Speaker 1: Bloomberg Audio Studios, podcasts, radio news joining us now. I'm
Speaker 1: so pleased to say, as Tamashad, CEO of a Kbwstfel company, Tom,
Speaker 1: a lot of people have been raising this issue about
Speaker 1: whether we're fighting the wrong war and whether maybe some
Speaker 1: of what the regulators are targeting with banks is counterproductive
Speaker 1: for the current cycle. Do you think that that's going
Speaker 1: to be in focus later this week?
Speaker 2: Well, I think first of all, with the stress test,
Speaker 2: the first thing you're going to see is that the
Speaker 2: banks are in very, very good shape. Remember, the stress
Speaker 2: tests were set up to look at an adverse scenario
Speaker 2: to show the marketplace that they have plenty of capital
Speaker 2: to withstand that. And we think that the conversation is
Speaker 2: going to move away from that to individual company analysis quickly,
Speaker 2: which is actually a really positive statement about how the
Speaker 2: industry has been continuing to build capital. The other thing
Speaker 2: is the industry has not only been building capital for
Speaker 2: the stress test, but the industry's been building capital get
Speaker 2: ready for Basel three endgame.
Speaker 3: So that's been the big story.
Speaker 2: So I think the first box to check is that
Speaker 2: the industry is going to come out it's being very
Speaker 2: well capitalized. And then they're going to be individual companies
Speaker 2: that are pivoting in one direction or another.
Speaker 3: So there's a lot to unpack.
Speaker 1: There's a question about which banks, let's start here, are
Speaker 1: really strong and resilient, right. I mean, it's one thing
Speaker 1: to say JP Morgan and Bank of American and City
Speaker 1: Group pre are going to fail. I don't think anyone
Speaker 1: is saying that they're at risk of any kind of
Speaker 1: real potential turmoil. It's really the regionals. At what point
Speaker 1: do we get to the confidence there?
Speaker 2: So there are twenty three banks in this test that's
Speaker 2: coming on Wednesday, so they start to go down into
Speaker 2: the super regional category. I think for all twenty three banks,
Speaker 2: the market's going to say they have plenty of capital.
Speaker 2: I think for the regional banks, the regional banks are
Speaker 2: still in pretty good shape, except for the ones where
Speaker 2: there might be more concern around real.
Speaker 3: Estate exposure for example.
Speaker 2: And you're seeing a downturn in some of their results,
Speaker 2: but by and large, and again I think it's.
Speaker 3: Very narrow as to where the concern is.
Speaker 2: Just in preparation for coming today, I was interested about dividends.
Speaker 2: I went back and looked at that there are seventy
Speaker 2: four banks that are in the KEEF Bank Index or
Speaker 2: regional bank Index.
Speaker 3: If you look at since the beginning.
Speaker 2: Of last year, five of them cut or eliminated their dividend. Meanwhile,
Speaker 2: fifty four of them raised their dividends over that period.
Speaker 2: The industry is actually in really, I think, pretty good
Speaker 2: shape for the challenges that we've had, and I think
Speaker 2: that the areas of concern are generally more narrow than
Speaker 2: you would think. And then remember last year's bank failure
Speaker 2: moment was really around a liquidity crisis, and what we
Speaker 2: realized is that some banks had gotten off sides in
Speaker 2: terms of their concentrations and their deposits. I don't think
Speaker 2: that that was a broad based trend even so.
Speaker 4: I mean, every now and again you hear of another
Speaker 4: bank that maybe isn't hedged to interest rates. The latest
Speaker 4: one was a large bank out of Japan, I think
Speaker 4: their largest agricultural bank, who was basically positioned for rates
Speaker 4: coming lower. Obviously that hasn't happened yet. When you hear
Speaker 4: these incidents of pockets of stress, do you think that
Speaker 4: these are still the rare bank that have been hedged
Speaker 4: against the current rate environment, or if it's higher for longer,
Speaker 4: do we hear more of this.
