1 00:00:03,560 --> 00:00:06,640 Speaker 1: Hello, and welcome to the Credit Edge Weekly Markets Podcast. 2 00:00:07,120 --> 00:00:09,680 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:10,240 --> 00:00:13,400 Speaker 1: Today's guests are Claire Boston, who leads the Leveraged Finance 4 00:00:13,440 --> 00:00:15,840 Speaker 1: team at Bloomberg News in New York and is a 5 00:00:15,880 --> 00:00:18,880 Speaker 1: real expert on distressed debt. We're delighted to have you 6 00:00:18,920 --> 00:00:22,000 Speaker 1: on the show. Thank you. Also this week we have 7 00:00:22,120 --> 00:00:25,159 Speaker 1: Arnold Kakula, one of my favorite debt analysts. We go 8 00:00:25,280 --> 00:00:29,000 Speaker 1: way back. He looks at banks for Bloomberg Intelligence. But 9 00:00:29,120 --> 00:00:33,040 Speaker 1: before we dig into banks, let's talk distress, by which 10 00:00:33,040 --> 00:00:36,400 Speaker 1: we mean companies running into trouble and not being able 11 00:00:36,440 --> 00:00:38,440 Speaker 1: to pay back debt, which for some of them can 12 00:00:38,479 --> 00:00:41,720 Speaker 1: run into billions of dollars. That's a massive problem if 13 00:00:41,760 --> 00:00:44,159 Speaker 1: you're lending to them or supplying products to them, not 14 00:00:44,240 --> 00:00:48,560 Speaker 1: just or for a handful of others. It's an opportunity 15 00:00:49,479 --> 00:00:52,879 Speaker 1: lawyers billing thousands an hour, and some investors who are 16 00:00:52,880 --> 00:00:55,760 Speaker 1: positioning around it. But let's get straight into it, Claire. 17 00:00:56,080 --> 00:00:58,680 Speaker 1: The retail sector is hurting, not just in the US, 18 00:00:58,720 --> 00:01:01,320 Speaker 1: but globally. Note all the big blow ups in the 19 00:01:01,440 --> 00:01:03,720 Speaker 1: UK at the moment. But let's stick to the US. 20 00:01:04,280 --> 00:01:07,800 Speaker 1: Party City is among several high profile bankruptcies in that sector. 21 00:01:08,440 --> 00:01:10,760 Speaker 1: Bed Bath and Beyond is another big name in the news. 22 00:01:11,240 --> 00:01:14,120 Speaker 1: What's the situation there? Why is this all coming to 23 00:01:14,120 --> 00:01:17,160 Speaker 1: a head now? We're definitely seeing a lot of retail 24 00:01:17,240 --> 00:01:20,560 Speaker 1: bankruptcies at this moment because we are in the first 25 00:01:20,640 --> 00:01:23,880 Speaker 1: quarter of a new year. A lot of companies will 26 00:01:23,880 --> 00:01:27,000 Speaker 1: look at their holiday performance with such a key period 27 00:01:27,040 --> 00:01:29,640 Speaker 1: of the year for them, and when they have big misses, 28 00:01:30,000 --> 00:01:33,119 Speaker 1: that can be the impetus for a bankruptcy filing. So 29 00:01:33,160 --> 00:01:35,679 Speaker 1: that's something we're seeing in Party City and as well 30 00:01:35,720 --> 00:01:38,720 Speaker 1: as Bedbath, even though they haven't filed yet but are 31 00:01:38,720 --> 00:01:42,280 Speaker 1: widely expected too soon. And these supply chain issues that 32 00:01:42,319 --> 00:01:44,319 Speaker 1: we've been hearing about for a number of years now, 33 00:01:44,600 --> 00:01:45,960 Speaker 1: you know, are really coming to a head for some 34 00:01:46,000 --> 00:01:48,560 Speaker 1: of these companies as well. But on bed Bath and 35 00:01:48,560 --> 00:01:50,760 Speaker 1: Build specifically, what do we expect to happen next? I mean, 36 00:01:50,920 --> 00:01:54,400 Speaker 1: they run these really large, big box stores in what 37 00:01:54,480 --> 00:01:57,680 Speaker 1: looks like very high rent locations, selling stuff that you 38 00:01:57,760 --> 00:02:00,320 Speaker 1: probably find cheaper online. You know. The last time I 39 00:02:00,320 --> 00:02:02,520 Speaker 1: was in one, I gave up at the checkout because 40 00:02:02,520 --> 00:02:04,680 Speaker 1: I was standing behind five people in line. They all 41 00:02:04,720 --> 00:02:08,400 Speaker 1: had cuts full of laundry detergent, and they all had 42 00:02:08,600 --> 00:02:11,519 Speaker 1: fistfuls of coupons and it just took hours for anyone 43 00:02:11,520 --> 00:02:15,800 Speaker 1: to get through. What where do they go from here? Right, 44 00:02:15,840 --> 00:02:18,880 Speaker 1: we're expecting an imminent bankruptcy filing, and our latest reporting 45 00:02:18,919 --> 00:02:20,880 Speaker 1: as telling us that this is going to be a 46 00:02:20,919 --> 00:02:24,440 Speaker 1: liquidation scenario. So um, you know, as far as we know, 47 00:02:24,560 --> 00:02:26,800 Speaker 1: they have not found a buyer for you know, either 48 00:02:26,840 --> 00:02:31,040 Speaker 1: the main bed bath assets or this Buy Buy Baby brand, 49 00:02:31,240 --> 00:02:34,080 Speaker 1: which a lot of creditors had sort of viewed as 50 00:02:34,080 --> 00:02:36,720 Speaker 1: a crown jewel. So you know, it looks like they 51 00:02:36,720 --> 00:02:39,040 Speaker 1: will go in as chapter eleven. But you know, be 52 00:02:39,120 --> 00:02:42,880 Speaker 1: looking to liquidate these stores, and you know, we'll see 53 00:02:43,200 --> 00:02:46,480 Speaker 1: when exactly they come in February. Rent is typically do 54 00:02:46,760 --> 00:02:49,880 Speaker 1: on