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It is Bloomberg business Week Daily. That's normal. Linda in for Carol Master this afternoon, on this Netflix earnings day, we are seeing shares of Netflix actually move lower in the after hours after an initial mounts higher, down right
now by one point seven percent. The company did report results that exceeded investor expectations in every major metric, revenue growing to eleven point one billion dollars, earnings jumping from seven, earn is jumping two rather seven dollars, and nineteen sense per share. The company also raised its forecast for full year sales and profit margins. It expects to generate up to forty five point two billion dollars in sales and have an operating margin of twenty nine point five percent.
Let's bring in Mark.
Douglass, the CEO, of the publicly traded advertising and marketing company Mountain ticker MNT, and he joins us from Miami. Mark always good to check in with you. I want to focus specifically with you on the ads supported element of this. I was telling Nora earlier. You know, I'm old enough to remember when Netflix said they would never do ads, they would never do live content, they would never do news, they would never do sports. Now they do all of those things, And is the in more?
Is the ads business working?
I think the ad business is off to a start. It can grow so much bigger, and you know, it's obviously growing. I think they're saying that they expect a lot more growth, but it's also in a competitive space. They're competing with Disney with Peak, with Paramount, Warner Brothers and.
Those big spenders.
Those big brands, they don't really increase their budget, so if you want to come into that space, you have to take market share from someone else. Netflix is what I would expect over time, is that whatever percentage of viewership they have is what percentage of the ad market they can get, So they have a lot of room to grow. It is working, but it's still relatively small compared to where it can be.
I find it really interesting.
We were discussing how people are willing to pay for these subscriptions even if they do contain ads. I can literally remember when you would watch Netflix all the way through, no gaps at all. But it seems as though this is a really thriving part of their business here.
Yeah.
Well, I mean why did they add the ads Because their customers wanted a lower price point, and so it's a simple trade off. We'll give you the lower price point if you'll let advertisers pay for part of your subscription. That's effectively what's happened opening, and so the customer is getting what they want and Netflix is getting the revenue they need know in order to make that possible. So
it is a win win. I'm not sure everyone that gets ads thinks it's a win, but it's certainly a win that they don't have to pay as much to get the content.
So I'm looking at the different plans and pricing for Netflix here in the US. There's the standard with ads, there's standard, there's premium, so it starts with seven ninety nine a month. You can go for premium up to twenty five dollars a month. Again, this is here in the US. There are different intricacies to this because you can pay for extra members and the like. Netflix has gotten really good at as my brother likes to remind our entire family understanding, if you're sharing an account and
now everybody kind of needs their own accounts. Is there from the perspective of actual growth here in a saturated market in the US, is there a concern or is this by design that if Netflix raises the premium price then there will be a small portion of the folks who don't want to pay twenty five dollars a month or whatever, and instead they'll drop down to that ad supported model. Is that the strategy?
I think yeah.
I think worldwide Netflix maybe last quarter the quarter before Essential, the last time they were reporting subscriber numbers, they said the number one, you know, kind of tier that people were buying was the ad supported tier. I think it was as much as half of all new subscribers. And
so people want it. They want that price point. I think what's really interesting is the way to think of it is Netflix is building a backlog of future revenue, so, in other words, they bring on the subscribers that they are essentially under monetizing. They're charging them seven ninety nine, and they're getting relatively few ads. And as Netflix increases the ad load and essentially makes more money, that is just like pure like that's going to flow directly bottom line.
I would Netflix's earnings to outstrip their revenue growth literally for years to come. It's somewhat similar to the password backlog, where they knew all these people were sharing the passwords and at any time they can just kind of kind of get more serious about that and all of a sudden it produced all this additional revenue. That's what's going to happen with Netflix is advertising. And I think I have never seen a company this large that I would
say should be treated as a high growth stock. That's the potential in the app business, right Mark.
One thing that was interesting to me as we're parsing through this earnings was the fact that Netflix boosted its full year revenue primarily due to US dollar depreciation. What's your takeaway from.
That, Well, I mean, the their global business. I mean, I think that's for financial analysts to really to really look at. I mean, obviously they don't want to be fluctuating their price points based on the way financial markets are valuing the dollar.
And other things.
But I think the I think most investors are going to look at the growth in revenue, growth and earnings, continue expansion in national and I think the most important value for Netflix, which is not really explicitly measured in numbers, is they, through surveys, they are the first place people go when they turn on their TV. Is they turn on Netflix. And the amount of power that gives this
company is it's almost hard to state that. That's how they can turn you know, like fights into like numbers that rival some of the biggest sporting events, or turn WWEE into you know, big show on Netflix where one has been as big as another channel. And if I'm gonna investor, I'm gonna be as long as Netflix is the first place people go, It's going to be the first stock I want to invest in that. I think that's the biggest correlation.
