Investors Process Big Bank Earnings as Tariff Talks Drag On

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Watch Investors Process Big Bank Earnings as Tariff Talks Drag On - Bloomberg on Dailymotion

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00:00I know from where you sit you end up buying a lot of bank bonds and what we've heard is that banks

00:05they after they report their earnings in this case these earnings were pretty solid they tend

00:10to sell a lot of bonds after the results. Are you a buyer of those bonds this time around?

00:15Yes absolutely. No absolutely there is a lot of issuance that comes on the back of earnings

00:20results and I think where we found the most relative value has been more on the regional

00:26bank side and a little bit smaller I think you get more yield and the opportunity to build a nice

00:32diversified portfolio with excess yield I think in this environment offers an attractive opportunity

00:38we feel good about the fundamentals of the banking system overall and see a lot of value in the bonds

00:44of these banks. Now we have seen the big banks raise or at the very least maintain their NII the net

00:50interest income guidance for the full year and depending on how each bank is managed whether

00:54they're more conservative or not it's either a reflection of the higher for longer rates that

00:58we have right now or loan growth picking up. What do you anticipate to be the driving narrative for

01:04the regional banks? I think loan growth is certainly turned turned into focus. We've seen I think a little

01:12bit better than we would have expected across the board on loan results so far and still early we're

01:17probably about halfway through on the regional banks but I think that's been the missing ingredient in what

01:22has been a very healthy sector. We have obviously nice tailwinds from deregulation and benign credit

01:29M&A picking up but loan growth I think is the final tool in their chest to drive better outperformance

01:36and particularly if we start to look towards an easing cycle towards the end of this year and more

01:41specifically into 2026. And of course you mentioned it but there's a lot of tailwinds and you see that

01:48reflected in the charts. You look at the KBW Bank Index for instance since the April lows it's returned

01:53almost 40 percent. The S&P 500 about 28 percent. The Nasdaq 100 about 36 percent. So quite a big gap

02:00there. A lot has been priced into the bank stocks rally. What do you think is not yet priced in?

02:07Yeah and I think that's a fair comment. You know when we look where we were earlier this year we were

02:11definitely leaning more towards the universals the large cap banks for the capital markets rebound which we

02:18certainly saw come into play this quarter and feel like the pipelines are strong for that to continue. I think

02:24what's not being priced in as much on the regional bank side specifically is the NII outperformance that's still to

02:30come. I think we heard a little bit of commentary about deposit competition heating up a little bit in some pockets of the

02:37country for sure. But loan yields I think are doing better. You have the benefit of fixed asset repricing to come

02:43through. We saw guidance on NII come up. I don't think that's fully priced in. And then we layer that on top of loan

02:51growth accelerating faster than we would have thought. Gotcha. Gotcha. Another big theme and you could call it a tailwind

02:57except that we haven't seen much evidence of it yet is consolidation in the banking sector itself. Last week we saw

03:04Huntington Bank for instance by Veritex Bank for about 1.9 billion dollars to expand its operations in Texas. Given the

03:11regulatory backdrop the more hands off approach of the Trump administration and the stronger stock prices that we've seen

03:18for banks overall. Do you think that others will follow in Huntington Bank's footsteps and start to announce more tie ups.

03:25Absolutely. I think M&A is one of the big themes that we've been looking for for 2025 and really over the next two to three

03:32years. I think there is still the need to build scale particularly you know the cohort we're probably more focused on

03:39would be that 100 billion 250 billion sort of middle class of banks if you will where we need to see that scale continue to

03:48build up. And I think that's going to be an opportunity with a more friendly regulatory regime. And I think we will only see more.

03:54We sort of track from the industry perspective the consolidation rate and that's moved up to about 4% from from just over three at

04:02year end. So it is starting to happen. Deals are getting approved quicker. I think Capital One and Discover you know the size of

04:09that deal and that coming through really helps the floodgates start to open here.

04:14Yeah. It helps to bolster some confidence. Cheryl tomorrow the Federal Reserve will be hosting a conference where they

04:19review the capital framework for large banks. That's actually the title of the event. We know that Basel 3 endgame

04:25stress testing capital surcharges for the GSIBs and leverage requirements will probably be among the topics of great

04:32discussion. What do you expect to emerge from this event in terms of concrete changes.

04:37You know I think we're really looking for more clarity and I think you know what we've been talking about deregulation

04:43and this fits into that narrative clearly is excess capital. And that's been a little bit hard to size.

04:50We've had stress test results. It looks like we are seeing more buybacks. Citi doubled their buyback for

04:56next quarter. So I think we're getting a little bit more confident in the margins but more concrete details

05:01as to excess capital and the ability to return is really what we're watching for.

05:07And as more regional banks get ready to report results this week do you anticipate that pace of

05:13share buybacks to continue with them as well. I do think we will see more buybacks. I do think that

05:19is going to be more skewed to the large banks who have been driving up excess capital to a higher degree

05:26given their business models. And on the regionals capital return is important but I think that will be

05:32balanced with the possibility of looking at M&A and other inorganic growth opportunities.

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