the first of the month, and so it's really 55 00:02:49,919 --> 00:02:54,000 Speaker 1: just probably a matter of them finalizing paperwork. But I'm 56 00:02:54,040 --> 00:02:55,919 Speaker 1: still kind of curious as to why this is all 57 00:02:55,919 --> 00:02:58,480 Speaker 1: happening now. I recall a big clear out of the 58 00:02:58,520 --> 00:03:01,400 Speaker 1: retail sector a few years ago in the States, where 59 00:03:01,760 --> 00:03:05,080 Speaker 1: you know, companies like Fairway, pay Less, Jim Boree, Bunnies, 60 00:03:05,080 --> 00:03:07,120 Speaker 1: they all went under, you know, big names like Seas. 61 00:03:07,440 --> 00:03:10,480 Speaker 1: We're really blowing up. But why are we seeing this 62 00:03:10,520 --> 00:03:12,840 Speaker 1: again now? Surely it was all cleared out. Then some 63 00:03:12,960 --> 00:03:14,680 Speaker 1: of it was cleared out, and we did see another 64 00:03:14,680 --> 00:03:17,120 Speaker 1: wave of bankruptcy is in kind of the early twenty 65 00:03:17,160 --> 00:03:20,160 Speaker 1: twenty COVID period. What we're seeing now is a lot 66 00:03:20,200 --> 00:03:23,240 Speaker 1: of companies that maybe got that rescue financing two years 67 00:03:23,240 --> 00:03:26,800 Speaker 1: ago or three years ago, but now creditors are just saying, 68 00:03:26,840 --> 00:03:30,480 Speaker 1: you know, look no more. The company couldn't turn things around. 69 00:03:31,000 --> 00:03:34,440 Speaker 1: You know, maybe their expenses got a lot higher. Consumers, 70 00:03:34,480 --> 00:03:36,960 Speaker 1: of course, are kind of pulling back as inflation has 71 00:03:37,000 --> 00:03:39,400 Speaker 1: been such a hot topic in the past year or so, 72 00:03:39,800 --> 00:03:43,240 Speaker 1: and that's a really difficult combination of factors to keep 73 00:03:43,280 --> 00:03:46,360 Speaker 1: a retail business going, especially when the entire sectors. I'm 74 00:03:46,400 --> 00:03:51,360 Speaker 1: struggling for years now, So expect more. Chapter twenty two. Yeah, 75 00:03:51,480 --> 00:03:54,360 Speaker 1: Chapter twenty two, that's always a fun one, for sure. 76 00:03:54,440 --> 00:03:56,800 Speaker 1: We are seeing some companies of concern that we'll be 77 00:03:56,840 --> 00:04:00,360 Speaker 1: going for their second chapter eleven Tuesday Morning one that 78 00:04:00,360 --> 00:04:03,080 Speaker 1: we've been covering a bit, and we've reported that they 79 00:04:03,080 --> 00:04:05,800 Speaker 1: are considering a second bankruptcy filing um. They were one 80 00:04:05,800 --> 00:04:08,040 Speaker 1: of the companies that went under kind of in that 81 00:04:08,120 --> 00:04:11,600 Speaker 1: first pandemic wave of twenty twenty, and they could file 82 00:04:11,640 --> 00:04:14,240 Speaker 1: as well very soon, and we do expect this to 83 00:04:14,280 --> 00:04:17,640 Speaker 1: be broader than the last time. There's a lot of 84 00:04:17,640 --> 00:04:20,000 Speaker 1: debt coming due. Rates are going up, the economy is slowing. 85 00:04:21,279 --> 00:04:24,080 Speaker 1: You know, people still like to get deals online, so 86 00:04:24,120 --> 00:04:25,680 Speaker 1: they maybe not going back to the shops. So we've 87 00:04:25,680 --> 00:04:27,440 Speaker 1: had the pandemic, so people stay down to the shops 88 00:04:27,520 --> 00:04:30,120 Speaker 1: during that period. What is the future of bricks and 89 00:04:30,160 --> 00:04:32,520 Speaker 1: water retail? Is that the one that's going to go 90 00:04:32,200 --> 00:04:34,800 Speaker 1: go under? You know, it's hard to say, right, We 91 00:04:34,880 --> 00:04:37,360 Speaker 1: have heard for years that bricks and water is dead, 92 00:04:37,440 --> 00:04:40,800 Speaker 1: and yet it still lives on in some capacity. That 93 00:04:40,920 --> 00:04:43,080 Speaker 1: being said, we are also seeing some new names that 94 00:04:43,120 --> 00:04:46,520 Speaker 1: are of concern and do rely heavily on bricks and mortar. 95 00:04:46,920 --> 00:04:49,440 Speaker 1: We wrote the other day about a company called West Marine. 96 00:04:49,480 --> 00:04:54,200 Speaker 1: They do stores that cater to fishermen and they are 97 00:04:54,480 --> 00:04:57,920 Speaker 1: having issues with their liquidity and their debt now. So 98 00:04:57,960 --> 00:05:01,039 Speaker 1: there are certainly, you know, more storage that are struggling 99 00:05:01,080 --> 00:05:03,360 Speaker 1: these days, and you know, rents can be a really 100 00:05:03,360 --> 00:05:06,800 Speaker 1: big burden on these companies. Surely phishing is totally recession proof. 