Bloomberg is now on your dashboard with Apple CarPlay and Android Auto. It gives you access to every Bloomberg podcast, live audio feeds from Bloomberg Radio, print stories from Bloomberg News in audio form, and the latest headlines of the click of a button with Bloomberg News. Now it's free with the latest version of the Bloomberg Business App. That's the Bloomberg Business App. Get it on your phone in
the Apple App Store or on Google Play. Just download the app, connect your phone to your car and get started. And it's all presented by our sponsor, Interactive Brokers.
Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market movin news.
I'm the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com Slash podcast. It's Thursday, so Sunday, you know, Merger Monday. But there's a trade out there in the shale business and we've seen a lot of consolidation in the patch out there in really the last couple of years, and we have another deal here APA to buy shale oil driller calland Petroleum for four point five billion dollars. And we want
to talk shale. We talk with Vince Piazza. He is our energy analysts for Bloomberg Intelligence. Hey, Vince, I know you've been busy recently kind of parsing through all these M and A trades in the shale patch here in the US. Talk to us about what APA is. What is APA doing here with this acquisition of Calent Petroleum.
Yeah, well, look in the Permian, Paul, and by the way, Paul, happy new here to you and yours. What we have here is a jump ball for acreage in the Permian. And we've seen this across several years. It paused and then kicked up again most recently. But this is really about larger players looking to gain scale and smaller players looking at the environment in front of them. With higher rates and big guys getting bigger, there's really not a
lot of room for them. And you know, we cover roughly, we follow roughly fourteen to fifteen names in the Permium that are below five hundred thousand net acres and they need to do something. They need to do something to survive or to put themselves up for sale and callan did. And we see this as a continuation of consolidation for scale and asset concentration. These guys are selling a commodity.
There's very little differentiation. The way you gain efficiency, the way you gain productivity is to be big, to have scale, to have concentration across your region. And in case it's the Permian, we've seen a lot of M and A in the Permian on the oil side. We haven't seen a lot on the gas side. I think that's where the real story will be in twenty twenty four. You know, natural gas has likely bottomed. In twenty twenty two, we
should see better conditions, better balances. We should see more consolidation in the gas side as well, especially with the curve of the way it looks, and we'll probably see that more in the Hainesville and also in the Marcellos. But what this really tells us is there is scarcity value, right, and so you are bidding up smaller operators, MidCap operators, operators that were privately sponsored, and the pe shops need to monetize these investments to recycle that capital as well.
So you're seeing small, mid sized pe back names selling out, and you're seeing publicly traded names also selling out, especially in an environment where you have higher rates. In the case accoun, they were one of the higher levered names of the companies that we follow. So, you know, I think it is reality coming to call on them and other smaller operators.
Yeah, I mean, I'm just you know, Bloomberg, it's got some good reporting here, just summarizing what's happened so far. Just recently, in October, Excellon Mobile reaches sixty billion dollars
deal to buy Pioneer Natural Resources. Chevron followed it up with a fifty three billion dollar agreement for Hesse Corporation, and in December, Occidental Patrolling mcgreed to acquire Crown Rock for a ten point eight billion So, Vince, as you say, a lot of deals getting done here, talk to us about just the natural gas market in general, you know, because when we talk about energy, we tend to talk about oil more than that gas. Here, talk to about
where we are in that market today. What's the outlook.
Well, the outlook right now, just given the backdrop for weather and the rather mild temperatures that we've had here early on in the winter season, it's been it's been a tough go for natural gas. You know, we would have thought we would have seen a better bid into the winter, but with a very mild December and a little bit turning here in January as of cooler at tempts settle in. But it's been a pretty tough go.
But then again, it's better than where we were last year, where we saw NAT gas go below two dollars very briefly, but we think we're past that point. We think twenty twenty four bounces will likely tighten. You know, right now we're in this mix of this two sixty two fifty spot, but we think that things will improve. There is a
structural secular trend, and that is toward LNG exports. The US has grown its export capacity, it will continue to grow this export capacity through twenty twenty through twenty thirty, and we think this is a net positive to pull the excess capacity that we have in the US into the European corridor and in the Asia corridor. You know, last year we had a lot of flows go into the European corridor, just given the fact of Russia and the Ukraine War and what that meant for energy security.
