WEBVTT - Deep Dive: Big Bank Earnings

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news, The.

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<v Speaker 2>Stock Movers podcast, your roundup of companies making moves in

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<v Speaker 2>the stock market, harnessing the power of Bloomberg Data.

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<v Speaker 1>I'm Tim Steeveek along with Katie Greifeld. Let's take a

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<v Speaker 1>look at some stocks on the move. Big banks reported earnings.

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<v Speaker 1>There was a theme market volatility sparked by the trade war,

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<v Speaker 1>leading to record quarters for traders. Goldman Stock Traders posted

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<v Speaker 1>the largest revenue hall in Wall Street history, Morgan Stanley's

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<v Speaker 1>Stock Traders scored their best second quarter on record, and

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<v Speaker 1>Bank of America Traders also posted a record second quarter.

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<v Speaker 1>Watching all of this closely, Ken Leon, director of Equity

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<v Speaker 1>Research CFRAA Research He joins US from Florida. So record

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<v Speaker 1>quarters for trading across the board, yet the stock reaction

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<v Speaker 1>to the downside.

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<v Speaker 2>Why is that?

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<v Speaker 3>When you look at the global US banks, they performed

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<v Speaker 3>very strongly. What we did see was not only trading,

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<v Speaker 3>but the elevated markets means that fee income across many

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<v Speaker 3>different businesses like acid management, wealth management, other services generated

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<v Speaker 3>substantial year over year growth. What we are also seeing

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<v Speaker 3>is how the capital markets can be the delta for

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<v Speaker 3>getting stronger growth and also higher estimates expected from the

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<v Speaker 3>street looking ahead, both for revenue and earnings. Those that

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<v Speaker 3>are more balanced or exposed to main street America consumer

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<v Speaker 3>and small business are likely to see much slower growth

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<v Speaker 3>and some risk of kind of sluggish demand in the future.

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<v Speaker 3>I think that's really the difference between the outside significant

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<v Speaker 3>performance of Gold and Sechs, strong growth for Morgan Stanley,

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<v Speaker 3>and then those that were kind of in between, where

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<v Speaker 3>the JP Morgan's and then Bank of America which didn't

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<v Speaker 3>fire on all cylinders. That's the difference.

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<v Speaker 4>What is the driver of these financial shares? Is it

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<v Speaker 4>the yield curve? Is actually the numbers that we get

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<v Speaker 4>in the earnings report? Is it something else? Because I

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<v Speaker 4>feel like I go through this puzzle at least four

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<v Speaker 4>times a year when we got these earnings.

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<v Speaker 3>Yeah, lucky for you, four times. For me, it's every day.

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<v Speaker 3>And we've been overweighted the financial sector really since last November,

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<v Speaker 3>and the large banks are in the top ten of

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<v Speaker 3>that sector. And what we've seen even in the second

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<v Speaker 3>quarter or year to day is tremendous performance more than

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<v Speaker 3>two times the S and P five hundred for diversified banks.

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<v Speaker 3>But that's not the point. The key point is where

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<v Speaker 3>do they go from here. We think the delta not

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<v Speaker 3>only for the rest of this year, but really these

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<v Speaker 3>stocks are going to be priced on twenty twenty six.

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<v Speaker 3>Earnings is going to be how they do into next year.

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<v Speaker 3>Obviously two to four rate cuts, some easing on the

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<v Speaker 3>regulatory framework, and then also some opening up in the

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<v Speaker 3>capital markets for investment banking. That's going to help these

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<v Speaker 3>banks when you look at them, you know, in terms

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<v Speaker 3>of PE multiples or what Gina was talking about the

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<v Speaker 3>overall market, they have to earn into these valuations or multiples.

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<v Speaker 3>When we look at more conservative metrics, which a lot

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<v Speaker 3>of bank analysts look at because they're a conservative lot,

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<v Speaker 3>such as priced and net tangible book value, they're pretty expensive.