101 00:05:06,839 --> 00:05:10,280 Speaker 1: I would have thought, Um, does this mean that when 102 00:05:10,279 --> 00:05:12,560 Speaker 1: you step back though that you know, all of those 103 00:05:12,560 --> 00:05:15,200 Speaker 1: companies that just loaded up on cheap debt over the 104 00:05:15,240 --> 00:05:17,240 Speaker 1: last ten years, let's say, when it was you know, 105 00:05:17,320 --> 00:05:21,440 Speaker 1: the record low costs of funds for most companies. Are 106 00:05:21,440 --> 00:05:23,400 Speaker 1: they just now going to blow up? I mean, is 107 00:05:23,400 --> 00:05:25,560 Speaker 1: it the end of the zombie companies as we know them? 108 00:05:26,040 --> 00:05:27,800 Speaker 1: We'll see. Um. You know, one thing we do hear 109 00:05:27,839 --> 00:05:30,000 Speaker 1: a lot about is that there are still firms that 110 00:05:30,120 --> 00:05:32,680 Speaker 1: specialize in what we might call it a rescue financing, 111 00:05:32,839 --> 00:05:35,640 Speaker 1: so you know, some sort of very expensive loan that 112 00:05:35,680 --> 00:05:38,200 Speaker 1: can provide liquidity if you think you have a short 113 00:05:38,320 --> 00:05:41,240 Speaker 1: term problem as a company. I think it remains to 114 00:05:41,279 --> 00:05:44,520 Speaker 1: be seen whether or not companies can afford to, you know, 115 00:05:44,560 --> 00:05:47,000 Speaker 1: refinance at some of these much higher rates. And that 116 00:05:47,160 --> 00:05:50,120 Speaker 1: is definitely a concern and a reason that some companies 117 00:05:50,160 --> 00:05:53,880 Speaker 1: may be pushed into bankruptcy. But even then after the bankruptcy, 118 00:05:53,920 --> 00:05:56,440 Speaker 1: that doesn't mean that they disappear completely, right, I mean 119 00:05:56,440 --> 00:05:59,760 Speaker 1: we can still expect potentially, I mean I'm hoping myself 120 00:05:59,760 --> 00:06:02,640 Speaker 1: to after the Party City bankruptcy to be able to 121 00:06:02,640 --> 00:06:08,080 Speaker 1: still purchase those massive helium balloons. Yes, most Chapter eleven bankruptcies, 122 00:06:08,120 --> 00:06:11,160 Speaker 1: the retailers are going to at least attempt to restructure. 123 00:06:11,320 --> 00:06:14,039 Speaker 1: You know, usually they do close a number of stores, 124 00:06:14,080 --> 00:06:17,400 Speaker 1: but most planned to not go away completely. You know, 125 00:06:17,560 --> 00:06:20,360 Speaker 1: the bed Baths of the world. There are liquidation scenarios, 126 00:06:20,400 --> 00:06:23,600 Speaker 1: but it's pretty typical to see retailers survive. You know, 127 00:06:23,680 --> 00:06:26,719 Speaker 1: under new private ownership, there's a few private equity firms 128 00:06:26,720 --> 00:06:29,000 Speaker 1: that have sort of started to specialize in buying up 129 00:06:29,000 --> 00:06:32,520 Speaker 1: these retailers and trying to turn them around us smaller companies, 130 00:06:32,720 --> 00:06:35,599 Speaker 1: and we would expect that to continue. Is there any 131 00:06:35,839 --> 00:06:38,800 Speaker 1: rhyme or reason to who survives and who doesn't? Yeah, 132 00:06:38,839 --> 00:06:41,560 Speaker 1: I think part of it is the Amazon effect. You know, 133 00:06:41,720 --> 00:06:43,920 Speaker 1: have you been completely run out of the market by 134 00:06:43,960 --> 00:06:46,360 Speaker 1: Amazon or you know, perhaps in the case of Bedbath, 135 00:06:46,400 --> 00:06:50,159 Speaker 1: big box retailers being more active in the space. You know, 136 00:06:50,240 --> 00:06:52,719 Speaker 1: sometimes it is just they say, you know, good business, 137 00:06:52,800 --> 00:06:55,400 Speaker 1: bad capital structure. Maybe you have too much debt, but 138 00:06:56,080 --> 00:06:58,720 Speaker 1: if your debt burden is lower, you can survive as 139 00:06:58,720 --> 00:07:01,320 Speaker 1: a chain. And so we've seen that in a number 140 00:07:01,360 --> 00:07:04,240 Speaker 1: of cases in previous years. But just digging in a 141 00:07:04,279 --> 00:07:07,240 Speaker 1: bit before we come to Arnold and talk about banks, 142 00:07:07,240 --> 00:07:08,839 Speaker 1: what's going on behind the scenes in terms of the 143 00:07:08,839 --> 00:07:11,120 Speaker 1: credits is there anything interesting. I mean, we've we've seen 144 00:07:11,120 --> 00:07:14,200 Speaker 1: for years all this talk of dry powder, drypowder, We're 145 00:07:14,200 --> 00:07:17,360 Speaker 1: going to be bouncing on any opportunity when everything blows up. 146 00:07:17,360 --> 00:07:19,640 Speaker 1: And all of these distressed funds have just been circling 147 00:07:19,680 --> 00:07:21,960 Speaker 1: like vultures, but they've not had anything to chew on 148 00:07:22,040 --> 00:07:24,120 Speaker 1: for quite a long time. So what's going on the 149 00:07:24,120 --> 00:07:26,960 Speaker 1: credit to side? They're certainly busy. I would say a 150 00:07:27,040 --> 00:07:29,920 Speaker 1: number of distressed funds have sort of sworn off retail 151 00:07:30,040 --> 00:07:32,640 Speaker 1: after being so burned in the past five years of 152 00:07:32,680 --> 00:07:35,800 Speaker 1: what we would call the retail apocalypse. But the ones 153 00:07:35,840 --> 00:07:37,800 Speaker 1: that do want to play in this space are often 154 00:07:37,840 --> 00:07:39,680 Speaker 1: going after what we would call like a loan to 155 00:07:39,760 --> 00:07:43,040 Speaker 1: own transaction, So they'll buy up this super distressed at 156 00:07:43,120 --> 00:07:45,960 Speaker 1: you know, often looking at sort of a high priority 157 00:07:46,000 --> 00:07:49,120 Speaker 1: loan or something with the intent of knowing this company 158 00:07:49,120 --> 00:07:52,120 Speaker 1: will file for bankruptcy and they will emerge as equity owners. 