00:00Wall Street's biggest banks delivering blowout results.
00:02Goldman Sachs beating its own record for equities trading revenue by more than $2 billion.
00:08JP Morgan, Morgan Stanley earning more in the second quarter than ever before.
00:12And Bank of America notching a record first half for its sales and trading division.
00:16Thomas Schulte, the CEO of KBW, a steeple company, writing,
00:20Banks are benefiting from positive operating leverage, accelerating loan growth,
00:24strong credit quality and significant share repurchases amid signs of a healthy economy.
00:29Tom joins us now for more.
00:31Tom, good morning.
00:31Good morning.
00:32Let's do it properly.
00:32We'll start again.
00:33It's great to be with you.
00:34Thanks for coming back.
00:35Thank you, as always.
00:36They've crushed it.
00:37Is it just capital markets or is it more than that?
00:39No, it's more than that.
00:41I think the banking industry has hit a new level of profitability and has a chance to even do better.
00:46Now, the ones with investment banking operations that you just mentioned,
00:49this may be a high bounce.
00:51It may not be repeatable.
00:53It could be in the next quarter, but I wouldn't expect this to be the new run rate.
00:57But I think the underlying profitability industry has absolutely been getting better.
01:03And that's really the core story here.
01:05Let's talk about it.
01:05Operating leverage.
01:06We talk about these things so many times.
01:08Where's it coming from?
01:09Where are these improvements coming from?
01:10Well, the first thing is that having zero interest rates, which is what we had, was unnatural.
01:15Banks weren't designed to be very profitable in that environment.
01:19An inverted yield curve is hostile to banks as well.
01:22So that's been fixed.
01:23And then you've got the regulatory shift.
01:26And I don't think it's really releasing regulations right now.
01:32I think it was the intensity of the regulations we had before being reset back to what I think is
01:39more originally intended.
01:41And that is absolutely unleashing growth.
01:44I think it'll have implications for bank versus non-bank market share.
01:48And so I think it's very – look, big bank stocks have been outperforming the market since October of 2023.
01:55They're 80% ahead of the market return year to date.
01:59I think the conditions still exist for banks to outperform.
02:03And now the regional banks are starting to catch up.
02:06And that started in the fall of last year.
02:08So we've got, I think, a longer cycle here of outperformance.
02:11Can you elaborate on that?
02:12How much of the boon type of activity that we've seen is a result of big banks winning share back
02:18from alternative asset management?
02:20I would say that's just beginning and it can run longer.
02:24I mean, I think the story – so if you're kind enough to have me back in five years, okay?
02:28Of course you will.
02:28So the story we're going to talk about is the fact that private credit had a once-in-a-lifetime
02:35growth spurt during COVID when interest rates were zero.
02:38And it couldn't be replaced.
02:40So really – and that was happening while the banks were still being hammered by policymakers not to grow.
02:47That era is over.
02:48So now the shift is going to come back.
02:50That doesn't mean the banks are going to go make seven times levered loans tomorrow because they think it's a
02:55good idea.
02:56But they're going to start clawing back some of their market share, and it's going to happen over time.
03:01The big five that reported on Tuesday had enormous residential mortgage growth on a percentage basis.
03:08In the last few months, Vice Chairman Bowman is leading a charge to release the very strong constraints put on
03:16banks after the global financial crisis when the market share in residential mortgages literally fled the banks, which is what
03:24they were originally designed to do.
03:25It's starting to come back.
03:27So I think it will be more of a slower shift.
03:30And I think it's good for the economy.
03:32I think it could be done responsibly.
03:34And I think it's good for the U.S. and the global standing.
03:37And I think Europe has gotten the message.
03:39And now you're seeing Bank M&A start in Europe because they realize how far their banks fell behind.
03:45Not that they're bad companies, but they had an anti-merger policy across country lines.
03:51And so their banks just couldn't play on the global stage anymore.
03:54So here's the question that Jamie Dimon asks.
03:56Is this as good as it gets?
03:57Because you've got the regulatory side of things, winning back share.
03:59You've got the M&A and IPO cycle and debt issuance cycle all just going gangbusters.
04:04And you have a consumer that's okay.
04:05You're not seeing delinquencies.
04:06I think I know the reason that will take the steam out of it.
04:10And it will be credit quality.
04:12Because in our models for the industry, we've got 21 basis points of provisions for the quarter.
04:17No way is that the number through the cycle.
04:21So the industry is over-earning on credit.
04:23Credit costs tend to come immediately.
04:25You don't think about it.
04:26You've got to pay for it right away.
04:28So the view is that the industry is over-earning on credit.