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<v Speaker 3>But I think it's earnings growth and what that does

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<v Speaker 3>in terms of confidence that they can still have upside

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<v Speaker 3>over the next year or two. That's the key can.

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<v Speaker 1>I'd be remiss if we didn't ask you about drama

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<v Speaker 1>with regard to Fedhair J. Powell, the reports emerging that

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<v Speaker 1>he would be fired by the president and the President

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<v Speaker 1>was seriously considered doing that. We saw a market reaction

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<v Speaker 1>from the equity side and from the fixed income side,

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<v Speaker 1>and then we heard from the President who denied that

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<v Speaker 1>he would do that imminently. Yet there are certainly concerns

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<v Speaker 1>about the way that the President feels about the FED share.

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<v Speaker 1>We all know that what would it mean for banks

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<v Speaker 1>if this were to happen? Would it mean anything?

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<v Speaker 3>So I'm a global director and I look at market

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<v Speaker 3>soul over the world, and also when you look at

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<v Speaker 3>the bond market and really the ten and thirty year treasury,

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<v Speaker 3>the FED really matters. It's independence, the respect and responsibility

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<v Speaker 3>of its two mandates for inflation and full employment. I

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<v Speaker 3>just think this is color or drama. You know. J.

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<v Speaker 3>Powell is highly regarded. And the other issue, of course

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<v Speaker 3>is when his term is up next year, likely probably

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<v Speaker 3>to retire, but he could stay on for a few

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<v Speaker 3>more years as a governor.

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<v Speaker 1>What would happen though if he were forced out?

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<v Speaker 3>I don't see that scenario.

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<v Speaker 1>The President has targeted the handling of the FED renovation.

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<v Speaker 1>What if there's something there and he can push him

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<v Speaker 1>out through that.

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<v Speaker 3>So President Trump's going to get a dubvish FED chairman

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<v Speaker 3>in part, nobody's really hawkish today. The data will suggest

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<v Speaker 3>possibly a slower US economy rest of this year, which

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<v Speaker 3>is why we're much more positive on the delta of

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<v Speaker 3>the capital markets, not main street America to help large

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<v Speaker 3>banks earnings. So we're just going to have to see.

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<v Speaker 3>But you know, overall, you know fed's going to be independent,

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<v Speaker 3>and you know, of course we're gonna get ray cuts

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<v Speaker 3>either way.

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<v Speaker 4>I have a thought as to what would happen to

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<v Speaker 4>the banks if Jerome Power forced out. You would see

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<v Speaker 4>a lot of volatility and the banks would probably trade

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<v Speaker 4>it ken And that brings me back to all of

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<v Speaker 4>these training records that we saw these for Goldman and

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<v Speaker 4>then these bumper quarterers that the other big banks put up.

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<v Speaker 4>Of course, we know what happened in April. We had

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<v Speaker 4>Liberation Day at the start of the month, and then

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<v Speaker 4>we had the walk back, and it seems like that

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<v Speaker 4>was a big boost for these banks. And the question

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<v Speaker 4>that comes about is how sustainable is that when you

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<v Speaker 4>think about all of this revenue that's being made, how

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<v Speaker 4>sustainable is that?

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<v Speaker 3>It's not the trading. You really need to focus on

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<v Speaker 3>financial sponsors, which are the large private equity firms. They're

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<v Speaker 3>sitting on two trillion dollars of companies they own. They

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<v Speaker 3>have to monetize in some way and also afford the

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<v Speaker 3>investment bankers to get that job done. That's where I

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<v Speaker 3>would really look as a delta that we haven't seen

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<v Speaker 3>really in the numbers and size as it relates to

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<v Speaker 3>mergers and acquisitions, equity underwriting or other forms of transactions.

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<v Speaker 3>Look to lower rates making it more appealing to valuation

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<v Speaker 3>for both public and private transactions. That's going to be

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<v Speaker 3>a bonanza for the large banks.

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<v Speaker 1>Ken Leon, director of Equity Research yet CFRA. Thanks so much. Ken.

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