159 00:07:52,200 --> 00:07:54,440 Speaker 1: So you know, if you're a creditor and you're doing that, 160 00:07:54,480 --> 00:07:56,120 Speaker 1: you have to have a vision for what this company 161 00:07:56,200 --> 00:07:58,200 Speaker 1: is going to look like on the other side of bankruptcy. 162 00:07:58,600 --> 00:08:01,200 Speaker 1: But that can be really compelling for certain types of firms. 163 00:08:01,960 --> 00:08:05,480 Speaker 1: So just going back to your phrase retail apocalypse. Where 164 00:08:05,480 --> 00:08:07,160 Speaker 1: are we in that cycle? Is it all over? Is 165 00:08:07,160 --> 00:08:10,280 Speaker 1: it coming to an end? Not to use the baseball metaphors, 166 00:08:10,320 --> 00:08:13,640 Speaker 1: but what inning are we in? Yeah, I think there's 167 00:08:13,640 --> 00:08:15,640 Speaker 1: definitely more to come this year. I would not say 168 00:08:15,680 --> 00:08:18,720 Speaker 1: it's the beginning of the end. You know plenty as 169 00:08:18,760 --> 00:08:22,040 Speaker 1: we talked about earlier of firms that you know, maybe 170 00:08:22,120 --> 00:08:26,400 Speaker 1: previously filed, might need to file again, and we're hearing about, 171 00:08:26,400 --> 00:08:29,120 Speaker 1: you know, sort of just new stores of concern every day. 172 00:08:29,920 --> 00:08:31,480 Speaker 1: This could go on for a number of years. I 173 00:08:31,520 --> 00:08:34,520 Speaker 1: think great. Okay, well, we look forward to that. Thank you, 174 00:08:34,559 --> 00:08:37,040 Speaker 1: Claire Boston, Bloomberg News. We look forward to hearing a 175 00:08:37,040 --> 00:08:39,920 Speaker 1: lot more on that. We looked forward to reading all 176 00:08:39,920 --> 00:08:42,839 Speaker 1: your scoops and you can see all the news and 177 00:08:42,960 --> 00:08:45,520 Speaker 1: analysis of leverage, finance and distressed debt by Claire and 178 00:08:45,559 --> 00:08:48,880 Speaker 1: her team on the Bloomberg terminal or at Bloomberg dot com. 179 00:08:49,480 --> 00:08:51,800 Speaker 1: So switching gears a bit here. As I mentioned earlier, 180 00:08:51,800 --> 00:08:54,959 Speaker 1: we are very lucky to have here Arnold Kakuda from 181 00:08:55,000 --> 00:08:59,640 Speaker 1: Bloomberg Intelligence. Now you look at the financial sector, which 182 00:08:59,679 --> 00:09:02,800 Speaker 1: is mostly not distressed, though there may be a few 183 00:09:02,800 --> 00:09:05,600 Speaker 1: issues with those that lend only to consumers, right, And 184 00:09:05,760 --> 00:09:07,600 Speaker 1: we'll get to that maybe in a bit, but let's 185 00:09:07,600 --> 00:09:09,960 Speaker 1: start big picture on all what's up with the banks? 186 00:09:10,440 --> 00:09:12,800 Speaker 1: All we're hearing is bad news or all I'm all 187 00:09:12,800 --> 00:09:17,400 Speaker 1: I'm seeing is bad news. Layoffs, lower earnings, trouble offloading 188 00:09:17,400 --> 00:09:19,600 Speaker 1: all of that debt that was used to fund buy backs. 189 00:09:20,120 --> 00:09:23,800 Speaker 1: What's the situation? Should we be worried here about the banks? Well, actually, 190 00:09:24,080 --> 00:09:27,079 Speaker 1: on the contrary, you know, I think the layoffs it's 191 00:09:27,160 --> 00:09:29,280 Speaker 1: it's a way to kind of manage the expenses in 192 00:09:29,360 --> 00:09:32,120 Speaker 1: terms of the revenue environment. And that's more specifically kind 193 00:09:32,120 --> 00:09:34,760 Speaker 1: of looking at the investment banking side, which is seen 194 00:09:35,000 --> 00:09:38,120 Speaker 1: revenue down about fifty odd percent I guess from a 195 00:09:38,200 --> 00:09:40,680 Speaker 1: really elevated twenty twenty one. Right, So that's one way 196 00:09:40,840 --> 00:09:43,120 Speaker 1: banks can manage the earnings. But kind of looking at 197 00:09:43,120 --> 00:09:46,240 Speaker 1: the bigger picture, right, Um, you talked about financing costs 198 00:09:46,320 --> 00:09:50,360 Speaker 1: hurting some retailers and other sectors. But you know, it's 199 00:09:50,360 --> 00:09:52,400 Speaker 1: a case of I guess you know, my European is 200 00:09:52,440 --> 00:09:55,520 Speaker 1: my gain, right, And so that's one bright spot that 201 00:09:55,600 --> 00:09:58,640 Speaker 1: these big banks have is higher net interest income. So 202 00:09:58,960 --> 00:10:00,760 Speaker 1: you know, as a sector or we're all these big 203 00:10:00,800 --> 00:10:03,800 Speaker 1: diversified banks. Revenue is actually going up, right, and of 204 00:10:03,840 --> 00:10:07,079 Speaker 1: course expenses are going up as well. You know, provision 205 00:10:07,120 --> 00:10:09,480 Speaker 1: for loan losses, you know, long loan delinquencies and stuff 206 00:10:09,600 --> 00:10:12,360 Speaker 1: expected to rise, so that is expected to go up too. 207 00:10:12,400 --> 00:10:17,280 Speaker 1: But overall revenue, because of the higher revenue, earnings are 208 00:10:17,280 --> 00:10:19,640 Speaker 1: actually gonna look to be about flat or slightly higher 209 00:10:19,640 --> 00:10:21,600 Speaker 1: as well for this year. So where's all this revenue 210 00:10:21,600 --> 00:10:23,560 Speaker 1: coming from? You you noticed a bit of jog in there, 211 00:10:23,559 --> 00:10:26,440 Speaker 1: but where's all the money coming in for the