1 00:00:02,440 --> 00:00:08,080 Speaker 1: Bloomberg Audio Studios, podcasts, radio news joining us now. I'm 2 00:00:08,119 --> 00:00:13,160 Speaker 1: so pleased to say, as Tamashad, CEO of a Kbwstfel company, Tom, 3 00:00:13,400 --> 00:00:15,960 Speaker 1: a lot of people have been raising this issue about 4 00:00:15,960 --> 00:00:19,000 Speaker 1: whether we're fighting the wrong war and whether maybe some 5 00:00:19,280 --> 00:00:24,000 Speaker 1: of what the regulators are targeting with banks is counterproductive 6 00:00:24,040 --> 00:00:26,360 Speaker 1: for the current cycle. Do you think that that's going 7 00:00:26,400 --> 00:00:27,880 Speaker 1: to be in focus later this week? 8 00:00:28,000 --> 00:00:29,880 Speaker 2: Well, I think first of all, with the stress test, 9 00:00:30,080 --> 00:00:31,520 Speaker 2: the first thing you're going to see is that the 10 00:00:31,600 --> 00:00:34,680 Speaker 2: banks are in very, very good shape. Remember, the stress 11 00:00:34,720 --> 00:00:37,760 Speaker 2: tests were set up to look at an adverse scenario 12 00:00:38,240 --> 00:00:41,120 Speaker 2: to show the marketplace that they have plenty of capital 13 00:00:41,159 --> 00:00:44,560 Speaker 2: to withstand that. And we think that the conversation is 14 00:00:44,600 --> 00:00:48,479 Speaker 2: going to move away from that to individual company analysis quickly, 15 00:00:48,800 --> 00:00:52,080 Speaker 2: which is actually a really positive statement about how the 16 00:00:52,080 --> 00:00:55,680 Speaker 2: industry has been continuing to build capital. The other thing 17 00:00:55,800 --> 00:00:58,000 Speaker 2: is the industry has not only been building capital for 18 00:00:58,040 --> 00:01:00,800 Speaker 2: the stress test, but the industry's been building capital get 19 00:01:00,800 --> 00:01:02,400 Speaker 2: ready for Basel three endgame. 20 00:01:02,920 --> 00:01:04,600 Speaker 3: So that's been the big story. 21 00:01:04,680 --> 00:01:07,080 Speaker 2: So I think the first box to check is that 22 00:01:07,160 --> 00:01:09,280 Speaker 2: the industry is going to come out it's being very 23 00:01:09,280 --> 00:01:12,479 Speaker 2: well capitalized. And then they're going to be individual companies 24 00:01:12,480 --> 00:01:14,759 Speaker 2: that are pivoting in one direction or another. 25 00:01:14,880 --> 00:01:16,039 Speaker 3: So there's a lot to unpack. 26 00:01:16,280 --> 00:01:19,720 Speaker 1: There's a question about which banks, let's start here, are 27 00:01:19,720 --> 00:01:22,160 Speaker 1: really strong and resilient, right. I mean, it's one thing 28 00:01:22,160 --> 00:01:24,080 Speaker 1: to say JP Morgan and Bank of American and City 29 00:01:24,080 --> 00:01:25,920 Speaker 1: Group pre are going to fail. I don't think anyone 30 00:01:25,959 --> 00:01:28,080 Speaker 1: is saying that they're at risk of any kind of 31 00:01:28,600 --> 00:01:31,880 Speaker 1: real potential turmoil. It's really the regionals. At what point 32 00:01:31,880 --> 00:01:33,120 Speaker 1: do we get to the confidence there? 33 00:01:33,280 --> 00:01:36,080 Speaker 2: So there are twenty three banks in this test that's 34 00:01:36,120 --> 00:01:38,559 Speaker 2: coming on Wednesday, so they start to go down into 35 00:01:38,560 --> 00:01:42,800 Speaker 2: the super regional category. I think for all twenty three banks, 36 00:01:43,000 --> 00:01:45,000 Speaker 2: the market's going to say they have plenty of capital. 37 00:01:45,800 --> 00:01:48,560 Speaker 2: I think for the regional banks, the regional banks are 38 00:01:48,600 --> 00:01:51,120 Speaker 2: still in pretty good shape, except for the ones where 39 00:01:51,160 --> 00:01:53,920 Speaker 2: there might be more concern around real. 40 00:01:53,760 --> 00:01:55,920 Speaker 3: Estate exposure for example. 