1
00:00:00,040 --> 00:00:02,040
Speaker 1: Well joining US now Mike Mayo well as far Ago

2
00:00:02,160 --> 00:00:05,120
Speaker 1: managing director and head of US large cap bank Research. Mike,

3
00:00:05,160 --> 00:00:07,360
Speaker 1: it's great to see you now. We know you're the

4
00:00:07,480 --> 00:00:10,119
Speaker 1: large cat, you're large bank guy. We get that. But

5
00:00:10,200 --> 00:00:12,039
Speaker 1: do you think that all the issues with the regional

6
00:00:12,039 --> 00:00:15,000
Speaker 1: banks are over? Are they solved? Or is it going

7
00:00:15,040 --> 00:00:17,720
Speaker 1: to be this like cherry picking one by one one

8
00:00:17,760 --> 00:00:19,240
Speaker 1: will fall?

9
00:00:19,360 --> 00:00:25,119
Speaker 2: Well banks, the biggest banks have benefited really a victory

10
00:00:25,120 --> 00:00:28,560
Speaker 2: from defeat after the global financial crisis two thousand and

11
00:00:28,560 --> 00:00:31,480
Speaker 2: seven to two thousand and nine. The regulation that was

12
00:00:31,640 --> 00:00:34,960
Speaker 2: forced upon them, imposed upon them, I mean, big banks

13
00:00:34,960 --> 00:00:37,040
Speaker 2: were going kicking and screaming, don't do this to us.

14
00:00:37,479 --> 00:00:41,159
Speaker 2: That's helped the big banks become much more resilient. So

15
00:00:41,200 --> 00:00:44,280
Speaker 2: the biggest banks have that resiliency that a lot of

16
00:00:44,280 --> 00:00:48,400
Speaker 2: those MidCap banks didn't have one year ago. So the

17
00:00:48,440 --> 00:00:53,199
Speaker 2: issue with the smaller regional banks isn't that they're an

18
00:00:53,240 --> 00:00:56,920
Speaker 2: imminent thread of some sort of contagion. It's that as

19
00:00:56,960 --> 00:01:00,400
Speaker 2: you pass a certain threshold one hundred billion dollars, you

20
00:01:00,480 --> 00:01:05,039
Speaker 2: have the extra regulation without the benefits of scale.

21
00:01:05,319 --> 00:01:06,840
Speaker 1: Right, But is there going to be like a sweet

22
00:01:06,840 --> 00:01:09,120
Speaker 1: spot between like one hundred billion and two fifty or three,

23
00:01:09,120 --> 00:01:11,200
Speaker 1: where like you're not megacat bank, but like you're a

24
00:01:11,240 --> 00:01:13,319
Speaker 1: little bit bigger and you can have regional scale, Like

25
00:01:13,400 --> 00:01:15,160
Speaker 1: is that going to be the next tier of the year,

26
00:01:15,200 --> 00:01:17,000
Speaker 1: And I start to cover something at one point.

27
00:01:16,920 --> 00:01:19,759
Speaker 2: Well, the sweet spot is four trillion dollars because those

28
00:01:19,760 --> 00:01:22,920
Speaker 2: are the ad of JP Morgan. One day after Silicon

29
00:01:23,000 --> 00:01:25,960
Speaker 2: Valley failed, I upgraded JP Morgan, made it my number

30
00:01:25,959 --> 00:01:29,120
Speaker 2: one pick last year, and they've just been gaining market

31
00:01:29,120 --> 00:01:32,240
Speaker 2: share in each one of their businesses, being very consistent,

32
00:01:32,600 --> 00:01:36,080
Speaker 2: having the resiliency of both their loans and their deposits.

33
00:01:36,080 --> 00:01:40,360
Speaker 2: Three decades ago is when our country first passed interstate banking,

34
00:01:40,360 --> 00:01:43,800
Speaker 2: when you could expand throughout the country. One reason was

35
00:01:43,840 --> 00:01:47,960
Speaker 2: to create that sort of diversification that prevent situations like

36
00:01:47,960 --> 00:01:50,720
Speaker 2: what happened to Silicon Valley a year ago. So when

37
00:01:50,720 --> 00:01:53,640
Speaker 2: it comes to the regional banks, it's not one size

38
00:01:53,680 --> 00:01:56,640
Speaker 2: fits all, but to some degree, you know they've they've

39
00:01:56,680 --> 00:01:59,120
Speaker 2: won the battle, but the war is still going to

40
00:01:59,160 --> 00:02:03,960
Speaker 2: be tough because they don't have the same scale of technology, marketing,

41
00:02:04,200 --> 00:02:08,200
Speaker 2: and regulatory ability to spread across a larger client base.

42
00:02:08,280 --> 00:02:10,840
Speaker 2: So I do expect a lot more banking mergers over

43
00:02:10,840 --> 00:02:12,760
Speaker 2: the next one to three five years.

44
00:02:12,880 --> 00:02:15,520
Speaker 3: Okay, even if there are banking mergers, which there haven't

45
00:02:15,560 --> 00:02:18,840
Speaker 3: been that many. Of what I'm hearing from you is

46
00:02:18,880 --> 00:02:20,560
Speaker 3: that it doesn't matter if they have let's say two

47
00:02:20,680 --> 00:02:22,920
Speaker 3: hundred billion dollars in assets or even four hundred billion

48
00:02:22,919 --> 00:02:25,560
Speaker 3: dollars in assets, because it's nowhere near what JP Morgan

49
00:02:25,600 --> 00:02:28,760
Speaker 3: has and so as a result, they will just in comparison,

50
00:02:28,880 --> 00:02:29,919
Speaker 3: look less safe.

51
00:02:30,200 --> 00:02:32,320
Speaker 2: Now, look, there are some banks that can do it

52
00:02:32,360 --> 00:02:35,120
Speaker 2: through skill. I mean, Fifth Third's been very targeted with

53
00:02:35,120 --> 00:02:38,200
Speaker 2: their approach. But just listen to the CEO of P

54
00:02:38,280 --> 00:02:40,920
Speaker 2: and C. They have half a trillion of assets, and

55
00:02:40,960 --> 00:02:44,120
Speaker 2: the CEO just in January and I went to visit

56
00:02:44,200 --> 00:02:47,080
Speaker 2: him at the headquarters in Pittsburgh a little over a

57
00:02:47,120 --> 00:02:50,240
Speaker 2: month ago, he goes, scale has never been more important.

58
00:02:50,639 --> 00:02:55,799
Speaker 2: Deposits are rolling uphill. Corporate treasurers cannot see what they

59
00:02:55,800 --> 00:02:59,079
Speaker 2: saw a year ago, and so corporate treasurers don't want

60
00:02:59,080 --> 00:03:01,120
Speaker 2: to have to worry about the safety and talents on

61
00:03:01,160 --> 00:03:03,919
Speaker 2: their bank. According to the CEOP and C, therefore they're

62
00:03:03,919 --> 00:03:06,079
Speaker 2: saying they need to be a lot bigger. And they're

63
00:03:06,120 --> 00:03:07,600
Speaker 2: one of the top seven banks and what does that

64
00:03:07,639 --> 00:03:08,560
Speaker 2: mean for everybody else?

65
00:03:08,760 --> 00:03:11,000
Speaker 3: So what's going to be the catalyst for that consolidation

66
00:03:11,080 --> 00:03:14,840
Speaker 3: to take place? Well, it we're marking to reality some

67
00:03:14,880 --> 00:03:16,120
Speaker 3: of the commercial real estate loans.

68
00:03:16,680 --> 00:03:20,400
Speaker 2: I think you've had these unrealized securities losses, and frankly,

69
00:03:20,600 --> 00:03:22,960
Speaker 2: I've been on your show and last fall I was

70
00:03:22,960 --> 00:03:27,600
Speaker 2: saying it's fantastical to impose a liquidation analysis on banks.

71
00:03:28,200 --> 00:03:31,480
Speaker 2: And if you impose the liquidation analysis the SEP five hundred,

72
00:03:31,680 --> 00:03:34,079
Speaker 2: over one fourth of the banks would have negative equity.

73
00:03:34,160 --> 00:03:38,480
Speaker 2: So that was inappropriate and an opportunity investing opportunity for

74
00:03:38,520 --> 00:03:41,880
Speaker 2: the last six months. So I think in terms of

75
00:03:42,480 --> 00:03:46,960
Speaker 2: you know, scale and size and diversity, you know, that's

76
00:03:46,960 --> 00:03:49,760
Speaker 2: what you're going to continue to you know, invest in,

77
00:03:50,080 --> 00:03:51,880
Speaker 2: and some banks will have it and some won't.

78
00:03:52,000 --> 00:03:53,960
Speaker 1: So let's get to one of your topics in that city.

79
00:03:54,160 --> 00:03:56,560
Speaker 1: So there was a New York Post article talking about

80
00:03:56,600 --> 00:03:58,520
Speaker 1: restructuring of the centry when it comes to City and

81
00:03:58,560 --> 00:04:02,120
Speaker 1: sort of the behemoth or the huge monster job that

82
00:04:02,160 --> 00:04:04,720
Speaker 1: they have to do, and he said that that's wrong,

83
00:04:04,960 --> 00:04:07,320
Speaker 1: like they can actually do it, talk us through it.

84
00:04:08,040 --> 00:04:13,360
Speaker 2: Well, look, City is remarkably consistent. They've failed their last

85
00:04:13,360 --> 00:04:14,680
Speaker 2: twelve restructure.

86
00:04:14,160 --> 00:04:17,640
Speaker 3: Except okay, well that was my attempt.