Speaker 2: So I think with the focus for this conversation right
Speaker 2: now being in the US, I'll go to our Bank
Speaker 2: America upgrade, which we did recently. We have earnings models
Speaker 2: by quarter for net interest income. I think just about
Speaker 2: all of the two hundred and twenty banks we follow,
Speaker 2: nearly all are going to hit a bottom on a
Speaker 2: quarterly basis, either last quarter or this quarter. That's the
Speaker 2: reason why we upgraded Bank America is the second quarter
Speaker 2: is the inflection point, and it gets better from here.
Speaker 2: So it's all a question of timing. Let me there's
Speaker 2: another point. The five month, five year, three month, five year,
Speaker 2: you'll curve spread is the most important for banks. I
Speaker 2: know that that plenty tentions on two tens. That's not
Speaker 2: the key for the banks. It's been sixty two years
Speaker 2: since we've seen the length of time for the inversion
Speaker 2: that we've had. So all things really kind of need
Speaker 2: to do is get a little bit less bad for
Speaker 2: these banks to do a.
Speaker 3: Little bit better.
Speaker 2: And I think that pivot is right here right now,
Speaker 2: and these banks have a lot of bad news in them.
Speaker 2: As long as we don't get a hard landing, I
Speaker 2: think you're going to see a continuing quarterly improvement.
Speaker 3: Over the next four or five quarters.
Speaker 2: And also too, there are specific types of banks like
Speaker 2: more than others. But this is a great opportunity if
Speaker 2: you can look longer term.
Speaker 4: We think, I know you want to stay in the US,
Speaker 4: but I have to take you to Europe, especially given
Speaker 4: we're going to get one of the first rounds of
Speaker 4: French voting on the thirtieth. You've had the likes of
Speaker 4: JP Morgan really be courted by mccraul and saying come
Speaker 4: move to Paris in a post Brexit world, and you've
Speaker 4: seen other US banks do something similar, really building up
Speaker 4: operations and talent bases in Paris. If there is political volatility,
Speaker 4: what happens.
Speaker 2: So I think it's really the big picture of what's
Speaker 2: happening with the economy. One thing I would note is
Speaker 2: over the last twelve months banks have been the.
Speaker 3: Leading group in Europe.
Speaker 2: Again, there was so much bad news in these stocks,
Speaker 2: and really what you need in Europe is you needed
Speaker 2: some improvement in the rates. Negative interest rates were certainly
Speaker 2: adversely affecting the banks. Our sense, as it all comes
Speaker 2: down to what the economy is doing, we still think
Speaker 2: there's upside for the banks, because the banks have done
Speaker 2: a lot to stabilize themselves over the last several years,
Speaker 2: and many of those stocks still trade at sixty percent
Speaker 2: of book value. So we think that the bigger banks
Speaker 2: are stable in Europe, and it's a question now of
Speaker 2: what's happening in the economy.
Speaker 4: Does it consider we've heard last week from the FED
Speaker 4: in terms of living wills and some of the US
Speaker 4: biggest banks finding some shortcomings when it comes to likes
Speaker 4: of Bank of America City.
Speaker 2: You know, you remember that teacher in college who was
Speaker 2: always a hard greater, who never really gave out the oh,
Speaker 2: this is perfect, You're all done, you don't have to
Speaker 2: do anymore. I will imagine for the rest of my career,
Speaker 2: every year there will be more work to do on
Speaker 2: a living will. Okay, And if you look at the
Speaker 2: living will, JP Morgan had work to do, City Group
Speaker 2: had work to do. Really, these living wills were evolving
Speaker 2: with the risks of the moment. And also, I would say,
Speaker 2: given last year's bank failures, the FDIC has probably sharpened
Speaker 2: their pencil on these living wills. But so I would
Speaker 2: view it as as a living, breathing thing. I didn't
Speaker 2: see our view on it is the banks are going
Speaker 2: to spend more money at preparing for them, but that
Speaker 2: there was nothing devastating or really significant in what we
Speaker 2: read in the results.
