00:00Joining us now is KBW Head of U.S. Bank Research, Chris McGrady.
00:03Chris, thanks so much for joining.
00:04Great to see you in what I'm sure is the last calm day of the week.
00:08Exactly. Let it begin.
00:09Let it begin.
00:10Look, capital markets activity is booming.
00:12The consumer looks largely healthy.
00:13We've had record M&A volumes.
00:15Is there anything not to like this earnings season?
00:18There isn't, but that makes us nervous, right?
00:20Expectations are high, right?
00:21The banks, the big banks in particular, have outperformed for good reason.
00:25The fundamentals are, you know, excellent.
00:27Earnings estimates are up 15% from a year ago.
00:30And the stocks are up 30%.
00:31So expectations are high.
00:32The bar is high.
00:33But we think they will deliver.
00:36So how will they guide?
00:37Because, I mean, sure, this volatility can continue.
00:40But it's been particularly spectacular, right?
00:43How will they guide in terms of, you know, FICC trading, equity trading, deals, everything?
00:48That'll be, you know, intra-quarter.
00:50They generally don't go too far out.
00:52But I would say, broadly speaking, we've been on the good side of volatility, right?
00:56If you go back in time, we'd ask ourselves when things like Iran and the war happen, who's
01:01going to get stuck with some bad trading losses?
01:03For the most part, the banks have ended up on the good side of volatility.
01:05So trading results, we think, will be up 15% year-on-year.
01:08Investment banking, we're going to hear about pipelines.
01:10So that'll be the outlook commentary.
01:12We heard last quarter there are records, and we want to hear that follow-through.
01:15We've had a lot of the big deals already come into this market.
01:18Is it your assumption that we are still in this era of mega deals and that the banks are
01:22going to be capitalizing off of that?
01:23Or will we see some smaller things come through the pipeline that can still support the record
01:27volumes that we've had thus far year-to-date?
01:29I mean, absolutely.
01:30The big deals are getting the attention.
01:31There's plenty in the pipeline.
01:33And I think, you know, beyond just the transactional nature of making, what, $100 million in SpaceX
01:38is the trickle-down effect.
01:40So managing the wealth and managing the money of these companies and these individuals, that's
01:45where you get the permanency.
01:45That's where you get companies like Morgan Stanley.
01:47Yes, they'll make a ton of money this quarter on these IPOs, but it's the longevity.
01:53And as an analyst, we look at the persistence and the repeatability of these revenues.
01:57Who will give us the most color on deposit costs?
02:02I mean, Bank of America and JP Morgan are the numbers one and two.
02:05I will be listening the most to them.
02:06I think as you get through the week, you'll see the regionals talk more about outlooks for
02:10deposit costs.
02:11That's the second major theme.
02:13The number one theme, we talked about capital markets.
02:15The second theme is just the outlook for deposit costs.
02:17Because for the traditional bank, net interest income, net interest margins are 70% of your
02:22revenue.
02:22And if the second derivative or flatlining of deposit costs are happening, you're going
02:27to have to really think about the outlook into 27 for margins.
02:30Are we at a point of inflection or perhaps rolling over?
02:33Well, how much is that complicated by, I know you and the team's view is that we're not
02:37going to get cuts this year nor next year.
02:40How much pressure is that adding on?
02:41On the margin, it's more difficult, right?
02:43The good thing is the assets are still repricing higher.
02:46So the margins are still steady to up.
02:49I think as you go into 2027 budgeting season and looking at next year, I think if we see
02:56stable rates, you're going to see deposit costs creep up.
02:58And I think the stocks will trade on that.
03:01So talk to us a little bit about where you're expecting the bar to be a little bit higher and
03:07be met as opposed to perhaps disappointing.
03:09So I know some of the regionals, for example, you're looking for really nice performance.
03:14The regionals are set up to make a lot of money, right?
03:16The mid to high teens, ROTCEs.
03:18What we haven't talked about is credit quality.
03:20Last quarter, it was private credit.
03:22That is absent from the conversation right now, which as an analyst makes me a little
03:25nervous.
03:26Wait, why is it?
03:26Because they still have been really tied to like the booming data center debt that's been
03:30taken out.