banks? Yeah? 212 00:10:26,480 --> 00:10:28,840 Speaker 1: So so the big driver is net interesting come so 213 00:10:28,960 --> 00:10:33,040 Speaker 1: basically being able to charge more on more interest on 214 00:10:33,080 --> 00:10:37,559 Speaker 1: the loans versus um what they're paying out in deposits, right, 215 00:10:37,559 --> 00:10:40,000 Speaker 1: so that you know, the net interest margin is still 216 00:10:40,040 --> 00:10:42,280 Speaker 1: expected to go up a little bit over this year. 217 00:10:42,600 --> 00:10:45,319 Speaker 1: And so you know, that's that simple fact of being 218 00:10:45,360 --> 00:10:48,480 Speaker 1: able to charge more on the loans um that that's 219 00:10:48,480 --> 00:10:50,640 Speaker 1: helping the revenue for these banks. So it's purely fact 220 00:10:50,720 --> 00:10:52,200 Speaker 1: that you know, rates have gone up, that we've not 221 00:10:52,280 --> 00:10:54,680 Speaker 1: seen such a steep and fast rising rates in a 222 00:10:54,679 --> 00:10:57,240 Speaker 1: long time, and that's benefiting the banks. Correct. Yeah, And 223 00:10:57,280 --> 00:10:58,719 Speaker 1: then but on the flip side, right, you know a 224 00:10:58,720 --> 00:11:01,280 Speaker 1: little higher expenses and then you know, if we're going 225 00:11:01,320 --> 00:11:03,960 Speaker 1: into a recession, and depending on what kind of recession, 226 00:11:04,040 --> 00:11:08,080 Speaker 1: right the banks are expecting you know, the it's Lincoln 227 00:11:08,080 --> 00:11:10,640 Speaker 1: seas and charge offs to rise as well, but maybe 228 00:11:10,679 --> 00:11:13,600 Speaker 1: not enough to kind of offset the revenue increase. So 229 00:11:13,679 --> 00:11:15,080 Speaker 1: let's dig into that a bit. I mean, I'm worried 230 00:11:15,080 --> 00:11:16,800 Speaker 1: about the consumer, and I'm worried you know, we looked 231 00:11:16,840 --> 00:11:19,000 Speaker 1: at retail, We talked with cloud Buston just now about 232 00:11:19,000 --> 00:11:22,000 Speaker 1: retail that shows that the consumers struggling a bit. Is 233 00:11:22,000 --> 00:11:24,120 Speaker 1: that not going to feed into them not being able 234 00:11:24,120 --> 00:11:26,120 Speaker 1: to pay about their bills to the banks? Well, I 235 00:11:26,160 --> 00:11:29,960 Speaker 1: mean I call this right now a goldilocks environment for 236 00:11:30,000 --> 00:11:32,640 Speaker 1: the past few months, and there are three things within that, 237 00:11:32,920 --> 00:11:35,880 Speaker 1: including the consumer, that have gone really well. Right, Well, okay, 238 00:11:35,960 --> 00:11:38,600 Speaker 1: let's talk about consumer. First of all, consumer has been 239 00:11:38,640 --> 00:11:42,040 Speaker 1: more resilient, you know, than expected, although I guess there's 240 00:11:42,040 --> 00:11:43,640 Speaker 1: a risk in the second half of the year where 241 00:11:43,679 --> 00:11:46,000 Speaker 1: that might start trailing off and kind of the cash 242 00:11:46,040 --> 00:11:50,400 Speaker 1: balances that they've maintained might go below below prepednetical levels. 243 00:11:50,440 --> 00:11:52,679 Speaker 1: But two other things that are kind of more you 244 00:11:52,880 --> 00:11:56,559 Speaker 1: also specific to banks, are you know, the issuance levels right, Um, 245 00:11:56,720 --> 00:11:59,520 Speaker 1: they were very elevated last year, and then you know 246 00:11:59,559 --> 00:12:01,880 Speaker 1: it's it's really trailed off this year. You know, this 247 00:12:01,960 --> 00:12:04,680 Speaker 1: year we expected for the big six banks issuance to 248 00:12:04,720 --> 00:12:08,000 Speaker 1: fall off about thirty three percent in January alone, when 249 00:12:08,000 --> 00:12:11,120 Speaker 1: they're typically very active. That's down about seventy percent. Just 250 00:12:11,160 --> 00:12:13,600 Speaker 1: to beeky, sorry, that's bond issuance by the banks who 251 00:12:13,600 --> 00:12:15,880 Speaker 1: are selling bonds to bring in debt to do what 252 00:12:16,000 --> 00:12:18,480 Speaker 1: with it? Uh So debt insuance uh yeah, by the 253 00:12:18,480 --> 00:12:22,440 Speaker 1: big banks, and they use that typically for regulatory requirements, 254 00:12:22,520 --> 00:12:26,480 Speaker 1: you know, basically post pandemic. As as the flood fed 255 00:12:26,520 --> 00:12:28,840 Speaker 1: flooded the cash into the system, a lot of that 256 00:12:28,880 --> 00:12:31,880 Speaker 1: inedibly landed at the banks. Bank balanced, it's got bigger 257 00:12:32,400 --> 00:12:35,160 Speaker 1: banks need to have in a debt as a percentage 258 00:12:35,160 --> 00:12:37,760 Speaker 1: of their assets to kind of get bigger. And then 259 00:12:37,880 --> 00:12:40,000 Speaker 1: you know, I think in the first half of last year, 260 00:12:40,040 --> 00:12:43,640 Speaker 1: I think det issuance was elevated because of expected volatility, 261 00:12:44,000 --> 00:12:46,440 Speaker 1: first on the rate hikes, maybe not as much as 262 00:12:46,440 --> 00:12:50,400 Speaker 1: they expected, and also volatility from Ukraine, um, you know, Russia. 