41 00:01:55,640 --> 00:01:59,920 Speaker 2: And you're seeing a downturn in some of their results, 42 00:02:00,280 --> 00:02:03,279 Speaker 2: but by and large, and again I think it's. 43 00:02:03,240 --> 00:02:05,040 Speaker 3: Very narrow as to where the concern is. 44 00:02:06,160 --> 00:02:09,360 Speaker 2: Just in preparation for coming today, I was interested about dividends. 45 00:02:09,560 --> 00:02:11,600 Speaker 2: I went back and looked at that there are seventy 46 00:02:11,639 --> 00:02:14,280 Speaker 2: four banks that are in the KEEF Bank Index or 47 00:02:14,320 --> 00:02:15,560 Speaker 2: regional bank Index. 48 00:02:15,880 --> 00:02:17,760 Speaker 3: If you look at since the beginning. 49 00:02:17,360 --> 00:02:22,280 Speaker 2: Of last year, five of them cut or eliminated their dividend. Meanwhile, 50 00:02:22,680 --> 00:02:26,040 Speaker 2: fifty four of them raised their dividends over that period. 51 00:02:26,600 --> 00:02:30,200 Speaker 2: The industry is actually in really, I think, pretty good 52 00:02:30,240 --> 00:02:32,839 Speaker 2: shape for the challenges that we've had, and I think 53 00:02:32,880 --> 00:02:36,240 Speaker 2: that the areas of concern are generally more narrow than 54 00:02:36,280 --> 00:02:39,600 Speaker 2: you would think. And then remember last year's bank failure 55 00:02:39,639 --> 00:02:43,760 Speaker 2: moment was really around a liquidity crisis, and what we 56 00:02:43,840 --> 00:02:46,800 Speaker 2: realized is that some banks had gotten off sides in 57 00:02:46,880 --> 00:02:49,880 Speaker 2: terms of their concentrations and their deposits. I don't think 58 00:02:49,960 --> 00:02:52,200 Speaker 2: that that was a broad based trend even so. 59 00:02:52,360 --> 00:02:53,960 Speaker 4: I mean, every now and again you hear of another 60 00:02:54,000 --> 00:02:56,560 Speaker 4: bank that maybe isn't hedged to interest rates. The latest 61 00:02:56,560 --> 00:02:58,160 Speaker 4: one was a large bank out of Japan, I think 62 00:02:58,160 --> 00:03:01,960 Speaker 4: their largest agricultural bank, who was basically positioned for rates 63 00:03:02,000 --> 00:03:04,840 Speaker 4: coming lower. Obviously that hasn't happened yet. When you hear 64 00:03:04,880 --> 00:03:07,640 Speaker 4: these incidents of pockets of stress, do you think that 65 00:03:07,680 --> 00:03:09,880 Speaker 4: these are still the rare bank that have been hedged 66 00:03:09,960 --> 00:03:12,720 Speaker 4: against the current rate environment, or if it's higher for longer, 67 00:03:12,960 --> 00:03:13,919 Speaker 4: do we hear more of this. 68 00:03:14,120 --> 00:03:16,600 Speaker 2: So I think with the focus for this conversation right 69 00:03:16,639 --> 00:03:19,200 Speaker 2: now being in the US, I'll go to our Bank 70 00:03:19,240 --> 00:03:23,560 Speaker 2: America upgrade, which we did recently. We have earnings models 71 00:03:23,600 --> 00:03:27,119 Speaker 2: by quarter for net interest income. I think just about 72 00:03:27,160 --> 00:03:29,640 Speaker 2: all of the two hundred and twenty banks we follow, 73 00:03:29,720 --> 00:03:32,160 Speaker 2: nearly all are going to hit a bottom on a 74 00:03:32,240 --> 00:03:35,760 Speaker 2: quarterly basis, either last quarter or this quarter. That's the 75 00:03:35,800 --> 00:03:39,240 Speaker 2: reason why we upgraded Bank America is the second quarter 76 00:03:39,360 --> 00:03:42,000 Speaker 2: is the inflection point, and it gets better from here. 77 00:03:42,240 --> 00:03:44,200 Speaker 2: So it's all a question of timing. Let me there's 78 00:03:44,200 --> 00:03:48,560 Speaker 2: another point. The five month, five year, three month, five year, 79 00:03:48,920 --> 00:03:51,640 Speaker 2: you'll curve spread is the most important for banks. I 80 00:03:51,720 --> 00:03:54,880 Speaker 2: know that that plenty tentions on two tens. That's not 81 00:03:55,080 --> 00:03:58,560 Speaker 2: the key for the banks. It's been sixty two years 82 00:03:58,960 --> 00:04:02,080 Speaker 2: since we've seen the length of time for the inversion 83 00:04:02,120 --> 00:04:05,200 Speaker 2: that we've had. So all things really kind of need 84 00:04:05,240 --> 00:04:07,520 Speaker 2: to do is get a little bit less bad for 85 00:04:07,600 --> 00:04:08,600 Speaker 2: these banks to do a. 86 00:04:08,520 --> 00:04:09,280 Speaker 3: Little bit better. 