So the US was a buffer for that. We will continue to be a buffer for that. LNG export capacity gains will be a structural story that we'll hear more of and that will tighten balances for US. In the US. You also have gas in the power stack that has gain share and that will continue to be stable over the next year or so. We will continue to gain
share there as well on the industrial side. So you have both a cyclical story, which is the weather component that we can control, but there is also a structural component to it that does provide longer term growth for natural gas, not just as a transition fuel, not just as a bridge fuel, but as a key component within the energy complex, the energy portfolio.
Hey, Vince, you know, it's interesting that the US has become a net exporter of oil here and a lot of probably a lot of our listeners probably aren't aware of that, particularly the ones I kind of remember back in the seventies when we had those oil emergencies and shocks here, and a lot of that's due to the shale. Can you you're the expert on shale, You're the expert
on fracking. Can you explain to us, when these fractors blast in a bunch of this water into the rock, what comes out in terms of oil versus natural gas? How does that typically work?
Yeah, So, in a place like the Permium where most of the M and A activity is occurring, not only do you have your crude oil, but you also have what's called associated natural gas or associated gas. You know, typically you will have something to the effect of two
thirds liquids, you know, one third gas. That gas has to go someplace, and it has been a big boon to a place like the Permian, which is the third largest producer of natural gas as a standalone basin, which is really incredible when you think about we're really drilling for crude oil in that basin. But what we have here is a plethora of natural gas, and the export market is the most likely area for it to move
through in order to balance. In order to balance these markets in general, no matter where you drill, you're going to drill some natural gas if you're drilling for crude oil as well. So when we do talk about natural gas, it is a default to talk about crude oil as well, since that is the driver of what we come up with when we also drill for natural gas and oil, so it is the thing that stirs the drink for the natural gas market as well.
So you know, I guess we all kind of got a little bit more smarter on liquified natural gas when Russia did invade Ukraine and that really cut off the supply of Russian gas to Europe. And we've got a lot of it, but it's not easy to transport. Is you got to do this whole liquification process. How is that whole part of the industry developing.
It's developing very rapidly. We're growing capacity. We have become a key exporter to only Europe, but also to Asia. One thing that is quite key for us here in the US. And we saw this last year as well, our ability to adapt quickly and move those move those molecules into the market that needed it the most. We were saved by a relatively warm winter in Asia, were able to move those molecules into Europe to help them
restock their storage. We have here in Europe relatively stout storage at well over eighty three percent fulfilled, and so for this winter at least, natural gas storage is not going to be an issue and We've done an exceptional job in the European Union has done an exceptional job refilling its capacity to deal with any uncertainty that would occur, not only on the warfront, but also in terms of
weather as well. So natural gas in the US being exported to other countries has been a key contributor to how we are looking to balance our market here in the US. And you know right now, with your being filled, the Asia market is looking quite quite attractive, and it is more profitable to move those molecules into Asia relative to the European market.
Vince, great stuff, great tortois force there on the energy space that guests Vince Piazza, senior industry analyst covering the energy space. We've got a great energy team, a global energy teams. You have to look at energy on a
global basis, and that's what Bloomberg Intelligence does. We appreciate getting some time from Vince Piazza here again some more m and A in the natural gas spase here in the US in some of those shale basins, as Vince was saying, there's a lot of demand there and there's a need for scale, particularly from some of these smaller companies. So again saw another deal today APA to Bai shale oil driller calend Petroleum for four point five billion dollars. So good stuff there.
You're listening to the team Ken's our line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Here's something that I don't do. I don't TikTok.
I know.
It is just a monster of a social media platform, particularly with the younger demos, and really a competitive threat to a lot of the existing social media platforms out there from certainly an advertising perspective and maybe even a e commerce perspective. And we've done some research in Bloomberg Intelligence on this, Man Deep Singh, he's our senior tech analyst for Bloomberg Intelligency. Man's our global tech team, which I'll tell you is one of the best tech research teams on the street.
B I go.
