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00:00Erica Najarian of UBS remaining mostly bullish on the sector writing, we expect any beats to come mostly from cap
00:06markets and trading and any misses to come from deposit cost surprises and higher costs related to higher transactional fees.
00:13Erica joins us now for more. Erica, good morning. Good morning. It's never been like this. I don't remember the
00:17last time they all did this at the same time. What's that about? Everybody had a great fourth of July
00:22weekend, long weekend. I'm feeling sick. I'm feeling sick Tuesday. Look at my earnings, everybody. Fantastic. What do you expect
00:29to say tomorrow morning? So we're all expecting great things, right? But can the mega cap banks really exceed the
00:37mega expectations that have been put on? So the whisper numbers from the buy side or the investor base, especially
00:44for Goldman and Morgan, tend to be higher than where consensus is. And so with five of the six of
00:51them reporting and expectations ratcheted up pretty high, I'm a little bit nervous that tomorrow is going to be a
00:58little bit of a mess.
00:59And that it's going to be difficult to stand out, especially since I expect that JP Morgan's earnings call will
01:07be somewhat dominated by succession questions. And so if you think about sort of what sticks out in a five
01:14day sort of sort of five bank reporting day, that might be it. So results might be, you know, you
01:20have to really stand out, right, to catch the headline.
01:23So let's try and unpack some of it now. So you mentioned the likes of Goldman. So Goldman's up 20
01:27% this year. Morgan Stanley's up 25%. Those two names have almost traded as one, had a fantastic year. How
01:33crowded is positioning around some of those names within the banking sector? Because I would often come on air and
01:38I'd say the banks as a group on the S&P record highs. But the performance spread across that group
01:43of banks is actually pretty wide, isn't it?
01:45So it feels a little bit like the investor base is playing kind of like a little dangerous game. And
01:51they're actually long Goldman short Morgan Stanley. And so they're trying to be long the purest expression of capital markets
02:00and short a name that's trading at a very lofty price, a tangible book multiple.
02:05And seasonally speaking, wealth flows are typically negatively impacted by tax payments. So there are, I think, also banking on
02:13that. But that is a super, super crowded trade. And so not only do they have to beat consensus significantly,
02:21both companies, but we also have to have pretty encouraging, you know, outlooks in terms of the pipeline.
02:27So when it comes to Goldman, out of all of them, is that going to be the highest bar for
02:31them to clear?
02:32I think Goldman has probably the highest bar to clear, yes, tomorrow, given positioning.
02:38So then who do you want to be exposed to if you're an investor going into tomorrow?
02:43I like a little Wells here, right?
02:46Because no one's talking about them.
02:47No one's talking about them. Everyone's like, oh, they may not make their $50 billion net interest income target, although
02:53Charlie, the CEO, and Mike, the CFO, had reiterated it during conference season in May and June.
02:59And, you know, they're not as purely exposed to cap markets names. But, you know, if they can hit anywhere
03:05near consensus, that stock is really sort of inexpensive.
03:09And if they could reiterate in that public forum that they could hit their targets, I think that stock could
03:13actually have a little bit of a squeeze.
03:15Do you see a new phase to the bank's trade emerging with the likes of Wells Fargo and others, a
03:20purer play on just the traditional banking story away from capital markets?
03:24Is there a next phase to this long bank trade?
03:28I had hoped so, but I'm still skeptical.
03:32What makes you skeptical?
03:33Because at the end of the day, as I think about what the fundamental question mark is, it's really about
03:39deposit growth and deposit cost challenges.
03:41And that is a little bit more acute in the regional bank names or names that don't have as much
03:47capital markets exposure.
03:48So, if war sounds hawkish, for example, during the testimony, and all of a sudden September is live.
03:55And, by the way, loan growth is fantastic.
03:58However, it's outpacing deposit growth by two to one.
04:01And then all of a sudden there's sort of like a, you know, a potential for earnings downgrades because of
04:07higher deposit costs versus the fantasy of the capital markets revisions continuing to go up and up and up.
04:12So, wait a second. Higher rates would be a problem for some of these banks?
04:15I think higher rates could be a problem for some of these banks if it's coming from the short end.
04:19The regional banks are very much tethered to the shape of the curve.
04:22The ideal scenario for them is that if we had a few cuts on the short end of the curve
04:27and the curve was steep.
04:29You said September. So, do you not think July is even an optionality to be live?
04:34Girl, who knows? But, I mean, if you don't see those ships passing and then, you know, we have a
04:41problem.
04:41If the CPI number's hot, we have a problem.
04:43Maybe good news for JP Morgan, they won't talk about any of this because on the call, you know what
04:47they'll be talking about.
04:48They'll be talking about succession planning. You said it.