263 00:12:50,440 --> 00:12:52,080 Speaker 1: But then in the second half of the year, the 264 00:12:52,080 --> 00:12:54,480 Speaker 1: trading environment I think was continued to be a lot 265 00:12:54,520 --> 00:12:57,080 Speaker 1: more active than expected, and that's a business that's funded 266 00:12:57,120 --> 00:12:59,240 Speaker 1: with debt. But kind of going back to the to 267 00:12:59,320 --> 00:13:03,600 Speaker 1: the third thing that UM has been goldilocks for for 268 00:13:03,600 --> 00:13:06,920 Speaker 1: for the banks is UM. You know, inflation expectations, right, 269 00:13:07,080 --> 00:13:10,120 Speaker 1: that has been kind of a little bit more subdued. UM. 270 00:13:10,240 --> 00:13:11,959 Speaker 1: You know, it seems like it's coming down and then 271 00:13:12,000 --> 00:13:14,120 Speaker 1: you know, if that kind of volatility rams up again, 272 00:13:14,360 --> 00:13:17,120 Speaker 1: I think I think that's a headwind. And in terms 273 00:13:17,120 --> 00:13:19,320 Speaker 1: of I think for the banks, you know, what we've 274 00:13:19,320 --> 00:13:23,880 Speaker 1: seen is they've had a massive underperformance last year. Right, 275 00:13:23,960 --> 00:13:27,880 Speaker 1: typically banks uh and and I'm using big banks, big 276 00:13:28,000 --> 00:13:30,320 Speaker 1: US banks as a metaphor for the over or financial sector. 277 00:13:31,120 --> 00:13:34,920 Speaker 1: But financials typically have traded about ten basis points tighter 278 00:13:35,600 --> 00:13:38,079 Speaker 1: than the overall index. Let's say, starting at the beginning 279 00:13:38,080 --> 00:13:41,160 Speaker 1: of twenty twenty two. Now they widened a lot more. 280 00:13:41,240 --> 00:13:44,880 Speaker 1: They were about thirty sort of twenty wider right at 281 00:13:44,920 --> 00:13:47,920 Speaker 1: the end of October, and then now they're about five 282 00:13:48,520 --> 00:13:50,839 Speaker 1: a little bit five wider. So you know, thirty wider 283 00:13:50,880 --> 00:13:53,439 Speaker 1: to now they traced back half and so I guess 284 00:13:53,480 --> 00:13:55,280 Speaker 1: in the Great bon Jovi the words of bon Jovi, 285 00:13:55,400 --> 00:13:58,079 Speaker 1: it's oh, you know, we're halfway there, I guess, right, 286 00:13:58,160 --> 00:14:01,200 Speaker 1: thirty thirty wider. Now we're fifteen tighter from there. You know, 287 00:14:01,559 --> 00:14:03,400 Speaker 1: can they make it back all the way. And if 288 00:14:03,480 --> 00:14:06,040 Speaker 1: if we're kind of going into like a mild recession, 289 00:14:06,360 --> 00:14:08,960 Speaker 1: hey hey, potentially and it's a shallow recession and we 290 00:14:09,000 --> 00:14:11,760 Speaker 1: come back out, maybe maybe there's potentially more room. I 291 00:14:11,760 --> 00:14:14,560 Speaker 1: guess if this benign you know, goldilocks environment continues. But 292 00:14:14,920 --> 00:14:17,880 Speaker 1: you know, then again, anytime you know, fed fed inflation, 293 00:14:17,960 --> 00:14:20,200 Speaker 1: voltilly can ramp up. So there's an opportunity right now 294 00:14:20,240 --> 00:14:22,680 Speaker 1: for investors to still buy bank bones because they're trading 295 00:14:22,680 --> 00:14:25,480 Speaker 1: two wide, and they could come in. Yeah, if they 296 00:14:25,520 --> 00:14:27,280 Speaker 1: do go back to that historical you know, there's still 297 00:14:27,320 --> 00:14:30,600 Speaker 1: five five basis points wider than the overall index. But 298 00:14:30,720 --> 00:14:35,640 Speaker 1: you know typically in the non recessionary times volatility low um, 299 00:14:35,840 --> 00:14:39,320 Speaker 1: they trade ten basis points tighter. Right, So, so the 300 00:14:39,320 --> 00:14:42,560 Speaker 1: opportunities that the performance has been decent, investors seemed to 301 00:14:42,600 --> 00:14:44,160 Speaker 1: light this stuff. Why didn't the banks sell a ton 302 00:14:44,160 --> 00:14:45,840 Speaker 1: of debt in January? You know that usually we see 303 00:14:45,880 --> 00:14:48,080 Speaker 1: everyone pile in, we see all six of the big 304 00:14:48,080 --> 00:14:50,560 Speaker 1: banks sell it a little bones. This time around only 305 00:14:50,600 --> 00:14:53,040 Speaker 1: two did, and it was not very much. Yeah, No, 306 00:14:53,080 --> 00:14:54,920 Speaker 1: so it's it's you know, last year I think was 307 00:14:54,960 --> 00:14:57,000 Speaker 1: a lot higher than expected. This year it seems like, 308 00:14:57,400 --> 00:15:00,200 Speaker 1: you know, it's it's trending lower. But um, you know, 309 00:15:00,240 --> 00:15:04,120 Speaker 1: we put out a note on regional banks. Actually you know, 310 00:15:04,280 --> 00:15:07,040 Speaker 1: we call them maybe maybe they're gesips, you know, they're 311 00:15:07,080 --> 00:15:09,960 Speaker 1: the wolves in sheep's clothing right where they've really picked 312 00:15:10,040 --> 00:15:13,160 Speaker 1: up the slack this year. Um, And we think that's 313 00:15:13,200 --> 00:15:16,240 Speaker 1: because the regional banks, they some of the bigger ones 314 00:15:16,280 --> 00:15:19,840 Speaker 1: like the P and C, Truest and US Bank Corps. 