I know I just said that about our energy team, but that's also true with our tech team as well. We have folks Europe, North America, Asia, pretty much everywhere you need to be, So Man Deep, talk to us about TikTok here. I mean, my basic knowledge of these social media platforms is just get as many people as you can on your platform and then to try to monetize them by selling advertising, trying to get them to buy stuff. What's TikTok strategy here?
Well, so they've done exactly that in terms of, you know, getting to one hundred million daily plus daily active users, monetizing the ads a fifteen billion dollar rund rate. And there is a real risk the fact that we're going into an election year, this company could be banned. We've been talking about it forever.
They ban could be banned in the US, Yes, because of its Chinese ownership.
Big yeah, Okay, yeah, And that's been the case, you know, in terms of a risk for the last couple of years. Hasn't happened, but we know this is an election year and so there will be more focus on that. And the fact that they announced this e commerce play, to me, it suggests they want to be out there for the small businesses because these are the companies that will advertise,
that will create their storefront on TikTok. And once you have merchants on your platform, it gets all the more hard to ban such a platform because people are actually generating revenues. Strategy that seems to be the play here. But we know social commerce hasn't been successful in the US. Take a look at Facebook. They tried Facebook shops, Instagram
shops never really took off. And so the play here is something that hasn't worked out in the US because the buying behavior of US consumers is very different from the Asia consumers where social commerce has been successful. Do you in which is the TikTok eqaluent is a two hundred billion dollar GMV business in China.
So social commerce that's a kind of kind of a new term for me. But that's basically just taking social media users Facebook, whatever in this case TikTok and having them and drive I guess e commerce off of that platform, getting them to start buying stuff, and then TikTok will make.
It, yeah, finishing the transaction within your social media app. So right now they show you an AD and that takes the user traffic to the e commerce website. In this case, the experience is in app.
It makes a ton of sense.
I mean, it makes for a good buying experience if I can do things within the app as opposed to going to another app.
So why hasn't it worked here in the US, do you think?
Because think of how an e commerce website works. You need logistics, you need payments, you need sourcing, you need inventory. Social media companies aren't doing that, okay, and Amazon is doing that. They've built so many warehouses just for doing that. They have their own delivery. So e commerce requires all these things. And for TikTok they're likely going to partner. So they have already partnered with Shopify and Walmart. They're gonna look for more partners. Obviously Amazon has done the
same with other social media companies. Who would have never imagined Amazon partnering with Meta and Snapchat.
They've done that. So what's the we need talk to the folks in the e commerce world. What's the feeling about the ability of bite Dance slash TikTok to actually has some success here in the US?
Very unlikely at least from my lens, given you know, you need to match that Amazon experience that people have in the US right two day prime shipping, one day prime shipping, and so for them to do it, one they need the merchants on the platform. They need to offer a lot of stuff. But look, they appeal to the younger demographic. We know TikTok appeals to that ten to twenty five year olds and they can adopt a
new platform much more quickly than other consumers. So I wouldn't be surprised if they use incentives to drive that e commerce shift. But in the end, there is a political bend to it, and the reason why they're doing it is just to make sure they have a lot of small merchants on the platform, which increases their odds that they won't be banned in the US.
All right, So for those folks that aren't really that familiar with the business of TikTok, bike Dance, which owns TikTok, aims to grow the size of its US e commerce business tenfold to as much as seventeen point five billion dollars this year, according to people familiar with the matter, posing a bigger threat to Amazon Dot So that's laying it out there.
Yeah, I mean, it's an ambitious goal, but we know the US e commerce market is huge, so it's still, you know, less than five percent of the overall e commerce market that's out there.
And TikTok was last year on track to a master around twenty billion in global gross merchandise value, with Southeast Asia contributing the bulk of the sales through its platform, Bloomberg News reported. So now they're saying, okay, so they have a success, Yeah, some success in other parts of the world. Now the question is can they do it here in the US. Yeah, and you talk to Amazon, They're like, they're a fly. We're not even worried about it. It's that's the case.
I think Amazon did pre empt that. So in December they announced this partnership with Meta, with Snapchat, with Pinterest. That didn't happen so far. So Amazon and the other social media platforms want to partner with these e commerce platforms because in the end, this is the next leg off the offline to online shift, the video shopping, the live stream shopping, which you have seen play out in China and the Asian regions where TikTok has had some success.