87 00:04:09,720 --> 00:04:12,240 Speaker 2: And I think that pivot is right here right now, 88 00:04:12,560 --> 00:04:16,039 Speaker 2: and these banks have a lot of bad news in them. 89 00:04:16,320 --> 00:04:18,880 Speaker 2: As long as we don't get a hard landing, I 90 00:04:18,880 --> 00:04:22,520 Speaker 2: think you're going to see a continuing quarterly improvement. 91 00:04:21,960 --> 00:04:23,560 Speaker 3: Over the next four or five quarters. 92 00:04:24,240 --> 00:04:27,479 Speaker 2: And also too, there are specific types of banks like 93 00:04:27,520 --> 00:04:30,080 Speaker 2: more than others. But this is a great opportunity if 94 00:04:30,080 --> 00:04:31,159 Speaker 2: you can look longer term. 95 00:04:31,360 --> 00:04:33,040 Speaker 4: We think, I know you want to stay in the US, 96 00:04:33,160 --> 00:04:34,960 Speaker 4: but I have to take you to Europe, especially given 97 00:04:35,000 --> 00:04:36,240 Speaker 4: we're going to get one of the first rounds of 98 00:04:36,279 --> 00:04:39,080 Speaker 4: French voting on the thirtieth. You've had the likes of 99 00:04:39,160 --> 00:04:42,000 Speaker 4: JP Morgan really be courted by mccraul and saying come 100 00:04:42,080 --> 00:04:44,240 Speaker 4: move to Paris in a post Brexit world, and you've 101 00:04:44,240 --> 00:04:46,840 Speaker 4: seen other US banks do something similar, really building up 102 00:04:47,040 --> 00:04:51,159 Speaker 4: operations and talent bases in Paris. If there is political volatility, 103 00:04:51,600 --> 00:04:52,320 Speaker 4: what happens. 104 00:04:52,920 --> 00:04:55,600 Speaker 2: So I think it's really the big picture of what's 105 00:04:55,600 --> 00:04:57,680 Speaker 2: happening with the economy. One thing I would note is 106 00:04:57,720 --> 00:04:59,919 Speaker 2: over the last twelve months banks have been the. 107 00:05:00,120 --> 00:05:01,400 Speaker 3: Leading group in Europe. 108 00:05:02,040 --> 00:05:04,279 Speaker 2: Again, there was so much bad news in these stocks, 109 00:05:04,400 --> 00:05:07,080 Speaker 2: and really what you need in Europe is you needed 110 00:05:07,120 --> 00:05:10,960 Speaker 2: some improvement in the rates. Negative interest rates were certainly 111 00:05:11,279 --> 00:05:15,560 Speaker 2: adversely affecting the banks. Our sense, as it all comes 112 00:05:15,600 --> 00:05:17,720 Speaker 2: down to what the economy is doing, we still think 113 00:05:17,760 --> 00:05:20,560 Speaker 2: there's upside for the banks, because the banks have done 114 00:05:20,560 --> 00:05:24,000 Speaker 2: a lot to stabilize themselves over the last several years, 115 00:05:24,000 --> 00:05:26,200 Speaker 2: and many of those stocks still trade at sixty percent 116 00:05:26,200 --> 00:05:28,840 Speaker 2: of book value. So we think that the bigger banks 117 00:05:28,880 --> 00:05:32,000 Speaker 2: are stable in Europe, and it's a question now of 118 00:05:32,040 --> 00:05:33,480 Speaker 2: what's happening in the economy. 