Speaker 1: To say, the reason why I started by asking you,
Speaker 1: are we looking at the wrong risks is because in
Speaker 1: the past couple of years, first of all the risks
Speaker 1: that I hear about what profitability opportunities do some of
Speaker 1: these smaller banks have when they're facing off with the
Speaker 1: rush of money into private capital. That's a big question
Speaker 1: at this point.
Speaker 2: Oh, there are some tectonic plates that are moving that
Speaker 2: if you want, you got to, if you want, take
Speaker 2: a step back and not look at the snapshot and
Speaker 2: look at the movie. Yes, and really what it comes
Speaker 2: down to was funding and liquidity and deposits. Banks don't
Speaker 2: fail because of capital. Banks fail because there's a bank run,
Speaker 2: and there have been very few of them in the
Speaker 2: United States. So the capital's fine, but really, what's happening
Speaker 2: in the deposit base. I think the greatest missed opportunity
Speaker 2: from last year is there's not been FDIC deposit insurance
Speaker 2: reform because it puts too much pressure on the small
Speaker 2: banks and it's encouraging market share to move up gap
Speaker 2: to the.
Speaker 3: Banks that have proven that they're too.
Speaker 2: Big to fail, and it also yeah, so that's the
Speaker 2: biggest And then number two is when it comes to
Speaker 2: stock selection. The way that regional banks, smaller community banks
Speaker 2: earn money in the biggest banks is very different. The
Speaker 2: smaller banks have more real estate and more spread income.
Speaker 2: They are going to be slower to rebound the bigger
Speaker 2: banks have. Bank America, amongst the biggest banks, has some
Speaker 2: of the least amount of commercial real estate exposure. These
Speaker 2: bigger banks have already made the shift away from that,
Speaker 2: and that's why we are leaning in heavier on these
Speaker 2: bigger banks for the stock ideas. We think it's going
Speaker 2: to take a little bit more time for the regional
Speaker 2: banks to turn.
Speaker 1: There might be safety and even profitability in some of
Speaker 1: the bigger banks. There isn't so much of the classic
Speaker 1: market making. And this is the other risk that people
Speaker 1: talk about liquidity risk on another level, that they're not
Speaker 1: going to be able to shepherd this amount of bond
Speaker 1: auctions into the market and allow the trading to commence
Speaker 1: with the same kind of stability that has in the past.
Speaker 3: Does that keep you.
Speaker 4: Up at night?
Speaker 3: No, you're talking about the treasury market.
Speaker 1: And the treasury of particular, given the fact that the
Speaker 1: market has swollen to such a huge part.
Speaker 3: But it's also the credit market.
Speaker 1: I hear about this with public credit as well well.
Speaker 2: What I take out of that is passive investing is
Speaker 2: at the highest degree of our lifetime and growing more
Speaker 2: and in many ways, it's changing the investment business. So
Speaker 2: there are so many of these indices and index driven
Speaker 2: funds that so much of that, and it's impacted the
Speaker 2: liquidity of a lot of the smaller companies. So if
Speaker 2: you look at a typical mid cap stock, it may
Speaker 2: have thirty five forty percent of their shares owned by
Speaker 2: passive investors. And it's happening in the credit markets as well,
Speaker 2: so when you get to individual credits. So that's pushing
Speaker 2: more of the trading into private markets away from some
Speaker 2: of the public markets, and so I think that is
Speaker 2: going to have an impact.
Speaker 3: So the way in which companies raise capital is all
Speaker 3: still evolving.
Speaker 2: Because there's this big private market that's grown a lot
Speaker 2: in the last four or five years.
Speaker 1: Tamashad, awesome to hear from you. Thank you so much
Speaker 1: for being with us. Yes, thank Tavi Shouda of KBW