Regional Bank Issues May Lead to Consolidation, Says Charles Schwab's Sonders

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00:00Anything to worry about? This is all kind of building up these one-off events, the fraud at

00:04a couple of banks, Tricolor, First Brands. How are you approaching this moment?

00:08So I think when you look at now some of the strains in the regional banks and you think

00:14back to the 2023 period, the mini banking crisis, there's been a spread since then that has, again,

00:24to the K-shaped aspect where regional banks are sort of seen as this separate little thing.

00:31I think the benefit to having this happen with Scions and Western Alliance is it occurred

00:36during a week where we were getting larger bank earnings. So that provided, I think,

00:42the continuation of that bifurcation between the regionals. High yield credit spreads broadly

00:48have been fairly well contained. I think, you know, the CEOs, leaving Jamie Dimon's comments

00:56aside, are going to be peppered with questions by analysts to see whether there's an infection

01:02here. Wouldn't surprise me if, like was the case in 2023, this leads maybe to a bout of some

01:09consolidation and maybe some acquisitions of some of the regional banks.

01:13You know, it's funny, just astound theme that all these comments about private asset managers,

01:16we're not talking about Apollo, KKR or Blackstone. We're talking about Western Alliance. We're

01:21talking about Zions. And in fact, we were talking about JP Morgan and their exposure to some of the

01:25stories of the last weeks. When you're thinking about, OK, there might be risks, there might be

01:29some so-called cockroaches. How do you think about where they are? Where are they? And what do you

01:35want to be avoiding? I think what you want to be mindful of are at the factor level, if you're a stock

01:42picker, consider factors like strength of balance sheet and high interest coverage and low debt to

01:49equity. I think that's instead of trying to find where the cockroaches are, maybe provide some

01:55protection within portfolios by going up the quality spectrum in areas specifically where they're less

02:01likely to have some of these troubles. Is up in quality and up in market cap the same thing?

02:07No, not necessarily. In fact, I think up in quality is even more important down the cap spectrum.

02:12So when you look at the Russell 2000 and you look at the 57% that are profitable, the 41% that are

02:18not profitable. By the way, I know that doesn't add up to 100. There's 2% of the Russell that just

02:24doesn't have earnings. They don't provide earnings. You can't get data. But the performance on a year

02:30to date basis of the non-profitable component is about double what it is in the profitable component.

02:36So you have seen this bias and retail trader bias down the quality spectrum into the non-profitable

02:43areas. You see it in baskets like non-profitable tech as well. I think that's where you want to

02:49go up in quality. Again, look for strength of balance sheet. Look for actual earnings growth and

02:54positive earnings revisions, profit margins, stability, and those lower leverage type companies.

03:00Thanks.

03:02Thanks, guys.