119 00:05:34,360 --> 00:05:36,400 Speaker 4: Does it consider we've heard last week from the FED 120 00:05:36,480 --> 00:05:38,200 Speaker 4: in terms of living wills and some of the US 121 00:05:38,279 --> 00:05:41,039 Speaker 4: biggest banks finding some shortcomings when it comes to likes 122 00:05:41,040 --> 00:05:42,599 Speaker 4: of Bank of America City. 123 00:05:43,160 --> 00:05:45,400 Speaker 2: You know, you remember that teacher in college who was 124 00:05:45,400 --> 00:05:48,280 Speaker 2: always a hard greater, who never really gave out the oh, 125 00:05:48,320 --> 00:05:50,279 Speaker 2: this is perfect, You're all done, you don't have to 126 00:05:50,279 --> 00:05:53,560 Speaker 2: do anymore. I will imagine for the rest of my career, 127 00:05:54,040 --> 00:05:56,039 Speaker 2: every year there will be more work to do on 128 00:05:56,080 --> 00:05:59,479 Speaker 2: a living will. Okay, And if you look at the 129 00:05:59,520 --> 00:06:03,320 Speaker 2: living will, JP Morgan had work to do, City Group 130 00:06:03,360 --> 00:06:06,760 Speaker 2: had work to do. Really, these living wills were evolving 131 00:06:06,760 --> 00:06:09,440 Speaker 2: with the risks of the moment. And also, I would say, 132 00:06:09,480 --> 00:06:13,479 Speaker 2: given last year's bank failures, the FDIC has probably sharpened 133 00:06:13,480 --> 00:06:16,479 Speaker 2: their pencil on these living wills. But so I would 134 00:06:16,560 --> 00:06:19,360 Speaker 2: view it as as a living, breathing thing. I didn't 135 00:06:19,400 --> 00:06:22,120 Speaker 2: see our view on it is the banks are going 136 00:06:22,160 --> 00:06:24,480 Speaker 2: to spend more money at preparing for them, but that 137 00:06:24,560 --> 00:06:28,640 Speaker 2: there was nothing devastating or really significant in what we 138 00:06:28,720 --> 00:06:29,720 Speaker 2: read in the results. 139 00:06:30,200 --> 00:06:32,520 Speaker 1: To say, the reason why I started by asking you, 140 00:06:32,600 --> 00:06:35,400 Speaker 1: are we looking at the wrong risks is because in 141 00:06:35,440 --> 00:06:38,360 Speaker 1: the past couple of years, first of all the risks 142 00:06:38,360 --> 00:06:41,719 Speaker 1: that I hear about what profitability opportunities do some of 143 00:06:41,720 --> 00:06:44,400 Speaker 1: these smaller banks have when they're facing off with the 144 00:06:44,520 --> 00:06:47,679 Speaker 1: rush of money into private capital. That's a big question 145 00:06:47,720 --> 00:06:48,200 Speaker 1: at this point. 146 00:06:48,279 --> 00:06:51,320 Speaker 2: Oh, there are some tectonic plates that are moving that 147 00:06:51,640 --> 00:06:53,160 Speaker 2: if you want, you got to, if you want, take 148 00:06:53,160 --> 00:06:55,159 Speaker 2: a step back and not look at the snapshot and 149 00:06:55,200 --> 00:06:58,160 Speaker 2: look at the movie. Yes, and really what it comes 150 00:06:58,240 --> 00:07:02,039 Speaker 2: down to was funding and liquidity and deposits. Banks don't 151 00:07:02,080 --> 00:07:06,200 Speaker 2: fail because of capital. Banks fail because there's a bank run, 152 00:07:06,680 --> 00:07:08,440 Speaker 2: and there have been very few of them in the 153 00:07:08,520 --> 00:07:11,880 Speaker 2: United States. So the capital's fine, but really, what's happening 154 00:07:11,880 --> 00:07:16,080 Speaker 2: in the deposit base. I think the greatest missed opportunity 155 00:07:16,160 --> 00:07:20,000 Speaker 2: from last year is there's not been FDIC deposit insurance 156 00:07:20,000 --> 00:07:23,000 Speaker 2: reform because it puts too much pressure on the small 157 00:07:23,040 --> 00:07:26,119 Speaker 2: banks and it's encouraging market share to move up gap 158 00:07:26,360 --> 00:07:26,680 Speaker 2: to the. 159 00:07:26,600 --> 00:07:28,320 Speaker 3: Banks that have proven that they're too. 160 00:07:28,280 --> 00:07:30,560 Speaker 2: Big to fail, and it also yeah, so that's the 161 00:07:30,560 --> 00:07:33,080 Speaker 2: biggest And then number two is when it comes to 162 00:07:33,160 --> 00:07:37,560 Speaker 2: stock selection. The way that regional banks, smaller community banks 163 00:07:37,600 --> 00:07:40,520 Speaker 2: earn money in the biggest banks is very different. The 164 00:07:40,600 --> 00:07:43,720 Speaker 2: smaller banks have more real estate and more spread income. 