Hey, hey, Mark, since you are focused on the ads business, in your view, what's a more profit subscriber for Netflix? Is it the one who's paying seven ninety nine a month for the ad supported version, or is it the premium subscriber at twenty five bucks or the standard subscriber at eighteen bucks.
I think the premium is probably the most profitable, but I think then the AD supported has the potential to become the second most profitable. I don't think it's there yet because they simply are not monetizing all those entertainment consumers at the level they could be. But when they are,
they're doing seven ninety nine on that price point. Who knows, it might be eight ninety nine next year or something like that, and they can make probably equal to that in terms of AD dollars per user, and maybe even a bit more than equal to that in AD dollars per user. And you see that's what Amazon did with Prime, where they just flipped the entire customer base in the
AD supported. So that AD supported in terms of volume, because most of the subscribers I think will be AD supported over time, is the most profitable just share dollars. Right now, it's probably the premium twenty five dollars mark.
I mean, when you think about Netflix historically, they were initially felt like the leader, but you're seeing a lot of these other companies in here trying to additionally monopolize the space. But that being said, we did see some news earlier that Comcast is raising the price of its Peacock streaming service by three dollars a month. Very fitting today when we have Netflix earnings. How are you thinking about Netflix as a potential leader right now in this space?
Yeah, I mean that losing that leadership position is going to be hard for them because they just have to keep investing in content, and they're profitable and very profitable, so they can afford to keep doing that. But I think what you're seeing happening is the other networks are fighting back. Peacock with Love Island just massive show over the last month from what I know, did incredibly well advertise in terms of revenue generation. I think it's the
number one reality show in the world. Plus they have Bravo and others. You have Disney with all the children's content, Star Wars contentes PN now going in a live sports I think all the networks have gone way more serious about about competing and they're bringing out their own hit content. But as long as Netflix is number one, I think it's hard for them to lose that spot. Probably the only company that can really truly challenge them is Disney.
Absolutely, it's interesting. We were just talking about Love Island.
I am.
I'm a watcher of Love Island, so I see how they were able to skyrocket here.
Somebody who I'm co anchoring with today went to like a Love Island premiere watch party, watch party or one you hosted a.
Watch party of my own two days later.
Meanwhile, I've never even seen an episode of whatever you guys are talking about.
Mark Douglas.
Always good to see you fly on up here to New York next time so we can hang out in the studio. Mark Douglas is CEO of the publicly traded advertising and marketing company Mountain.
You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from two to five e's during Listen on Alva, Karpe and Android Otto with the Bloomberg Business app, or watch us live on YouTube.
Well signs at the US economies holding up just lifting stocks this afternoon, as we heard from Charlie. This coming just a day after speculation about the fedhare.
Really rattled markets.
Better than estimated retail sales and a drop in jobless claims pointed economic resilience driving the S and P five hundred toward fresh all time highs. Let's bring in Molly Smith. She's Bloomberg News Economics editor. She joins us here in the Bloomberg BusinessWeek Studio. I want to start with retail sales because a big rebound in June, a broad advance. Ten out of thirteen categories posted an increase. Does this answer all questions about the health of the US consumer?
Are we all good?
God?
I wish it was that easy, Tim It's not. I wouldn't be here if it were that easy. I explained it was, so I like to caveat by saying that, like retail sales is, I would say, like a relatively narrow look at consumer spending, that this is a report that mostly captures just spending on goods like physical stuff, but that's really just that's a third of overall consumer spending in our economy.
I think this is a really important point.
The consumer powers the economy, but services are what they spend their money on, bing go, Okay, yes.
So not to say that a third of consumer spending is nothing, but it is not the majority of where consumer spending is really directed at. So that's one thing. Second thing, these are not inflation adjusted, so when you see these increases, you can kind of do a little bit of the math, since we did just get the CPI to see where prices were rising or not. But generally, if you see a number that's up, it could be up because prices are up, or because actual spending activity
is up, or both. So in this case, there's probably a bit of a mix of that, and either way, though, the takeaway from economists was definitely positive that, you know, we just had two months of declines in retail sales coming into June, so to see a rebound, especially of this magnitude, was definitely reassuring in some ways, you know that maybe tariffs are not totally sapping consumer demand at least as of yet, but.