All Right, I can't let you out of here without talking about AI whatever that is generative AI market. This is your research, dude. Generative AI market appears set to reach one point three trillion by twenty thirty two. What are you talking about?
Well, so what we saw last year was a bumper year in terms of what Nvidia showed us, you know, their data center sales. So I don't think anyone can write off such forecasts now after what we saw with video last year. But look, it's going to happen in phases. Right now, we are still in that infrastructure phase where chip companies are seeing that demand, and more so around you know, the accelerator chips, the GPUs. Not every type
of chip is in demand. Now you're seeing memory companies see that AI demand, and gradually you are going to see other types of infrastructure really get replaced. Within data centers, we are going through a massive data center refresh cycle, and then it will trickle through applications. The real disruption will be in how we use our application software because AI is going to redefine the way we use software.
And that's the.
One point three trillion component over ten years.
Here's some more numbers, because you guys have a lot of numbers in your research generative. AI may expand to about ten to twelve percent of the total IT hardware, software services, AD spending and gaming markets by twenty thirty two from less than one percent. Based upon the bi calculations. That gives you some sense of kind of the growth here.
Yeah, and that's the disruptive element. We're not talking about companies finding new dollars to put in generative AI. You are going to see some existing spend being migrated to generative AI for good reasons because of productivity. Copilots make you more productive, the workers more productive, and that is why companies are going to move some of their existing spend towards these any eye tools.
You guys wrote a research report on this, right, Yeah, where can you? I can get a Bloomberg terminal users? I mean basically, this report tells you everything you need to know about AI. Yeah, get it onto the report, sixty page report. BI go gets you to Bloomberg Intelligence. That's where you can find it. Yeah, anywhere else for like the non subscriber, the non Bloomberg people, Oh, they.
Could reach out to the media folks, and I'm sure they can share something.
Because I'm telling you, folks, a lot of people, as we all know, in twenty twenty three, AI was not just the tech story. It was a US global marketplace story that you have a lot of the gains we saw in the equity markets in twenty twenty three, that weight loss drug. So and I know we've got a weight loss report out there. The GLP stuff from Sam Fizzelli. So again some great stuff coming out of Bloomberg Intelligence. Check it out on the Bloomberg terminal, big Man Deep
saying thank you so much for joining us. He's a senior analyst for technology Bloomberg Intelligence. He's in the studio. He's in the office on like of some management level folks at BI. But take note of that who comes in and who doesn't, Man Deep sing. He is our senior guy on technology, along with anorog Rana, doing our global coverage.
Here you're listening to the tape. Can's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and 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.
All right, let's check in with Ed Harrison. Why do we do that? Because he's a senior editor Bloomberg News. He's a smart person, has a ton of experience here covering the markets, and he's got a great column that a lot of people feel like is they must read the Everything Risk, a column for Bloomberg News. His latest one is this twenty twenty four is risk is a
hot US economy? What do you mean by that? Ed, Senior Editor, Bloomberg News, joins us Ed, what do you mean by the twenty twenty four risk is a hot US economy?
Hey? Happy new year to you, by the way.
Cheers.
I think the risk is that everyone really is expecting soft landing, Yes, but really they're expecting that soft landing to be associated with enough softness to get rate cuts. In fact, in the bond market, we have one hundred and forty basis points of cuts that are being priced in, and we're already saying that as soon as March we could have a rate cut. That's what the pricing for
the market is. If the economy is too hot, and right now we have GDP now at two point five percent, that's too much for those kind of rate cuts to come through. And so if you have to look at where the path of least resistance is right now, it's towards lower yields generally. But this is going to be a huge headwind against that, and therefore that's going to be the pain trade yet again this year.
So is there a reasonable call here that the Fed kind of knows all that and therefore they may hold back a little bit and push the rate cuts to mid or later in the year to try to, you know, kind of avoid some of that.
