WEBVTT - KBW's Cannon: Banks Will All Be Focusing on Expenses (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie Pelt. The Dow, the SMP, NEZ dank all

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<v Speaker 1>trading higher. The SMP and Record Territory Dow very close

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<v Speaker 1>to the best level of the day. Let's over the

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<v Speaker 1>first Word Breaking news desk for today's afternoon call, and

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<v Speaker 1>here's Bill Maloney. Good afternoon, Charlie. Stocks are rising again today,

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<v Speaker 1>with the Dow currently hired by a hundred and fifty points.

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<v Speaker 1>Sup's game thirteen and NAZAC rises thirty four. The SUP

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<v Speaker 1>five hundred rises for a fifth day. That's the longest

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<v Speaker 1>streak since March. Over In Europe, Italy rose one point

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<v Speaker 1>six percent and Germany climbed one point four percent. Back

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<v Speaker 1>In the US small cap six hundred games two points

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<v Speaker 1>and the US ten yield at one point five three percent.

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<v Speaker 1>Night out of tennis be sectors are higher, led by

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<v Speaker 1>games and financials, materials and technology only utilities foul down

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<v Speaker 1>transports APT perform gain a hundred and three points, nasobiotexs

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<v Speaker 1>rise eight and the VIX is down by three percent,

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<v Speaker 1>regarding I p O S line search as high as

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<v Speaker 1>forty four forty nine, and it's US trading debut. Down

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<v Speaker 1>leaders included Goldman, Sachs, JP Morgan, and Apple, while United

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<v Speaker 1>health Group and Verizon led to the downside. MetLife jumped

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<v Speaker 1>as much as six point to percent amid gains in

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<v Speaker 1>the insurers, while Rim Resorts fell three percent. Shares were downgraded.

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<v Speaker 1>Over at JP Morgan Live from the First Big News Desk,

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<v Speaker 1>I'm Bill Maloney, Charlie all right, hey, thank you very much,

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<v Speaker 1>Bill Maloney, and they here live breaking news over your

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<v Speaker 1>Bloomberg Time Squawk squ a w K on your terminal.

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<v Speaker 1>I'm Charlie Peloton. That so Bloomberg Business Flash. This is

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<v Speaker 1>taking stock with Kathleen Hayes and Pim Fox on Bloomberg Radio.

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<v Speaker 1>JP Morgan. Shares of JP Morgan Chase are higher right

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<v Speaker 1>now by more than two percent volume more than twenty

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<v Speaker 1>three million shares. Here to tell us more about JP

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<v Speaker 1>Morgan's stronger than expected a second quarter results is Fred Cannon.

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<v Speaker 1>He is Global director of Research at KBW. Fred, thank

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<v Speaker 1>you very much for being with us. Great to be

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<v Speaker 1>on Tim, Thanks for having me. Okay, so uh, stronger

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<v Speaker 1>than expected second quarter results, a surprise increase in revenue,

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<v Speaker 1>a surge in the trading business. Let's start there. How

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<v Speaker 1>did that happen? Well, one of the things that Brexit

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<v Speaker 1>did was an increased volatility near the end of the quarter,

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<v Speaker 1>and so we saw trading pick up and already been

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<v Speaker 1>a bit better in the first quarter, quite a bit

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<v Speaker 1>better actually the first quarter, and then we got a

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<v Speaker 1>little surge there at the end that got us the nice,

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<v Speaker 1>nice beat on trading. So will that continue? Probably not.

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<v Speaker 1>As we entered the summer months, especially August, we always

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<v Speaker 1>see a slowdown in trading in the back half of

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<v Speaker 1>the year tends to be slow. Plus there's some big

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<v Speaker 1>long term pressures on that business from regulation, the amount

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<v Speaker 1>of capital that banks have to hold against it. Tell

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<v Speaker 1>us about the lower expenses at JP Morgan Chase, so

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<v Speaker 1>they can continue to cut I think the short answer

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<v Speaker 1>is yes, they did get a special benefit in a

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<v Speaker 1>reversal of some legal fees this quarter, and we know

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<v Speaker 1>that's not going to continue. But overall, what you're going

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<v Speaker 1>to see all the big banks do in this low

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<v Speaker 1>interest rate environment is very much focused on expenses. So

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<v Speaker 1>I think the trend at JP Morgan to control and

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<v Speaker 1>contain expenses. You're going to see from all the big

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<v Speaker 1>banks and loan growth that exceeded what ten How did

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<v Speaker 1>that happen? Annualize credit cards? It looks like JP Morgan

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<v Speaker 1>is gearing up on credit cards. We think there's probably

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<v Speaker 1>a little bit of market share steel from American Express

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<v Speaker 1>that's been struggling recently. But also it looks like all

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<v Speaker 1>these credit card lenders are willing to take a little

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<v Speaker 1>bit more risk, go down this credit spectrum and push

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<v Speaker 1>growth now. Part of the conference call included comments from

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<v Speaker 1>the chief financial Officer, Marianne Lake, saying that the June

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<v Speaker 1>jobs report, wage growth and retail sales and housing are healthy,

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<v Speaker 1>and that the US economy is set for continued moderate growth.