Not the end all be all here, which you've clearly spelled out for us here. What were some of the highlights that you saw in this print.
I think I don't know if I would call it a highlights so much as a surprise that that motor vehicle sales were up as much as they were, especially because we saw the administrative data from Ward's Automotive groups showed that car sales dropped again in June, and the CPI report showed that car prices were down, So that to me would spelled, you know, an overall negative for car sales a commist you're saying, probably a seasonal adjustment issue, because I'm not really sure how else you would get
a positive number out of that.
But there was also this pull forward in the earlier part of the year because consumers are very worried about what tariffs would do to automobiles. Is that part of this equation at all? Is that why it's surprising too.
I think that there's probably still you know, there's been so many obviously, as we know, whiplash with tariffs. Are they on, are they not? Is it delayed?
What date?
So I think, you know.
There was a bit of a pullback in June when like we had, you know, put to rest the idea of one hundred plus percent tariffs on China. You know, that was like a pact that was reached in early May, and that we've had a bit of this pause until the now we had this announcement in the past week that the real mayly more significant tariffs are going to kick in next month. At least that's the plan right now.
So who knows, we could be going through another one of those you know lulls right now with the tariff talk that could be boosting spending and sentiment. In the meantime, Well, let's.
Talk about the job market right now. Of course, we got that weekly print that we always get, which is jobless claims data that came out today. We saw that the estimates were two hundred and thirty three thousand, but it actually came in at two hundred and twenty one thousand, So a slight miss here. But what are you really seeing when we think about the broader economy as it relates to jobless claims.
Well, it's a good thing when we see a miss on jobless claims froming a point that how these fewer people are filing for unt employment, So that's a good thing. Plus, yeah, assuming that we're in the camp of not wanting people to lose their jobs, so that's good. And at that level of overall claims of where the initial ones have been coming in in this like two hundred and twenty thousand area, that's very much in line with like the pre COVID economy and would suggest like a pretty solid
labor market overall. Granted, where more of the concern is happening is in continuing claims. So these are people who are continually receiving unemployment benefits, whereas the other number is just new filers. So the continuing claims number has kind of been flirting with around like that two million number for a while now kind of like up around the highest levels. Since the end of twenty twenty one, that one has definitely been trending in a worse direction.
So for a while it used to be bad news is good news? Where do we sit now? What are we say?
Oh gosh, I want to say that good news is good news. I mean it's I think, well a lot of it is because you're thinking from the perspective of, like what happens to FED rates? Right, So I mean, right now, all of this data is telling you that, like the economy is solid and that this is all also supporting why we're not expecting to see ray cuts in July, at least July for now, who knows. September still seems to be a wild guard.
Okay, So on this I just want to end with you on the FED and play some sound from one of the Kevins who is a vying to be the next chair of the FED. Kevin Walsh, former FED governor, was on CNBC earlier today.
I think the President's language is this could be a golden age, and frankly, I think they.
All could be right.
Good policies could advance this US economy. What we'd call AI in a couple of years will just call business, and AI is going to make almost everything costs less
and the US can be a big winner. If I were the president, what I'd be worried about is a central bank that doesn't see any of that, a central bank that is stuck with models from nineteen seventy eight, governance from a prior period and don't recognize we could be at the front end of a productivity boom, and if I were the president, I'd be worried that they might.
Not see it.
Kevin Walsh, a former FED governor, on CNBC earlier today, Molly, I want to ask you about this idea that a central bank with this dual mandate, in Kevin Warsh's view, might be stuck on old models and old priorities.
What's your view on this.
I mean, I still think the priority for the FED is definitely the dual mandate, as you said, so that's ensuring price stability and maximum employment, and I think those are still good goals to have, no matter if you're in nineteen seventy or if you're in twenty twenty five. There are a lot of central banks that don't have both of those, you know, they just have an inflation mandate or an employment mandate, but not both. So I think that, you know, and that's also something that for
us comes from Congress. That's not the Fed's own idea. This is a mandate from Congress as to what they're meant to achieve here. That said, I mean, yeah, the economy is rapidly evolving. AI certainly has a lot of promises, but I don't think that's really had any widespread impact yet in terms of like taking out jobs that were
you know, at a really widespread level here. I think it's just so far been like pretty concentrate and we haven't yet seen all of that, and of course when those things are going to be happening a bit more notably, Yes, the FED wants to be acting forward looking, but like you can't also be like, you know, acting in advance of like if this is still perhaps years or decades away from now, who knows our.
Good place to end it?
