Atlas Merchant 'Very Bullish' on Regional Banks, Says CEO Diamond

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00:00Bob Diamond writes the following, the dislocation in regional banks stems from a few single bank

00:05specific issues, but doesn't change our view on the opportunity. We remain very bullish on regional

00:10bank consolidation. Bob joins us now for more. Bob, good morning. Morning, John. It's good to see you,

00:14sir. Look, a few years ago, we had some problems managing interest rate risk. Can we avoid it with

00:19credit risk in this segment now? I think broadly in regional banks, as you've just quoted me,

00:25we're very bullish. I think, you know, both the interest rate dislocation that started with SVB or

00:32was recognized with SVB, and we're really a function of rates going from zero to five and a half percent

00:37is in the market. I think the, you know, the regional bank area has some really strong banks

00:45and some that are not as well managed. So, of course, some have more exposure, for example,

00:50to commercial real estate than others have. And if the commercial real estate is in Iowa,

00:55it might be different than if it's in L.A. So, we look at all of those things. But as a sector,

01:00this is a really, really strong sector, the banks. There's four and a half thousand.

01:05It has the support of Secretary of the Treasury, Besson, that consolidation is necessary,

01:11makes the banks more competitive. It increases the ROEs. It makes them just better, better investments.

01:18And I think four and a half thousand banks in the United States of America, it's just,

01:21it's the wrong number. And so, we see this going over the next two to three years to closer to a

01:26thousand or a fifteen hundred. And we think also, John, I think this is really important.

01:32The thesis here is one of consolidation and taking costs out. So many of these smaller community banks

01:40are just too small to succeed. They're very good banks. But to get a positive ROE with technology

01:46costs, with regulatory relation costs, virtually all of these banks have the same technology

01:52platform. So you eliminate one technology platform. Many of them, or all of them, have regulatory

01:58relations staffs. You can eliminate one of those. You don't really need two. So, if you add the cost

02:05synergies, which we've proven in backtesting really come out and are real, and you add the increase in

02:11ROE because when a bank buys another bank, there's purchasing accounting, and you have to mark to

02:17market fully through the P&L, the bank that you're acquiring. You're putting capital in. Automatically,

02:24the ROE goes up because the asset prices are different. So, when we look at the cost savings,

02:29we look at the increase in ROE. We look at four and a half thousand banks. We look at too many or too

02:34small to succeed. This is probably the best investment we've seen where the downside is really,

02:40really protected, and there's good upside. It's happening. Your forecast is happening. We've seen

02:45it with Fifth Third and Comarica. You're suggesting there's more to come. You talked about how region

02:50specific some of these issues can be. Is there a common thread in the consolidation so far?

02:55I think what we have seen is where the synergies are most clear is in-state and close to state. So,

03:02when you have a really good front office, meaning you have a good business around deposits and loans,

03:08and a similarity in terms of region where you're really adding clients and customers

03:15and taking out costs, those are the best opportunities. But not in terms of where in

03:20the U.S. It's more that in-state and close to state is the preference.

03:25There's been this fear that some of the biggest banks have really taken the wealthiest and the

03:30highest credit ratings in terms of customer base, and that mid-tier banks are stuck with everybody

03:36else, and that that's where the credit problems have really come. Has there been anything that

03:40you've seen that proves that to be true?

03:44No. We've seen idiosyncratic issues. We've seen certain banks that may have a specific name issue.

03:51But the truth is that 40% to 50% of lending to small businesses in the U.S. come from the regional

03:58and community banks. They don't come from the big banks. Many of the big four, many of the larger

04:03regionals just don't have the cost structure or the attention to service smaller businesses. So

04:09we think the credit quality on balance in lending is very, very good across regional and community

04:15banks. If there's no real weakness that they're seeing with respect to consumers or smaller

04:19businesses, does it make sense? And does it really help the case to have the Fed cutting rates

04:24at the same time that inflation is still a concern?

04:28I think the cutting rates, I mean, if you think of the go-forward environment, so let's say

04:34a regional bank buys a community bank, you get the synergies, you have an ROE,

04:38and now you're focused on additional acquisitions and what's the go-forward.

04:44The go-forward is terrific. I mean, the Treasury, the Fed,

04:48the SEC are encouraging consolidation. They're talking about simplifying capital rules. They're

04:57talking about endorsing these mergers and this consolidation. And then you have rates at four

05:04to four and a quarter percent, likely coming down this month, potentially again in December.

05:10You have 100 basis points between twos and tens. You can't make a better environment for banks going

05:16forward than that. So if you strengthen through consolidation and then you look at the go-forward,

05:21obviously, assuming that the economy stays stable and strong, it's a great environment for banks.

05:28But you're forecasting at least that 4,500 number to be cut in half in the next three years,

05:33is that right? More than that. More than that.

05:35Yeah. How is that possible?

05:38I think one of the situations we faced prior to this administration is there wasn't quite the same

05:44support for approving mergers. Was it Elizabeth Warren and Bernie Sanders a little bit on the edge?

05:50Like, I'm very, very surprised, Ann Marie, that Elizabeth Warren would come out and say,

05:55we shouldn't approve consolidation in banks. And we're talking about putting additional capital in

06:00banks, making them stronger, making them better competitors with JP Morgan and Citi,

06:07and yet she's against it. And that's the politics of being a liberal and saying no,

06:11no, no, no to anything that looks like it's positive for business and positive for profits.

06:16This administration has been very clear. It's going to make the banks stronger.

06:20It's going to make them better competitors to the big banks. It's going to provide more lending.

06:24In a way, it's getting more, it's kind of monetary easing, right? It's getting more money into the

06:30market for businesses that need to raise money, small businesses to expand what they do.

06:36Bob, we've got 30 seconds left with you, which is not enough, I know.

06:39Oh, come on, give me more. The mayoral race in New York City.

06:43Yes. The beating heart of capitalism and the socialists ahead. What's your brief take

06:48on what's happening in this city? You know, I think the city is at the

06:51strongest it's been since pre-COVID. You know, I live in Midtown. We have our office in Midtown.

06:57I walk to work in the morning for 11 blocks, and I have never seen so many people on the streets

07:02every morning as we've seen in the last couple of months. The city was really hit by COVID.

07:08It was really, really tough. I think we all kind of, you know, struggled through,

07:12not quite able to admit this is really bad. And it's really good. The city's back,

07:17new restaurants, new clubs, people excited down in the village. My son and his family

07:24who live in London are moving to Brooklyn. They're really excited. I think the city has a lot of buzz.

07:30You managed to answer that question without answering that question.

07:32Don't get along the way I wrote that.

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