165 00:07:44,000 --> 00:07:46,880 Speaker 2: They are going to be slower to rebound the bigger 166 00:07:46,920 --> 00:07:51,080 Speaker 2: banks have. Bank America, amongst the biggest banks, has some 167 00:07:51,120 --> 00:07:54,120 Speaker 2: of the least amount of commercial real estate exposure. These 168 00:07:54,120 --> 00:07:57,320 Speaker 2: bigger banks have already made the shift away from that, 169 00:07:57,640 --> 00:08:00,480 Speaker 2: and that's why we are leaning in heavier on these 170 00:08:00,480 --> 00:08:03,160 Speaker 2: bigger banks for the stock ideas. We think it's going 171 00:08:03,240 --> 00:08:05,720 Speaker 2: to take a little bit more time for the regional 172 00:08:05,760 --> 00:08:06,480 Speaker 2: banks to turn. 173 00:08:06,680 --> 00:08:09,520 Speaker 1: There might be safety and even profitability in some of 174 00:08:09,560 --> 00:08:12,920 Speaker 1: the bigger banks. There isn't so much of the classic 175 00:08:13,000 --> 00:08:15,080 Speaker 1: market making. And this is the other risk that people 176 00:08:15,120 --> 00:08:18,160 Speaker 1: talk about liquidity risk on another level, that they're not 177 00:08:18,240 --> 00:08:22,280 Speaker 1: going to be able to shepherd this amount of bond 178 00:08:22,280 --> 00:08:26,400 Speaker 1: auctions into the market and allow the trading to commence 179 00:08:26,600 --> 00:08:30,440 Speaker 1: with the same kind of stability that has in the past. 180 00:08:30,880 --> 00:08:31,640 Speaker 3: Does that keep you. 181 00:08:31,640 --> 00:08:32,120 Speaker 4: Up at night? 182 00:08:32,440 --> 00:08:34,280 Speaker 3: No, you're talking about the treasury market. 183 00:08:34,040 --> 00:08:35,640 Speaker 1: And the treasury of particular, given the fact that the 184 00:08:35,679 --> 00:08:37,480 Speaker 1: market has swollen to such a huge part. 185 00:08:37,520 --> 00:08:38,800 Speaker 3: But it's also the credit market. 186 00:08:38,920 --> 00:08:41,280 Speaker 1: I hear about this with public credit as well well. 187 00:08:41,520 --> 00:08:45,480 Speaker 2: What I take out of that is passive investing is 188 00:08:45,480 --> 00:08:48,480 Speaker 2: at the highest degree of our lifetime and growing more 189 00:08:48,559 --> 00:08:51,920 Speaker 2: and in many ways, it's changing the investment business. So 190 00:08:51,960 --> 00:08:54,480 Speaker 2: there are so many of these indices and index driven 191 00:08:54,559 --> 00:08:58,200 Speaker 2: funds that so much of that, and it's impacted the 192 00:08:58,240 --> 00:09:02,600 Speaker 2: liquidity of a lot of the smaller companies. So if 193 00:09:02,640 --> 00:09:05,439 Speaker 2: you look at a typical mid cap stock, it may 194 00:09:05,480 --> 00:09:08,679 Speaker 2: have thirty five forty percent of their shares owned by 195 00:09:08,760 --> 00:09:12,439 Speaker 2: passive investors. And it's happening in the credit markets as well, 196 00:09:12,800 --> 00:09:15,959 Speaker 2: so when you get to individual credits. So that's pushing 197 00:09:16,080 --> 00:09:19,080 Speaker 2: more of the trading into private markets away from some 198 00:09:19,200 --> 00:09:22,000 Speaker 2: of the public markets, and so I think that is 199 00:09:22,080 --> 00:09:23,200 Speaker 2: going to have an impact. 200 00:09:23,440 --> 00:09:26,199 Speaker 3: So the way in which companies raise capital is all 201 00:09:26,559 --> 00:09:28,240 Speaker 3: still evolving. 202 00:09:27,920 --> 00:09:31,520 Speaker 2: Because there's this big private market that's grown a lot 203 00:09:31,520 --> 00:09:33,000 Speaker 2: in the last four or five years. 204 00:09:33,520 --> 00:09:35,760 Speaker 1: Tamashad, awesome to hear from you. Thank you so much 205 00:09:35,760 --> 00:09:39,240 Speaker 1: for being with us. Yes, thank Tavi Shouda of KBW