Yeah, I mean, I think that that's what the teta tet that you're gonna have in the beginning of the year is the Fed versus the markets saying, yes, we're gonna cut rates, but how much are we gonna cut them by? With the with the market really you know, front running these these rates very aggressively. But you know, to a person, I think that the Fed officials have been saying over the last several weeks that yes, that's right, we're gonna do it in Q three, We're gonna do
it in Q four, not in Q one. Maybe at the end of the second quarter. It all depends on, obviously, what the data say. And I think that this has all been spurred on by that December dot plot that we got, which so seventy five basis points have cuts more than we'd seen in the September dot plot, and then a very h you know, some people would say dubvish pow in the press conference after that.
Yeah, we saw that. And as you've called out before, in the bond market, we had a you know, the ten year treasure, which, as Tom Keane likes to say, was, you know, fifty a cup of coffee ago was five percent. We traded it all the way down to like three and a quarter percent on the tenure. We packed it up a little bit here now at three point ninety seven percent, So you know, maybe the market's trying to adjust here. I guess the next big data point is can be the non farm payrolls tomorrow.
Yeah.
I mean I'm with the FX raids team, and we're anticipating that hotly, you know, especially because we had the ADP data that came out today that was higher than expected. We also had the jobless claims data, both continuing and initial claims were lower than expected. So there's a lot of angst, if you will, about where we're positioned in the bond market visa VI that that job support, Because if the job support is hotter than expected, exactly as
I'm saying, that's the pain trade. Yep, then you could see the a big reaction to that.
So what are your sources saying out there in terms of the positioning in the marketplace. I guess in twenty twenty three, a lot of the quote unquote smart money, the hedge funds, you know, had a net short position out there on the treasury market. You know, on the other side of that trade was long term investors like mutual funds like Warren Buffett saying, you know, I'm going to show up at every auction and keep buying US treasuries.
Where do you think kind of the smart faster money may be with treasury positioning right now?
Well, you know, that's that's an interesting question because ultimately, Matt, I think that we've seen such a big move that you would think that the shorts would move in. But I think people are now they're unwinding their lungs and we're moving to sort of a more neutral position. We haven't gotten to the point where there are a lot of people who are starting to reanimate the shorts yet.
I think that's when we would see a bigger move to the upside for ye deals if we got that, But we weren't seeing that yet.
Now.
As a result, I'm thinking that you know, we're sort of in a range bound mode at this point, with four percent sort of the sweet spot within that mode. You know, BED funds at five to five sort of limits how much upside you can have because you curve would be too inverted. But then at the same time, how much higher can you go from here? I don't think that you're gonna get more than up to four
twenty five, four thirty five at the max. So we're kind of in this this this this range where four percent is really kind of a sweet spot for the market at this point in time.
W IRP GO World Interest Rate Probability Function on the Bloomberg terminal kind of tries to forecast where the Fed will go with a rates based upon FED funds futures. I don't know, it's pricing it up to six rate cuts this year, you know, starting I don't know what I mean, how do you feel about that? As a market just to ahead of itself and maybe not once again, I'll say, underlying once again not paying attention really or listening to FED chairman Pale.
Well, you know, it's it's a good question about what the market's doing collectively. I mean, basically, you're you're trying to, you know, give your winners room to breathe. Uh. And you know, when the when the FED basically gave a green light in December, the people who were bullish in
the market, they posted to the max. And there hasn't been any push There hasn't been enough pushback, and we haven't had enough data, we haven't any had any FED meetings to dispel the notion that you could get those six rate cuts, So people are putting those positions on. I think that as the data come in, likely those six rate cuts will get paired back to a more manageable number. The only way that you're going to get them, unfortunately,
is if you have a recession. I think then you're actually going to get more than one hundred and fifty basis points of cuts. And I know that. I think it's Wells Fargo is the one. No, No, it's it's TD. They're the ones who are predicting two hundred based points of CODs.
Wow. Wow, Yeah, that would suggests something's askew with there in the economy. Hey, thanks so much for joining us. Ed Harrison, he's a senior editor for Bloomberg News. Got tons of experience in the markets, He's also former diplomat at the US State Department. How about that, So he's kind of got a varied experience, a great worldview looking at these markets here as part of our Bloomberg News team. Appreciate geting a few minutes of his time.