315 00:15:20,240 --> 00:15:23,520 Speaker 1: Those guys might be hit with additional regulation that requires 316 00:15:23,560 --> 00:15:27,240 Speaker 1: them to hold bill and eligible. That t lack, right, 317 00:15:27,280 --> 00:15:29,800 Speaker 1: which has been a big driver of the biggest banks, 318 00:15:29,880 --> 00:15:32,680 Speaker 1: is active that issuance. So you know, while while the 319 00:15:32,680 --> 00:15:35,160 Speaker 1: big big six have been very kind of subdued, only 320 00:15:35,160 --> 00:15:37,200 Speaker 1: two out of the six James as you mentioned, have 321 00:15:37,200 --> 00:15:39,640 Speaker 1: come to market. But you know, these regional banks have 322 00:15:39,720 --> 00:15:41,920 Speaker 1: really picked up the slack and so they've been more active. 323 00:15:41,960 --> 00:15:45,080 Speaker 1: So you know, I wouldn't bet against these big gesips 324 00:15:45,160 --> 00:15:47,680 Speaker 1: not issuing, right, but I think it will it will 325 00:15:47,720 --> 00:15:50,520 Speaker 1: be more subdued compared to last year. The smaller banks 326 00:15:50,520 --> 00:15:52,120 Speaker 1: are the regionals, as you say, I mean, are they 327 00:15:52,120 --> 00:15:54,720 Speaker 1: not much more exposed the consumer through through loans to 328 00:15:54,800 --> 00:15:58,600 Speaker 1: consumers through I don't also through credit cards, et cetera. Yeah, 329 00:15:58,680 --> 00:16:01,840 Speaker 1: I guess, depending on which one. Right, the biggest commercial bank, 330 00:16:02,080 --> 00:16:04,760 Speaker 1: biggest regional banks are more kind of oriented more to 331 00:16:04,800 --> 00:16:07,800 Speaker 1: the businesses and companies. But you do get into you know, 332 00:16:07,840 --> 00:16:11,280 Speaker 1: some some more kind of um regional banks, like like 333 00:16:11,320 --> 00:16:13,880 Speaker 1: the ALLY Financials or something, who are heavily exposed to 334 00:16:13,920 --> 00:16:17,080 Speaker 1: auto loans, right, and that's um, you know a segment 335 00:16:17,120 --> 00:16:20,240 Speaker 1: that I think is is coming under pressure given ALLY 336 00:16:20,480 --> 00:16:23,440 Speaker 1: is heavily exposed to use car loans, which you know 337 00:16:23,880 --> 00:16:26,520 Speaker 1: was great in the beginning of the pandemic when everybody 338 00:16:26,600 --> 00:16:29,720 Speaker 1: you know, wanting a social distance, um, and supply change 339 00:16:29,760 --> 00:16:33,080 Speaker 1: issues in the new car segment that really pushed up 340 00:16:33,200 --> 00:16:35,560 Speaker 1: use car prices a lot. But now we're seeing kind 341 00:16:35,600 --> 00:16:37,840 Speaker 1: of the unwind of that where you know, the supply 342 00:16:37,880 --> 00:16:40,440 Speaker 1: chain issues have gotten better and so um, you know, 343 00:16:40,480 --> 00:16:43,920 Speaker 1: people can get new cars and so a little bit better. 344 00:16:43,960 --> 00:16:47,080 Speaker 1: But then um, yeah, use car pricings though still elevated, right, 345 00:16:47,160 --> 00:16:49,800 Speaker 1: that's come down a lot, and so you know, I 346 00:16:49,840 --> 00:16:51,680 Speaker 1: think that is kind of pressuring some of these you 347 00:16:51,720 --> 00:16:55,960 Speaker 1: know more monoline um, you know, business oriented UM, you know, 348 00:16:56,040 --> 00:16:58,320 Speaker 1: regional banks and stuff like that. So within the banks 349 00:16:58,360 --> 00:17:00,720 Speaker 1: in the sector as a whole, what do you like 350 00:17:00,840 --> 00:17:03,600 Speaker 1: and what do you not like for twenty twenty three. Yeah, 351 00:17:03,640 --> 00:17:05,800 Speaker 1: so I think you know, the big US banks are 352 00:17:05,840 --> 00:17:08,600 Speaker 1: also exposed to the consumer, right know, they have big 353 00:17:08,640 --> 00:17:12,520 Speaker 1: credit card arms as well, but again they're more diversified, right, 354 00:17:12,520 --> 00:17:14,119 Speaker 1: And so the great thing about that is you know, 355 00:17:14,200 --> 00:17:17,640 Speaker 1: when something's not working, uh, something else might be doing better. 356 00:17:17,760 --> 00:17:19,520 Speaker 1: I e. You know, if you look at just the 357 00:17:19,560 --> 00:17:22,920 Speaker 1: investment banking and trading business, uh, investment banking was down 358 00:17:22,920 --> 00:17:25,640 Speaker 1: fifty percent last year in terms of you know, lower 359 00:17:25,720 --> 00:17:28,800 Speaker 1: M and A, the underwriting environment for IPOs, follow on 360 00:17:28,880 --> 00:17:32,320 Speaker 1: equity offerings, leverage loans, right, all that stuff was really 361 00:17:32,359 --> 00:17:36,560 Speaker 1: severely hit. But the trading business was highly active, right 362 00:17:36,560 --> 00:17:40,040 Speaker 1: and you know get you know, garnering positive revenue. So 363 00:17:40,400 --> 00:17:42,080 Speaker 1: and I think that's what you have for the big 364 00:17:42,080 --> 00:17:45,800 Speaker 1: banks is this diversity. And plus these bigger banks, where 365 00:17:45,800 --> 00:17:48,080 Speaker 1: they are exposed to the consumer, they deal with more 366 00:17:48,160 --> 00:17:51,360 Speaker 1: kind of the prime uh segment, right, So I think 367 00:17:51,359 --> 00:17:54,760 Speaker 1: that helps isolate them from from kind of the the 368 00:17:54,800 --> 00:17:57,159 Speaker 1: sector that I think is you know, most hard hit 