03:30And we've seen stories of banks trying to offset some of the exposure we have.
03:34Why won't that be present in this conversation?
03:36I think it will be.
03:37I think we'll have to dig a little bit.
03:38But I think in general, analysts, investors focus on one or two things.
03:42And those two things we talked about, deposits and capital markets.
03:44But I think in terms of what could wreck the rally, what could really deter confidence,
03:48it's any conversation around credit.
03:50And so this higher for longer narrative, that has the potential over time to weigh on credit
03:56concerns.
03:56So higher rates make it a little bit more difficult on credit.
03:59So at the same time, I know that you also like Morgan Stanley over Goldman Sachs heading
04:06into their earnings season.
04:07Why is that?
04:08Well, first off, they're both excellent at what they do, right?
04:10Goldman is the number one in investment banking and trading.
04:14Morgan Stanley's got this powerful 10 trillion wealth management business.
04:17Our difference is really what you, in terms of repeatability, we think Morgan Stanley's business
04:23model deserves a higher multiple.
04:24They're both trading at very high multiples.
04:26Goldman at three times book, Morgan Stanley at four times tangible book.
04:30But it was more just a nuance.
04:32Like, they're both going to have blowout quarters.
04:34I think there's probably more likelihood that Morgan Stanley's earnings beats run rate into
04:39earnings projections going forward.
04:41But they're both going to have outstanding quarters.
04:43For Citi, Bank of America, JP Morgan, Goldman Sachs, we're talking about 20% to 25% gain
04:48year-to-date, right?
04:48You think that's not really pricing them fairly, that perhaps there should be more gains there?
04:54They're expensive by historical standards, right?
04:57The largest banks are trading roughly 13 times next year.
05:00And the smaller banks are trading at 25% discounts.
05:03You go back in time, that was flipped on its head, right?
05:05The small banks would get a growth premium.
05:07The large banks would get a regulatory discount.
05:09We think because of the regulatory momentum that's apparent in the system right now, and the
05:14repeatability and the scale that these large banks have, we think they deserve high multiples.
05:19And when you think about it broadly, outside of the bubble of financial services, 14, 15
05:25times earnings isn't that expensive compared to other sectors.
05:29So it's uncomfortable as a bank analyst to put a 15 or 16 multiple, but they are growth
05:33companies in some capacity.
05:35We had heard for Diamond saying in May, late May, he basically said, we are on the lookout
05:40for deals.
05:41We're on the lookout of adding more capacity for JP Morgan.
05:45Do you think that there are a lot of opportunities out there?
05:47Do you look around in maybe some of the smaller, the regionals, and see, yeah, they're real
05:50M&A targets for some of the big players right now?
05:53There's no holes in JP Morgan's franchise, right?
05:55They are at scale in all their businesses, technology, investment banking, depositories.
06:01They can't buy another bank because they're above the cap.
06:03Could they fill out the wealth management, asset management, payments?
06:06Absolutely.
06:07So could some of their peers.
06:08But I think broadly, the regionals, they are scale buyers, right?
06:11They are looking up in terms of scale.
06:13They're doing a great job.
06:14But we are at a moment in time where the regulatory world is allowing banks to do deals, and they're
06:19allowing them to do them quickly.
06:20And I think they'll capitalize on that.
06:22Just want to let everyone know.
06:23So you love PNC among the super regionals, Flagstar, Popular, Hancock, Whitney among the
06:28SMIDs.
06:29You have downgraded First Citizens.
06:33First Citizens is a name we stepped aside from this quarter.
06:36And those were all calls into the quarter, the PNCs and the likes.
06:39First Citizens is the number one bank in terms of regionals that has grown tangible book over
06:45a 1, 3, 5, 10.
06:46So they are working for shareholders every day.
06:48Our decision to step aside was really based on the conversation earlier about deposits.
06:53They have a nuanced headwind from the SVB acquisition a couple years where they have to pay back the
06:59government.
06:59And so they have to raise more deposits more quickly and at a more expensive rate.
07:04So that's impacting the margin outlook a little bit.
07:06But again, great company, very cheap valuation, continuing to buy back stock.
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