Molly Smith, Bloomberg News Economics editor joining us here in the Bloomberg Business Week a studio.
This is the Bloomberg Business Week Daily Podcast. Listen live each weekday starting at two pm Eastern on Apple Cocklay and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Let's talk about commercial real estate today. We had pro Lodge's shares that gained in yesterday's session. Those they're down today. The industrial real estate investment trust industry and that company in particular, that company delivered a beat and raised earnings report for the second quarter and beat consensus expectations for the second quarter. There, that's industrial commercial real estate and
that can certainly tell us one thing. For a view on the office market, we bring in John Gates, CEO of Leasing Advisory America's at JLLL. The offer real estate and investment management services around the world, so it's got a great view on different economies and if we're indeed getting back to the office, talk to us John a bit about what the landscape is like right now for the office space in the United States. Are people coming back to the office.
They are thank you for having me by the way, and good afternoon.
Yes, unequivocally, we see increasing numbers of organizations ask their people to come back and in fact tell them to come back to the office an increasing number.
Of days a year.
It's been more of a step function, I would say, than a leap, if you will.
That's been happening and building for quite some time.
John, where are we compared to let's say, January twenty twenty, though.
You know a year if you said twenty twenty, we're getting closer, but we're not in the same place. So fifty four percent, I think of the fortune one hundred have said you're in the office five days a week, and that was probably ninety percent then. But hybrid policies, you know, have people in the offices three to four days a week. So it's you know, somewhere in between, but far closer than we were a year ago.
What about from the perspective of inventory and how much leased inventory you have versus what you had back then.
There's a lot of ways to segment buildings for that question. I think the easiest way to do it is the new higher quality product and then everything that's say pre twenty fifteen, and the first category is leasing very very well at record rents, and occupancy levels are very high, and vacancy levels are low.
We don't have a lot of construction. We're going to run out of space.
The older product is a different story, and leasing volumes there are nowhere near as high, and that's where the majority of any increasing vacancy is coming from older product.
John I cover commercial real estate stock for our US equities team here at Bloeberg News, and we talk a lot about the bifurcation in quality office space in the United States. You have the Class A buildings, You've got buildings that are lower tier, and of course you see a lot of these big corporations going for the higher quality buildings. As we look at the broader country and what it looks like for the office real estate space, where are you seeing areas for opportunity?
Well, I think well positioned assets that are a little older, meaning a good location and good bones and a good footprint because they would trade at a really meaningful discount. So you have in the old days we called that neurovalue ad play. But you invest some money, you're below brand new replacement cost and you've got a very leasable building because you've spent a lot of money on us.
I would view that as an opportunity.
And then I think at the high end, well located sites, you all would be familiar with the all street phenomenon, a lot of financials moving jobs here. As an example, if someone were to break ground on a top of the market off US building, my belief is in Dallas it would lease quickly. So some of us where you are, New York is very solid right now, and in general, the cities across the south are very.
Solid, and I know Park Avenue in particular. Here we are seeing a bit of a tailwind here in New York City. But let's talk about the West Coast. Of course, we have a lot of those remote workers. We've got the tech industry that started going a bit more virtual, not paying as much. They're not seeing these companies forcing people as much back into the office as other industries. What is the West Coast office demand looking like right now?
You know, location, location, location has always been a thing in real estate, right and we call that sub markets in our space.
Some markets matter a lot.
In Northern California, dramatic change really started a year ago. And it's not necessarily big tech driven, but it's AI spawned industries and organizations at startups. So absorption of space has been very healthy in the Bay Area. LA is highly concentrated on the west side of LA if you wille Orange County would be more typical. And then SEE has been lagging, but we're starting to see recovery as Amazon and Microsoft and other great big name companies have said,
we're coming back to the office. You just don't see the job growth right now in the largest tech companies. It's more in the startup community, so that's overweighted to Northern California.
You know, John we you mentioned that New York is strong right now, and that's where Nora and I are located. That's where our headquarters is here at Bloomberg, and I wanted to ask you a question about this region, specifically in regard to the mayoral election that's coming up. There's been some concern, especially from business leaders, that Zorroon Mamdani might drive away business as a result of wanting to raise taxes on the wealthy and wanting to raise taxes on businesses.
And he did meet with.
A bunch of leaders Hunter business leaders from the Partnership for New York City earlier this week to.
Talk with them.
Are you looking at that at all as being a risk to New York City commercial real estate?