04:50Succession does matter, though. What did you find out? What did we learn in the last few weeks with JP
04:55Morgan?
04:56So, I think we learned that the sort of rolling retirement for Jamie is over, right?
05:01You think it is done now?
05:02I think it is done now.
05:03And I think that I would peg his remaining time with the length of the retention awards contracts that they
05:10gave to Doug Pettno and Troy Rohrbaugh.
05:12So, do you think he needs to come out with clarity on when he is going to retire?
05:18I think so because I do think that long-only investors that are staunchly loyal to owning the stock, you
05:25know, still somewhat believe in this rolling retirement, right?
05:29Especially since, you know, the sort of heiress apparent, the star that everybody had thought was going to take over
05:36had left, right?
05:38And so, they have sort of less time to get to know Troy Rohrbaugh, especially, who's newer than Doug Pettno.
05:45And so, I think a little bit of clarity.
05:48But also, I think investors are wondering, what is Jamie looking for, for, you know, the new CEO role, right?
05:54What do you think he's looking for?
05:56I don't know. I'm going to ask him tomorrow, right?
05:58Because what are the key characteristics for JP Morgan, who's already so far in the lead, to further future-proof
06:05their business?
06:06And by the way, you're not just CEO and chairman of JP Morgan.
06:09You are the spokesperson for the entire financial services industry.
06:14Do we want that as a shareholder?
06:16Do we want that person to fill those shoes, to be the spokesperson for the industry?
06:20Is that something we actually want?
06:22There's no choice. They're huge, right?
06:24They're going to be a trillion dollars in market cap pretty soon.
06:27Does it automatically pass to the next CEO of JP Morgan, or potentially the spokesperson is someone who's already a
06:34CEO at another bank?
06:35Like, look, just given, you know, technically it could be Bank of America, right?
06:40But given JP Morgan's size and just its returns, right?
06:46I mean, and also, you know, there's also a retirement question over the next several years with Brian Moynihan as
06:52well, right?
06:53And so, you know, it does automatically still is JP Morgan.
06:57How great is the key man risk at JP Morgan?
06:59I ask this question with a great deal of respect for the man and, of course, the institution.
07:02That goes without saying.
07:04But to believe in the stock, you have to believe that the company survives past the handover from one man
07:10to another.
07:11There's got to be more to a company than just one man running JP Morgan.
07:14You could have said that about GE and Disney, right?
07:20And you can say the same thing on the, like, Berkshire Hathaway and Apple.
07:24But there is an enormous amount of talent.
07:27The reason that JP Morgan's returns are 20% plus on tangible common equity is everybody goes into 270 Park
07:34or wherever else and rows the boat in the same direction, right?
07:37Obviously, it's chock full of talent.
07:39But for the stock and for investors, key man risk is real.
07:44At some point, hopefully, it's called key woman risk, FYI.
07:47But the key man risk is real.
07:49Well, it is over at Citi.
07:51But when it comes to John's point, isn't this part of his job to set up a proper successor?
07:56So as a shareholder, you're not sitting here wondering what's going to happen next.
08:01I think that's what he's doing, right?
08:02I think that we're just a little bit perhaps surprised that Marianne Lake is not part of the discussion.
08:11Was that a fumble?
08:13Is that a fumble?
08:14Look, I think Marianne Lake is extraordinarily talented.
08:18But there has to be a reason why one of the best boards in the globe, one of the best
08:25bank boards in the globe decided that Troy Rohrbaugh and Doug Pettino had to be sort of the ultimate successors.
08:31And I think he's doing the right thing, right?
08:33Troy comes from a trading background, and now he's running the largest consumer bank in the U.S.
08:40And Doug Pettino gets to run the whole corporate investment bank on his own.
08:44So I think they're doing the right thing.
08:46I just think that Marianne was so considered to be the heiress apparent that everyone needs a second to digest
08:54the new reality.
08:55Does this feel like a repeat of Goldman, Harvey versus David?
08:59Does it feel like that again, or is this different?
09:01You lived through that.
09:02We all did.
09:02Is this different?
09:04A little bit.
09:05What makes this one different over at J.P. Morgan?
09:08It was just such a longer...
09:10We have been talking about succession, like, forever, right?
09:15You know, I think I had a three-handle in my age when we were talking about, you know, succession.
09:21And so it's just that there's been, like, so many...
09:25Like, Mike Kavanaugh, you know, there's so...
09:29Like, Jen Peepsak.
09:30There were so many other folks to have considered.
09:33That's what makes it different from, you know, the Goldman succession.
09:37Like, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman
09:38Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman
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09:38Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman
09:38Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman
09:38Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman
09:38Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know, the Goldman Sachs, you know,
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