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<v Speaker 1>Is that necessary for the results of JP Morgan and

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<v Speaker 1>other banks to improve. Absolutely. Remember, we have a huge

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<v Speaker 1>head wind from the interest rate environment. The market hitting

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<v Speaker 1>record levels, but the ten year bond rate is one

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<v Speaker 1>point five three. I think we just heard that's a

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<v Speaker 1>very tough environment for banks. Uh, it means that spread

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<v Speaker 1>on their business is low. Um, So what has to

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<v Speaker 1>happen is we have to have other offsets and so

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<v Speaker 1>as she was talking about today. We really need this

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<v Speaker 1>loan growth economic growth to continue at a good pace

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<v Speaker 1>in the US, because we're not seeing it overseas well.

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<v Speaker 1>Jamie Diamond, the chief executive of JP Morgan Chase, said

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<v Speaker 1>that he hopes that politicians are going to be sensible

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<v Speaker 1>when they make decisions relating to the European Union in Britain,

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<v Speaker 1>and that he hopes that businesses are going to get

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<v Speaker 1>some time to adjust to this new reality. Do you

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<v Speaker 1>think he's going to be listened to me, He's gonna

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<v Speaker 1>be heard. I don't know about politicians being sensible is

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<v Speaker 1>something that we can expect this year, to be honest him, Um, certainly. Uh,

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<v Speaker 1>you know, we can be hopeful on that, but we'll

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<v Speaker 1>just have to see. I mean, it was a big

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<v Speaker 1>move for Britain to exit the Union. We've gotten what

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<v Speaker 1>one of my clients called a brolly here at the

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<v Speaker 1>end of the Braxton vote, right, but we will see

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<v Speaker 1>if it continues. I mean, I think things seem a

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<v Speaker 1>little bit softer here than We've a little bit better

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<v Speaker 1>than perhaps people have thought initially, but we have a

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<v Speaker 1>long ways to go to work through this. What is

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<v Speaker 1>the best way to put a value on a bank. Uh,

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<v Speaker 1>what we really have to do is look at the

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<v Speaker 1>profitability to bank, and then we have to back into

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<v Speaker 1>what the price to book value return should be. So

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<v Speaker 1>JP Morgan makes around, you know, ten eleven return on equities.

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<v Speaker 1>We think in this environment the cost of equity is

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<v Speaker 1>probably nine percent. They should earn around where they are

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<v Speaker 1>or maybe a little higher one point three one point

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<v Speaker 1>four of times book value. So that's the best way

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<v Speaker 1>to think about banks. Especially remember when you're thinking about

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<v Speaker 1>these trading this uh, fixed income trading, you can't forecast that.

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<v Speaker 1>That's just a crapshoot each each quarter. So a lot

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<v Speaker 1>of these things can't be forecasted, so you really have

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<v Speaker 1>to fall back on some of these price to book ratios.

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<v Speaker 1>All right, So I'm gonna ask you to forecast or

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<v Speaker 1>at least roll the dice a little bit, because we're

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<v Speaker 1>going to get results tomorrow from City Group as well

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<v Speaker 1>as Wells Fargo. What do you expect we expect some polls.

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<v Speaker 1>Who remember, expectations have been reduced for all these big

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<v Speaker 1>banks coming into earnings as a result of the interest

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<v Speaker 1>rate environment. I think some of the things that we

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<v Speaker 1>saw at JP Morgan should pull through for Wells Fargo.

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<v Speaker 1>Mortgage business is a big part of their business. They

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<v Speaker 1>won't recognize as much of that income as JP Morgan

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<v Speaker 1>because of some obscure accounting issues, but yet that's a

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<v Speaker 1>that's a big help for Wells Fargo, and we're quite

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<v Speaker 1>positive on Wells Cities a little bit. You never know,

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<v Speaker 1>they do tend to stumble on their quarters, so we'll

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<v Speaker 1>just have to say. And next week we're going to

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<v Speaker 1>get results from Bank of America, Goldman Sacks as well

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<v Speaker 1>as Morgan Stanley. Is there a standout among those three

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<v Speaker 1>for you? Well, I think one reason you saw more

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<v Speaker 1>Goldman Sachs be the big winner today is is some

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<v Speaker 1>of the read across from JP Morgan it would be

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<v Speaker 1>quite positive, both on trading and on some of the

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<v Speaker 1>capital markets activities and some of the investment banking. So

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<v Speaker 1>that's the one to watch. The stock has been beat

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<v Speaker 1>up pretty good here in the last last few months,

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<v Speaker 1>so that's one to watch. The pop I want to

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<v Speaker 1>thank you very much for spending time and giving us

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<v Speaker 1>some detailed information about the banking sector. Fred Cannon is

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<v Speaker 1>Global director of Research at k b W. Right now,

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<v Speaker 1>the shares of JP Morgan chase. They're up two percent.

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<v Speaker 1>Shares of City Group they are up nearly three percent,

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<v Speaker 1>Bank of America shares up at two percent, Goldman Sachs

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<v Speaker 1>shares a higher by three percent, and Morgan Stanley a

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<v Speaker 1>gain of more than three percent. You're listening to taking Stock.

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<v Speaker 1>I'm pim Fox and this is Bloomberg coming up on

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<v Speaker 1>taking stock. Will take stock of Israeli technology companies? Why

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<v Speaker 1>are they leading a technology rally. We've got the details

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<v Speaker 1>with Stephen Schoenfeld of Blue Star Indexes. That's next