Yes, I mean would be the one word to answer. I'll draw I think a direct comp for you. Last fall in San Francisco, in the city proper, we had a local election, as you too would be aware, and we had some of our agency professionals, people who represent the owners of the buildings, had leases ready for signature, and the tenants said, I want to see the outcome of the local election, and based on the way it went there, they ended up signing the leases and putting their people in the city.
And I know, I.
Do believe that could happen in New York, but that doesn't mean it will as a certainty.
I would take people at their word, though.
Well.
Talking a bit more about this mom Donnie and the impact that it's having on markets here. Of course, we know that part of his campaign has been to freeze rents in New York City, so we did see apartment reads, especially that have exposure to New York City falling after
the news. But I want to talk about office conversion because of course, we are also dealing with the housing shortage, and a lot of the conversation in the real estate, in the real estate industry has been about whether or not we're able to convert some of these office spaces into multifamily apartment properties. Is that something that you all are thinking about and what is the leatest status with that?
Oh, it's accelerating, and it's happening at a pace we've never seen in the commercial history.
You know.
Again, as you know, Nora, absolute real estate is not a new thing. People see houses torn down that are old and build bigger, shinier ones, and so that can happen and all the asset classes, and we see that happening now. Now, as you know, not all office buildings lend themselves to being multi family. The floor plate configuration matters a lot, and obviously the location in a given
city matters a lot. But we do see unprecedented amounts in terms of numbers of building and total aggregates square footage that are being converted to another use hospitalities and other likely candidate that's probably the two most meaning multifamily and hospitality. And we do have an affordable housing challenge.
So that's good John.
You guys are with a two q US office market Dynamics report, and one thing that you argue in the report, based on the data that you found, is that there's essentially this turning a corner for the US office market. What's the evidence that you have for that.
We're just looking at the data and statistics and watching aggregate industry decisions. As an example, law firms have very broadly said we're working out of the office, and they've been expanding their footprint for a ear taking more space, and the data is very clear that it says that, and you see office leasing volumes increasing on a quarter
over quarter basis. There's also anecdotal data. If I walk down the hall here where I sit with the real estate brokers, they're positive when they're in a better mood. It means volumes are good and they are in a
better mood, and they will tell you they're busy. They'll tell you they're chasing more opportunities and people are making decisions at a greater pace, which is also cycle times is something we always measure and pay attention to here, and they're shrinking, which means people are making decisions.
So all good news.
And it adds out, John, good to see you. Thanks for joining us, John Day.
Thanks you for having me. Great to see you.
Whenever the jail folks join us, they're always joining us from the office, which I.
Guess makes sense.
Nobody's ever working, nobody's ever working from home. I can tell you that John Gaates, CEO of the Leasing Advisory America's services over at JLL. They offer real estate and investment management services all over the world.
You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from two to five eastering. Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.
Mac.
How about you let me drive?
Oh no, no, no no, this is not a twin, Honry.
Please, I'll do the travels ease. Great, I want to drive.
It's a good question.
This is the drive to the clothes plunks.
Your thing well up on Bloomberg Radio.
TikTok, everybody. Just about eighteen minutes to the close. We've got a special guest for our drive that close. Today we're talking regional banks. We've got Herman Chan with a senior analyst for US regional Banks at Bloomberg Intelligence. Herman joins us here in the Bloomberg Interactive Brokers studio. I just want everybody to remain calm. Okay, despite the fact that Herman is in our studio. Nothing is collapsing, Nothing
is collapsed. The reason I say that is because we got to know you so well a couple of years ago during the regional banking crisis.
It's my claim to fame each and every day. We spent so much time together.
So it's nice to see you on a day when we don't have to talk about the FDIC.
That's right.
Actually, banks have been pretty good this far in the earning season. Actually it's been pretty interesting because banks universally have have been estimates. But the bar's a bit higher because just because of the run up over the past.
Okay, so let's take a little step back.
Because we've gotten earnings from I think it's fair to say the majority of them, M and T Bank, First Horizon, P and C Financial, Citizens Financial Group, fifth third in US Bank Corp. We're going to get tomorrow, truest Co America and Huntington Bank shares. Right, you would say if there is a through line to sort of tie all these companies together, at least the ones that we've heard from.
Things are good.
Yeah, things are good universally. The banks have beaten on credit, So the fears of tariff uncertainty and potentially worsening credit quality and higher loan losses, that really hasn't been apparent so far, and banks have been able to deliver some growth, which is interesting because you've seen some corporate clients and business clients front run some tariffs and build inventory ahead of higher costs, so that's actually been helpful for regional banks.
