00:00And I do want to just start off with credit quality because that's been on the tip of everyone's tongue and it's easy to just dismiss it and say, OK, this was either fraud or this was just such a one off event.
00:09We don't need to be worried about it. But did you see any evidence leading into this year that maybe the due diligence and was maybe not up to snuff as it would have been in the past?
00:20So, first of all, I don't have any evidence to suggest that. The first thing to always follow when you want to think about credit quality is, has there been any excessive growth?
00:31Because over my career, that's usually an early warning sign. If you see something grow too fast, then it's the first place to look for potential stress down the road.
00:40But on the subject of credit quality, so there are two snapshots. One snapshot is for the whole industry. If you look at the whole industry, this was a very benign credit quality quarter.
00:50Our analysts were estimating about 24 basis points to loans of provisions. In a historical context, that's very light. And you could say the industry is over earning on credit.
01:02We are still in this period where credit really hasn't been anywhere in the income statement. You would expect it to normalize. And the surprise isn't that it's normalizing.
01:13The surprise is for how long it's been near zero. OK, now, that being said, we did have three notable blow ups and three individual credits.
01:21The fact of the matter is, is that's typical. And banks weren't built to take zero risk. Banks have loan loss reserves.
01:28They have capital. It's to handle these things when they happen. So I don't. And then you also have to remember, the industry is starting from an amazing standpoint with record amounts of capital, record amounts of liquidity.
01:40So it's in a good position to handle this normalization. I am curious. So, I mean, you mentioned them being in this good position. Part of that has been because of certain regulations.
01:49I mean, I know they would hate to hate to say that. But, I mean, that's been the truth. And now we're at a stage where we're talking about at least maybe a potential easing of some of those regulations.
01:58And if not that, certainly not an increase in those regulations. How do you think that's going to change?
02:04Well, first of all, I think we're getting a regulatory reset, which I think is long overdue.
02:08And the surprise isn't to where the regulation's going. The surprise with how tight and how anti-bank I think it got to the point where it was making the banks less competitive.
02:19I like to look at mortgages.
02:21Can I just jump in there? These banks are doing really well. What makes you think they're doing less competitively?
02:25Record bonuses going to people, money increasing. Why do they need to get any more competitive?
02:30Remember, there are 4,300 banks in the country, and about eight of them are investment banks.
02:35So I was speaking more broadly about the broader industry. The industry is doing better.
02:41But if you look at it, let's look at the S&P 500 as a bogey here.
02:46If you go back to 1998, half of the S&P financials were banks. Today, a quarter of them are.
02:52You look at Robinhood. You look at Coinbase. You look at all these non-banked competitors that are coming.
02:57You look at the Federal Reserve data. Most banks have lost market share as an industry to the non-banking industry.
03:04And I applaud the Treasury Secretary for talking about this arbitrage that's happened.
03:09As an example, you look at mortgages. Going into the global financial crisis, eight of the top ten mortgage originators in the country were banks.
03:17Today, only two are. They did not forget how to make mortgages. Something happened.
03:21Well, the mortgage tax or capital tax on servicing became too high to make it economic.
03:28The number of regulators a bank has relative to rocket mortgage is considerable and has to be factored into it.
03:33So they effectively don't do the product that they were all founded to do.
03:38So you look at areas like that.
03:40And the Treasury Secretary gave a great speech about a week and a half ago at the Fed where he talked about,
03:45we have to find out where this arbitrage is happening and allow the banks.
03:51But in many ways, it's sometimes a lack of innovation rather than an over-regulatory environment.
03:55I mean, look, figure comes out. They list this as multiple entrepreneurs.
03:59Can I make a statement that I believe that you can never fact-check?
04:02I think J.P. Morgan, so it'll be very safe for me, very safe for me.
04:06I think J.P. Morgan may be the best fintech company in the world.
04:10And they're a bank.
04:11No, I was just with the head of digital today interviewing her, and she's leading away with a company.
04:15Don't underestimate the big banks in technology.
04:17And you ready for this?
04:19If you look at J.P. Morgan's last investor day, they spent $18 billion on technology.
04:25PNC, which is a really big bank, spent $14 billion on all of their expenses.
04:30So the amount of money they spend, and they're innovating, and I believe the banks are okay at it.
04:37But here's the big key, I think, for the banking industry.
04:41Deposits and payments have been their competitive moat for 200 years, okay?
04:45To the extent that erodes, that will have implications on the economy that I think are really important.
04:52And I think you want finance happening in a regulated world, which means you'd like to have the banks do it.
04:57Don't regulate the fintechs like banks.
05:00Take some of the heat off the banks and level the playing field, and I think it'd be good for growth.
05:05I do have to ask you sort of what all this means, though, for kind of the regional banks,
05:09basically the ones that aren't sort of the big ones that we're talking about.
05:12I mean, if, you know, basically their direct lending is being eaten up to a certain extent by private credit.
05:17You obviously have the fintechs coming in, taking away some of that,
05:21and even some of the deposit base has moved into the nontraditional banking sector here.
05:27Do we need, I mean, you mentioned the 44,000-plus banks we have out there.
05:31Do we still need them?
05:32Well, first of all, when I was hearing you talk, I'd say, for now.
05:35Okay.
05:36Since the rise of these non-banks, there's not been a credit cycle.
05:40And by the way, there are some great non-bank lenders.
05:42I'm not, I don't want to say that the whole sector's got a problem.
05:45It doesn't.
05:46But there will be some that do well and some that don't do well.
05:49I wouldn't count the banks out quite yet.
05:52The other thing about the banks is they had an inverted yield curve.
05:55The longest inverted yield curve in 47 years ended last September.
06:00So now that is why the banks are earning better, is they didn't have to fight an inverted yield curve.
06:05So now it's kind of coming back the bank's way a little bit.
06:08So I wouldn't cut them out.
06:09But I also, there's another really important stat here, is when we had a hundred-year pandemic that we had to try to fix,
06:15the government said, let's do these payroll protection plan loans.
06:19Let's get cash into small business hands fast.
06:21When you go back and look, 55% of it went through the regional and community banks.
06:27Yeah, they came into their own.
06:28The big banks were unable to do it.
06:30You need them for Main Street America.
06:32One thing, well, one thing I can potentially fact-check you on,
06:35but it'll take a quarter until you come back and ask us so we can talk to you again, is where's undervalued?
06:40Where should people be investing in right now, therefore, across this?
06:43So we cover 200 bank stocks.
06:45We cover 460 financials.
06:46In the banks, we've identified our two favorite spots, the $50 to $100 billion banks.
06:53A lot of these banks are earning mid-teens returns on capital and still trade at eight or nine times earnings.
07:00And the market was very cautious about their ability to cross $100 billion because of the regulatory tax, so to speak.
07:08Well, I think that regulatory tax has been declining in this new environment so they can cross hopefully more easily.
07:14So our analysts have identified those stocks.
07:17And we like the investment banking stocks because we think there's a tremendous amount of pent-up demand for our activities.
07:24If indeed the government reopens, we get a few more IPOs.
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