369 00:17:57,280 --> 00:18:00,399 Speaker 1: right now is the subprime where you know, elevated food, 370 00:18:00,680 --> 00:18:03,440 Speaker 1: you know, housing and all this stuff is affecting them most. 371 00:18:04,240 --> 00:18:06,840 Speaker 1: Thank you. So um, big banks, that solid, nothing to 372 00:18:06,840 --> 00:18:09,400 Speaker 1: worry about here. What's the one thing that would change 373 00:18:09,400 --> 00:18:11,840 Speaker 1: that assessment? What really keeps you up at night worrying 374 00:18:11,840 --> 00:18:15,160 Speaker 1: about your bullish outlook? Well, I mean, I think it's 375 00:18:15,160 --> 00:18:18,680 Speaker 1: more from that relative valuation, right, I'm not not worried, 376 00:18:19,480 --> 00:18:22,920 Speaker 1: but I think it's. Um. What comforts me, I guess 377 00:18:23,040 --> 00:18:26,720 Speaker 1: is that because the banks are really underperformed last year, 378 00:18:26,920 --> 00:18:29,080 Speaker 1: so you do have some of this cushion kind of 379 00:18:29,080 --> 00:18:32,199 Speaker 1: going back you know, fifteen basis points of underperformance you know, 380 00:18:32,280 --> 00:18:36,399 Speaker 1: still right M versus early twenty twenty two. Um. And 381 00:18:36,480 --> 00:18:39,879 Speaker 1: I think from from U a spread perspective, one might 382 00:18:39,960 --> 00:18:42,560 Speaker 1: impact that is you know, I think, um, you know, 383 00:18:42,560 --> 00:18:45,280 Speaker 1: there's a great you know, Bloomberg article today in terms 384 00:18:45,320 --> 00:18:48,720 Speaker 1: of you know, investors fighting the FED and and really 385 00:18:48,720 --> 00:18:52,200 Speaker 1: that outlook of um, you know, you know, FED says 386 00:18:52,200 --> 00:18:55,280 Speaker 1: we'll keep rates elevated. Um. But then you know that's 387 00:18:55,280 --> 00:18:58,040 Speaker 1: not what the market is saying, right, So we'll see 388 00:18:58,040 --> 00:19:00,800 Speaker 1: how that dynamic plays out, you know, as these kind 389 00:19:00,840 --> 00:19:03,400 Speaker 1: of rate hikes temper um. You know, how long will 390 00:19:03,440 --> 00:19:06,520 Speaker 1: the Fed keep rates high? Right? And I think that's 391 00:19:06,560 --> 00:19:10,000 Speaker 1: really impacting sentiment. Uh So that that's one thing, And 392 00:19:10,000 --> 00:19:12,760 Speaker 1: the other thing is, um, you know, how bad will 393 00:19:12,800 --> 00:19:15,240 Speaker 1: this recession be? Right? Will it be? You know the 394 00:19:15,240 --> 00:19:17,439 Speaker 1: the the out out of the earnings call. It's you know, 395 00:19:17,560 --> 00:19:19,280 Speaker 1: all the big banks are saying, oh, it'll be a 396 00:19:19,320 --> 00:19:22,480 Speaker 1: mild recession, right, okay, so what does that mean for 397 00:19:22,560 --> 00:19:25,520 Speaker 1: how long? Um? You know? And and and in terms 398 00:19:25,560 --> 00:19:29,120 Speaker 1: of the reserve levels, um they're anticipating. They're they're saying, hey, 399 00:19:29,160 --> 00:19:31,120 Speaker 1: you know, our reserves are good enough for let's say, 400 00:19:31,200 --> 00:19:33,639 Speaker 1: unemployment to go up to five percent, which you know 401 00:19:33,720 --> 00:19:36,560 Speaker 1: from a base of three and a half percent seems reasonable, 402 00:19:36,640 --> 00:19:39,160 Speaker 1: but you know, will that be enough? Right? How much? 403 00:19:39,200 --> 00:19:42,560 Speaker 1: Will you know? Will delinquent cheese that charge duffs happen 404 00:19:42,720 --> 00:19:46,000 Speaker 1: if you know we go far above you know that level? 405 00:19:46,080 --> 00:19:48,240 Speaker 1: So it's like, you know the degree of recession, I 406 00:19:48,280 --> 00:19:50,160 Speaker 1: guess you know towards the second half of the year, 407 00:19:50,200 --> 00:19:52,280 Speaker 1: you know how bad we'll get. And then also you 408 00:19:52,320 --> 00:19:55,439 Speaker 1: know inflation expectations and you know how high will the 409 00:19:55,600 --> 00:19:57,439 Speaker 1: you know, or or how long will the Fed have 410 00:19:57,520 --> 00:19:59,720 Speaker 1: to hold rates high that that's those are my two 411 00:19:59,760 --> 00:20:01,719 Speaker 1: cun kind of big concerns. Thank you. Well, let's hope 412 00:20:01,760 --> 00:20:03,919 Speaker 1: you're right on your bullish outlook. We will read your 413 00:20:03,960 --> 00:20:06,840 Speaker 1: analysis with great interests as we go through this traveling 414 00:20:06,880 --> 00:20:09,200 Speaker 1: time of high inflation and slower growth in the US. 415 00:20:10,320 --> 00:20:13,640 Speaker 1: Thanks very much again to Arnold Kakula from Bloomberg Intelligence. 416 00:20:13,680 --> 00:20:16,000 Speaker 1: You can read all of his analysis on the Bloomberg Terminal. 417 00:20:16,320 --> 00:20:19,120 Speaker 1: And thanks also to Claire Boston from Bloomberg News. Read 418 00:20:19,160 --> 00:20:21,280 Speaker 1: all of the scoops from her team on the terminal 419 00:20:21,320 --> 00:20:24,320 Speaker 1: and at Bloomberg dot Com. I'm James Crumby. It's been 420 00:20:24,320 --> 00:20:26,199 Speaker 1: a pleasure having you. See you next week on the 421 00:20:26,200 --> 00:20:26,840 Speaker 1: Credit Edge.