How are we thinking about this earning season more Brolby? Who are the out performers here?
Yeah?
So P and C has done probably the best so far. They've been able to deliver loan growth and also improve their nand margins, which is they're spread between lending and deposits. That's the one that has been the belt weather, and you've seen that performance from yesterday. Some of the other ones have been a bit more mixed because they've either haven't grown their loan portfolio or their not just margins wasn't as robust.
Are you How do we think about just leverage right now? When we look across the industry what are you seeing? What are the main takeaways?
The main takeaways really is I was trying to preference earlier. There's a higher bar for performance given the thirty percent run up in stocks over the past three months.
And on the back of that, the largest.
Banks like JP Morgan and Bank of America, we're showing strong deposit and loan growth, so there's a higher bar for performance. And where things really stack up is can the banks really drive top line revenues in the form of an interesting come work fees.
When we talk about the six big banks, we often talk about Bank of America being a good bell weather of the consumer because they have so much consumer access. We talk about JP Morgan in a similar way. A lot of the focus of our coverage is about the trading revenues, and they were certainly good during volatility. The regionals serve somewhat of a different group of folks. We speak to Bruce Vansn a lot over at Citizens Financial and he reminds us that construction small business, they're the
ones who are powering their loan books. Is that every regional bank.
The regional banks that I cover, which are the tier below the Bank of Americas and the JP Morgan's we're talking about P and c US bank truists all the way down to OZ King.
And when you say tier below you just mean an assets in assets, right.
These banks really tend to cater towards the middle market commercial customer and small businesses. Those are the bread and butter customers.
For what was the commentary that they offered around those customers.
Yeah, so it's a bit more mixed if you talk about the small the mid market commercial. They're saying that they're still transacting, but on the other hand, there's not a lot of you know, key capital spending that drives a lot of loan growth for the regional So depending on what we're seeing. Some banks are talking about higher commercial line usage, which means they're just tapping their existing
commercial lines for gross purposes like a good sign. So that's a good sign, but it could also mean that once the terraff costs really start to pull through in the economy, those line usage will be paid back.
Were there any concerns that stood out to you at all through these prints.
Yeah, there's hasn't been a lot of real concerns. It's really about if we get further loan growth or if that can be persistent in the back half of the year. Right, So, if you take a step back last year, there was not a lot of loan activity for the regionals. A lot of it was due to the uncertainty with rates with the election, et cetera. And then perversely with tariffs. You've actually seen more loan growth and if that continues, that would be great for the regionals.
But that's still a question I'm.
Wondering about exposure to commercial real estate. One of our viewers listeners getting in touch about Historically people have been petrified of commercial real estate exposure, right when it comes to at least that was in twenty twenty four.
Is that still happening.
Yeah, So the commercial really state exposure that is been in the spotlight has been office commercial real estate exposure in particular, and for these larger regional banks, it's the smaller and exposure. We're talking about on average, about two percent of their entire loan book is off a CRE and they've had a lot of time to really build
their bad debt reserves on these loans. So it's a known risk that they've been managing, and you've see charge offs come quarter after quarter, but because of the smaller exposures, it doesn't really move the needle that much. And they've been really conservative with building their reserves. In fact, you mentioned citizens they actually reduce their reserves, which means that they're just letting the reserves flow down as they incur
more charge off. So that's just a sign of strong confidence that the portfolio can perform going forward.
So we know that US lenders really came into this earning season trading at or near record highs and looking at the KBDS Bank Index that's ticker BKX up twelve percent year to date. So essentially we're hearing some people saying that high valuations among the big banks really is what tempered some of the enthusiasm surrounding the results. But how are you thinking about next steps? Where do we go from here?
The next steps really is there going to be a catchup trade? So for the KBW index, the largest banks are really driving the boat here, with JP Morgan and Bank of Mary City Group showing out performance for the year.
Whereas the regional banks have lagged a little bit.
Right, So because the regionals don't have the markets and trading exposure that you mentioned earlier, are they going to be able to catch up, and is the catchup trade going to happen. That's what we're waiting to see, and really that's really dependent, as I mentioned before, on growing the balance sheet and improving the manager's margins.
Herman, always good to see you, especially on a day where we're not talking about a regional bank collapse. So yeah, thanks so much for hanging out with us.
You.
Herman janis senior analysts for US regional banks at Bloomberg Intelligence. Check out his research and the research from the entire team on the Bloomberg Terminal.
He's here in the interactive Brokers studio.
This is the Bloomberg Business Weekdaily podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from two to five pm Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal