US Banks Setting Up For Good Earnings Season: Angel Oak Capital's Pate

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00:00I think we are setting up for a really good earnings season. There's a lot of good fundamental

00:04momentum here. I think capital markets and investment banking revenues will be

00:10an outperformer. And we are looking for the big banks and the likes of Goldman and Morgan to

00:15outperform on earnings here. M&A activity obviously picking up and capital markets have

00:21a really robust quarter. In terms of credit, this is going to be a huge focus, the credit

00:28environment, because we're not getting any official economic data. And there's big questions

00:33as to how clients, how companies are faring right now, what they're seeing, how comfortable

00:38they are taking on new loans. How much insight do you anticipate the banks will be able to

00:43offer on that? I do think management commentary is going to be critical this quarter. Lower

00:49rates are clearly credit positive, but they also help spur economic activity and drive

00:55higher loan growth, both of which we're looking for this quarter. I think when we look on the

01:00consumer side of things, we have seen good data on both auto and credit card. I think student

01:05lending is a little bit more of a question mark, and we are closely watching lower income subprime

01:12consumer behavior. And then on the commercial side of things, lower rate is clearly credit

01:17positive. I think we avoid a commercial credit cycle here. We are looking for some normalization,

01:23but not a cycle. And as we continue to move into a lower rate environment, I think that will be

01:29supportive to loan growth as well. And in terms of return of cash to shareholders, there's a lot of

01:35anticipation building that there's going to be some big share buybacks. How much of that is priced in?

01:40I think you are going to see most of that priced in at this point. I think the signaling of that has

01:46been strong. I do think as we move into this continued deregulatory momentum type environment,

01:53and that's clearly been beneficial on the M&A side too, and we could see more deals to come

02:00using stock as currency given improved valuations. I do think you will see more share buybacks coming

02:07from that as well. That tends to be, I think, a little bit more signaled into the market and

02:12therefore a little bit more in the price than other capital actions.

02:17Now, you're a senior portfolio manager at Angel Oak Capital. You serve as the PM for the Financials

02:21Income Impact Fund, as well as the Financial Strategies Income Term Trust. You own shares of

02:27Citi in your fund, but not of JPMorgan, for instance, or Goldman Sachs or Wells Fargo. You do hold

02:34some of JPMorgan and Bank of America's debt. Why not buy JPMorgan equity, for instance, or Goldman Sachs

02:40equity, given what you just told me? Yeah, no, I think we've been playing that more on the debt

02:46side. We have seen, I think, an inefficient market on the debt, and there has been, I think,

02:51a better risk reward from our perspective on the fixed income side. Citi on the equity side,

02:57I think, you know, was more of not just the trends I've spoken to, but also the restructuring that's

03:04going on driving a little bit more outsized returns than the other. But I think we like

03:10the big banks here specifically, particularly over the regionals at this part of the cycle,

03:15given capital markets. Some of the larger banks, I do think, are getting sort of priced to perfection

03:21and sort of looking for opportunities to perhaps buy in at a lower cost here.

03:28Okay. You had mentioned that Goldman Sachs and Morgan Stanley would be definitely banks to watch,

03:32given they're highly levered to the capital markets and trading environment. I want to get

03:37your take on consolidation within banking. Certainly not going to be at the big banks level

03:41because they're so big, they don't really need to be participating. But at the regional bank level,

03:46there's a lot of expectation that Fifth Third's bid for Comerica is going to kick off another round.

03:51It hasn't happened just yet, but who is a most likely obvious target?

03:58Yeah, I think when we look at the opportunity set, obviously seeing Fifth Third and Comerica,

04:03I think sort of gives more confidence that you will see more big regional bank M&A,

04:08and that's important for scale to compete against the big guys. You know, some names that make sense

04:15in the M&A discussion to us are names like First Horizon, Webster, Valley, those type of sized

04:21institutions, I think could greatly benefit from increased scale.

04:27Where do you expect the most surprise to come from in this round of bank earnings? Not just

04:32tomorrow's earnings reports, but also Bank of America, Morgan Stanley on Wednesday.

04:37Yeah, I think what we're going to be watching for particularly, I do think we're going to see

04:41continued NIM expansion here. I think deposit costs are coming down and importantly, deposits are

04:47growing. One thing I'm watching for is shortening up of deposit durations. I think you're going to see

04:53more and more repositioning as we look forward to further rate cuts. And then the other area that I

05:00think could be a bit of a surprise, there's clearly been a search for yield going on. On the asset side,

05:05we're seeing more competition from capital markets, from insurance companies, from private credit

05:09on the lending side. So we are looking for loan growth to pick up. But that could be a bit of a

05:16surprise, the competitive environment picking up, I think.

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