One is the bank crisis discount, and the crisis is

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Speaker 3: over if it ever even started.

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Speaker 2: You had three banks fail.

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Speaker 3: The second is the bank recession discount, which still can happen,

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Speaker 3: but why are banks pricing in and the SMP isn't.

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Speaker 3: And the third is the regulatory discount. There are big

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Speaker 3: regulatory changes coming, but so far the regulators are saying

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Speaker 3: they're going to take a measured approach.

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Speaker 2: They're not going to cause big problems.

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Speaker 4: Okay, So since we've had a couple of days here

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Speaker 4: of the rising tide lifting all boats, you know, you

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Speaker 4: have banks that are rising before even reporting earnings, just

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Speaker 4: because the other ones are showing some signs of positivity.

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Speaker 4: My wonder is what has got to give? Looking for

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Speaker 4: holes that are still in the system, places that people

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Speaker 4: could lose money if they were to get in right now,

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Speaker 4: what should they still be worried about?

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Speaker 3: Well, look, commercial real estate and especially office. The losses

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Speaker 3: at Goldman Sachs today, the one point one billion dollar

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Speaker 3: charge they took was driven a lot by office investments

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Speaker 3: they weren't traditionally. Some were loans, some were debt security,

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Speaker 3: some were equity investments.

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Speaker 2: But that's office.

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Speaker 3: So office is still going to cause I think pain,

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Speaker 3: not only for Goldman Sacks, but for a lot of

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Speaker 3: the industry. Now, some banks have tried to get ahead

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Speaker 3: of this. It's interesting that PNC, a regional bank that

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Speaker 3: reported yesterday they've reserved eleven percent losses for their multi

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Speaker 3: tenant office buildings. That's significant pain. So you still have

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Speaker 3: to pay attention to that over the next couple of years. Absolutely,

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Speaker 3: and you still have to pay attention to next week.

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Speaker 3: There's new Kappa rules called the Basel three end game,

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Speaker 3: and that could cause banks to delever even more than

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Speaker 3: they've already delevered.

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Speaker 1: And that sounds like an movie, exactly, a puzzle three endgame.

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Speaker 1: I have a viewer, Mike writing in with the question.

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Speaker 1: He asked, if Goldman Sacks pivots away from consumer driven

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Speaker 1: businesses like markets, you know, what do they pivot to?

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Speaker 2: And also he wants.

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Speaker 1: To know are there any other US big banks that

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Speaker 1: are going to try and fill that void or are

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Speaker 1: they going to just stick to the Morgan Stanley type

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Speaker 1: of wealth management business model.

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Speaker 3: Goldman Sachs is going back to the future. They're going

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Speaker 3: back to their roots. Of over one hundred and fifty

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Speaker 3: years of serving large wholesale clients. So they have two

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Speaker 3: main businesses, and that's global banking and markets, and that's

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Speaker 3: general capital markets where they've been a leader for decades.

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Speaker 3: And then they have wealth and asset management where they're

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Speaker 3: trying to serve more high net worth customers and do

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Speaker 3: more with private equity off their balance sheet, and as

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Speaker 3: far as everything else, get rid of it. So they're

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Speaker 3: pivoting back to their areas of greatest strength. Now, who

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Speaker 3: picks up the slack, Well, that's a question for the

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Speaker 3: entire banking industry. And I asked the question to Jamie

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Speaker 3: diamond on the earnings call last Friday, and I said,

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Speaker 3: what about these new capital regulations. If capital must go

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Speaker 3: up twenty percent for the banks.

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Speaker 2: Who gets the business?

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Speaker 3: And by the way, the same week that the Vice

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Speaker 3: Chairman of the FED gave a speech about those higher

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Speaker 3: capital requirements, the stock Apollo hid an all time high.

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Speaker 3: So the business is going ncering in the street, dancing

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Speaker 3: in the streets exactly, is what the CEO JB.

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Speaker 2: Diamonds said. So a lot of this business is going

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Speaker 2: to go from the banks to the non banks. It's

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Speaker 2: already gone there. Yep.

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Speaker 4: The real cool question here I have too, is if

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Speaker 4: the capital rules are going to attack fee based businesses,

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Speaker 4: this is wealth that has that management. And if they're

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Speaker 4: going to attack trading, how does that lower the roe

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Speaker 4: on the business over time? Morgan Stanley's about to have

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Speaker 4: a new CEO walk into that dynamic. Goldman Zachs is

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Speaker 4: building a whole business around that dynamic.

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Speaker 2: I wouldn't use the word attack. I mean I was.

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Speaker 3: I worked at the Federal Reserve in the late nineteen eighties,

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Speaker 3: and the regulator's job is to prevent situations like we

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Speaker 3: had with the global financial crisis. Two thousand and seven

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Speaker 3: is two thousand and nine. So they're doing the best

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Speaker 3: they can to recalibrate the capital rules that are out there.

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Speaker 3: But they're doing it across the board. So it's not

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Speaker 3: just trading, it's not just fees. It's also loans. So

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Speaker 3: if you require banks to have a lot more capital

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Speaker 3: than their cost of goods sold goes up and it

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Speaker 3: makes some customers unprofitable, you say forget it. And you're

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Speaker 3: hearing from private equity firms saying they're taking over the

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Speaker 3: business that the banks used to do and here's the

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Speaker 3: important point. The US banking industry is one of the

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Speaker 3: most dis intermediated among all countries in the world. In

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Speaker 3: other words, financing by US banks it's like twenty five

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Speaker 3: percent of total financing. And so to the extent that

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Speaker 3: you push more business away from banks, it reduces the

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Speaker 3: ability of banks to provide a cushion in times of stress.

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Speaker 3: So I think careful for regulators to strike the right

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Speaker 3: balance between being tough one banks to prevent situation like

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Speaker 3: the global Tanta crisis, but not pushing so much that

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Speaker 3: you marginalize them.

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Speaker 4: I would die to see him take up coverage of Apollo.

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Speaker 1: It would be fantastic and maybe someday he will. Mike

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Speaker 1: great having on the program. Thank you so much for

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Speaker 1: joining us. Really appreciate your insight.

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Speaker 2: Mike Mayo.

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Speaker 1: There of Wells Fargo and of Bloomberg's Shanali Basset our

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Speaker 1: star Wall Street Reporter. Great having you by my side

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Speaker 1: always