87
00:04:17,839 --> 00:04:21,400
Speaker 2: Had a joke there's But you know, everything's turned upside

88
00:04:21,400 --> 00:04:23,240
Speaker 2: down for City As you know, I was very negative

89
00:04:23,279 --> 00:04:25,920
Speaker 2: during the globe of financial crisis, and I had my

90
00:04:26,080 --> 00:04:28,440
Speaker 2: sell at A four hundred and eighty dollars and wrote

91
00:04:28,440 --> 00:04:31,680
Speaker 2: a book about this and everything else. And now I'm

92
00:04:31,880 --> 00:04:35,400
Speaker 2: really emphatically calling the turn here in City Group. It's

93
00:04:35,400 --> 00:04:38,480
Speaker 2: my number one pick ahead of JP Morgan right now.

94
00:04:38,839 --> 00:04:41,880
Speaker 2: And I think they've thirteen is the lucky number for

95
00:04:42,000 --> 00:04:45,919
Speaker 2: City Group, and I think they've never been successful with

96
00:04:45,960 --> 00:04:49,360
Speaker 2: their restructuring before. But this one's different for two reasons.

97
00:04:49,400 --> 00:04:53,200
Speaker 2: Number one, they're selling businesses equal to ten to fifteen

98
00:04:53,240 --> 00:04:56,560
Speaker 2: percent of their revenues. And number two, they're going to

99
00:04:56,800 --> 00:05:00,120
Speaker 2: a line of business structure, five lines of business. And

100
00:05:00,120 --> 00:05:02,839
Speaker 2: you say, well, who's done that before. Well, I'm wandering

101
00:05:02,920 --> 00:05:06,120
Speaker 2: our research floor at Wells Fargo and I run into

102
00:05:06,320 --> 00:05:09,440
Speaker 2: Chris Carey. He's the consumer staples analyst. You know, we

103
00:05:09,440 --> 00:05:12,360
Speaker 2: don't always talk to each other that much. And he's like,

104
00:05:12,760 --> 00:05:16,280
Speaker 2: this sounds like Procter and Gamble. So we publish a report.

105
00:05:16,560 --> 00:05:19,680
Speaker 2: Procter and Gamble five years ago they sold off businesses

106
00:05:19,720 --> 00:05:22,240
Speaker 2: equal to ten to fifteen percent of their revenues. They

107
00:05:22,320 --> 00:05:26,760
Speaker 2: consolidated their geographical and functional and other functions. They caught

108
00:05:26,760 --> 00:05:29,600
Speaker 2: it the thicket into six lines of businesses. And he

109
00:05:29,680 --> 00:05:32,039
Speaker 2: know what he said. When they first did it, it

110
00:05:32,120 --> 00:05:34,600
Speaker 2: was kind of a big yawn. People didn't recognize what

111
00:05:34,640 --> 00:05:37,080
Speaker 2: was happening at Procter and Gamble. And then it's according

112
00:05:37,080 --> 00:05:38,800
Speaker 2: to Chris Carrey, this has become one of the best

113
00:05:38,839 --> 00:05:42,000
Speaker 2: turnaround stories he's ever seen in decades. Two weeks from

114
00:05:42,040 --> 00:05:46,040
Speaker 2: this Friday, City Group will be done with the decisions

115
00:05:46,320 --> 00:05:50,080
Speaker 2: for its ORGS simplification project, so five lines of business

116
00:05:50,279 --> 00:05:54,520
Speaker 2: delayering management from thirteen down to eight layers, ritting a

117
00:05:54,520 --> 00:05:58,320
Speaker 2: lot of co heads, co reporting, co ventures, and committees.

118
00:05:58,760 --> 00:06:01,039
Speaker 2: And they've done that six and a half months. So

119
00:06:01,279 --> 00:06:03,440
Speaker 2: I think two weeks from Friday, it's going to be

120
00:06:03,600 --> 00:06:06,400
Speaker 2: kind of you won't feel the earth move if you're

121
00:06:06,400 --> 00:06:08,520
Speaker 2: a City Group in the building, it's not going to shake.

122
00:06:08,640 --> 00:06:11,080
Speaker 2: It'll be like a butterfly just flying off and away.

123
00:06:11,360 --> 00:06:12,839
Speaker 2: But then you're going to come back in two years

124
00:06:12,920 --> 00:06:16,400
Speaker 2: and go, wow, that was a momentous occasion, all right.

125
00:06:16,440 --> 00:06:19,040
Speaker 3: The flopping on the butterfly wings has a long lives.

126
00:06:19,080 --> 00:06:21,880
Speaker 3: Some Fridays, all right, Helender, Mike Mayo, thank you as always.

127
00:06:21,920 --> 00:06:24,159
Speaker 3: Mike Mayo, of course, the senior banking analyst over at

128
00:06:24,200 --> 00:06:25,159
Speaker 3: Wells Fargo