04:31It's over-earning some on tremendous investment banking results.
04:35But it's also under-earning on its capital position.
04:39Because the capital of this industry is the highest it's been in decades.
04:45So if you go back to pre-global financial crisis, the purest form of the capital ratios was about 6
04:51.5%.
04:52Our models show it will be 9-7 at the end of 27.
04:56So the industry's got all this capital.
04:58What is it going to do with it?
04:59It could grow organically, which is what I think policymakers would like them to do.
05:03Help the economy grow.
05:04Raise dividends, buy back stock, and buy each other.
05:07And compete with non-banks.
05:09Compete with non-banks.
05:10So I think this financial services sector, I mean, we saw the news about PayPal yesterday possibly being in play.
05:17Financial services is kind of exciting.
05:20All these companies are bumping into each other.
05:23My favorite press release of the last few weeks was Morgan Stanley announcing that they were going to undercut Robinhood
05:29on crypto trading fees.
05:31So that's the old sheriff letting everybody know they can still be the new sheriff.
05:36Thank you for ranking his press releases.
05:38It's my favorite press release.
05:39Exactly.
05:39Who doesn't?
05:40Help me invest.
05:42Do I trade this as a group?
05:43Or is this still a stockpicking story?
05:45No, it's stockpicking.
05:46It doesn't feel that way right now.
05:48So just explain that.
05:49Well, first of all, I think the whole group can do okay.
05:51But I do.
05:51So I heard from investors going into the quarter.
05:55And you think of someone like Goldman who had a blowout quarter, right?
05:58But when you look at their business mix, it is generally more dependent than Morgan Stanley on strong markets.
06:06Morgan Stanley spent a couple of decades building more fee income businesses.
06:10And now they're being rewarded for it.
06:12So that's why we like Morgan Stanley stock more than we like Goldman at the moment.
06:17And so, yes, you can't go by the whole group, I think, has got wind in its sails.
06:22Our favorite stories are the return on capital improvement stories.
06:26We still like Citigroup even after the sell-off after earnings.
06:29We like KeyCorp, which is an improvement story.
06:32Citizens Financial, which I think might be reporting tomorrow.
06:36I think they report stocks had a great run, but they're a profitability improvement story.
06:42So those have been more of our favorite stories.
06:44And we like Bank of America.
06:46You've got Brian on.
06:47We think this improvement story at Bank of America, it has legs to it.
06:51Got more questions for Brian?
06:53You can share them now.
06:54I didn't realize them.
06:55I realized they had a great quarter.
06:56What comes next?
06:57Sometimes I'm so casual off the top of the break that people don't realize we're live on TV.
07:00I didn't realize we were live.
07:02Yes, we're going to talk more about World Cup soccer, I thought.
07:07But I would just talk to them about the sustainability and durability.
07:10And look, I think the market has to stop thinking of some of these companies just as banks.
07:15Bank of America is a financial services company.
07:19And you look at where Capital One is going, which is a company and a stock that we like,
07:24and American Express.
07:26These are some of the, I think they're some of the global gems of companies.
07:29And now they're going to start competing in each other's businesses because the fintechs are coming.
07:34And if you don't do that, you're going to miss out.
07:38I don't think these boardrooms are thinking about how can we be a really good bank.
07:42I think they're thinking about how can we make sure that we're involved in the payments conversation,
07:47that we're involved in what happens to stablecoin, that we're aware of blockchain.
07:53And a lot of the businesses in America, like consumer banking, it's becoming a mass market business.
07:59Are you anticipating some acquisitions across financial services?
08:04I think we're going to absolutely.
08:05Not just between banks?
08:06Oh, we're absolutely going to see that.
08:08Just describe that, what that might look like.
08:10Well, so we'll talk about investment banking.
08:12So you're seeing companies like Citizens Financial, Key Corp, and others building investment banking operations
08:20for their middle market clients.
08:22Now, this is on a smaller scale.
08:24They're not going to try to go compete with Goldman and JP Morgan.
08:27They've got a 100-year head start in some cases.
08:30But they are going to offer more services to their clients than also payments.
08:35I mean, Fifth Third is an industry leader in payments, for example.
08:38And so when you go to a fintech to go do something, there very likely is a bank behind it,
08:44and it might be Fifth Third.
08:45So I think it's a collision.
08:48I think, you know, while I'm in the investment banking business and research business, I'm, like, going to be a
08:53traffic cop watching a collision of all these companies.
08:56Like I mentioned with Robinhood earlier, with crypto trading.
08:59And look, you go to the website of Coinbase and Robinhood and check out what they're offering.
09:04Those are good companies.
09:05Do not underestimate them.
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