You're listening to the tape Cansur live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Let's talk a little bit of ECONOMICUS. We've got some breaking news here. Michael McKee joins us. Michael, what's happening with our friends and your Saint Louis Fed.
They are getting a new boss, really, Alberto Mussalam. He is a PhD economist and has worked on Wall Street for a significant amount of his career, also at the IMF and also at the New York Fed. He was most recently the non executive chair at the Man Group and a member of the board at Feddie Mack. He says he'll resign those two positions. He was the CEO of Events Asset Management and he was a managing director
and partner at Tutor Investment. So he has got a broad Wall Street background and it looks like some experience at the FED. So he has straddled both worlds.
So when of a bank regional bank gets gets a new head, how do how do you kind of view it? Is there a period of just kind of get to know each other, figures thing things out, or and is this new FED present given I guess authority over some period of time or how's that work? The transition?
Well, Jim Bullard has already gone. He left class August and he's now at Purdue University. Now the first vice president for the Saint Louis FED takes over and represents the Saint Louis FED at all the FED meetings and things like that. Kathy O'Neil. She is not voting this year, so it's not an issue. She presents what information she has to the FED and takes part in the discussions. He is going to take over starting in April April second, so he will miss the first two meetings of the
year and then begin to take part. He doesn't vote until twenty twenty five.
Okay, what's the historically, what's the role of the Saint Louis Fed ben They have a rep reputation.
Well, it evolved. It was known as one of the kind of monitorist banks where the money supply and that sort of thing mattered a lot. But under Jim Bullard that went away as monitorism sort of died out when it became hard to tell exactly what was money these days. And then the President Bullard rather sort of became one
of the think leaders leaders at the FED. He came up with the idea of regimes where you didn't change monetary policy unless the whole regime of the economy changed, and he was one of the first to really get dubvish going into the going into COVID and coming out of the Great Financial Crisis. So that's kind of their reputation. We'll see what mister Musalem very goos to say.
All right, sage news for this FED watcher. Saint Louis FED names ex tutor and New York FED executive as President. St. Louis the Gateway to the West. Alberto Musalem is now its new president.
You're listening to the tape Cancer live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and 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.
I've been hearing a lot of people fund manager, strategist when they talk about twenty twenty four and maybe some of the sectors that we should be looking at. They say banks. Now, I think they mean like JP Morgan, Bank of America, those types of things. I'm not sure they're talking about the regional banks, the community banks that really had some problems in the beginning of last year. So I wanted to flush that out. And there's only
one person to do. That's Emily. That's Herman Chan. He covers all of the regional banks for Bloomberg Intelligency Joints US here in our Bloomberg Interactive Brokers studio. So, Herman, is it too early to go back into regional banks yet? Because I know you were very good at telling us it's an earnings problem. It's an earnings challenge for these banks. It's not necessarily a credit risk problem, it's an earnings problem. So where are we right now?
The market's been pretty optimistic. You've seen a big rally in regional banks over the past couple of months to end the year, and that's really driven by interest rates, right The markets now expecting you know, five six rate cuts in twenty twenty four, which would help alleviate some of the earnings issues, the revenue issues from higher funded costs. So that's really what's driving the rally. It remains to be seen if that will hold, but it's more optimism on rates more than anything else.
So I see, I'm just kind of looking at my Bloomberg chart, you know, just from the lows back and I guess late October the spider s and P Regional Banking ETF, which is kr E, is the ticker up about a thirty three percent. So again that nice rally you were talking about, where are we in terms of evaluation? Is there still room to grow here? Do we still have earnings risk? How do you put it all together?
Yeah?
Sure, so evaluation is still fairly you know, attractive. We were towards that that October timeframe. We're about one times tangible book value on injusted basis, which is historically the traf levels. So now we're a bit higher than that. The revenue picture and the oarnings picture is going to be a wildcard with credit quality, right, So if the market's correct that we see rate cuts, the NENDI just margins for the banks could improve in twenty twenty four.
But what's still in flux is really what's happening with credit quality. Are banks going to see higher loan losses from areas like commercial real estate, particularly office commercial real estate, multifamily commercial real estate. So those are the questions that still remain unanswered for twenty twenty four.
So in terms of the commercial real estate exposure, is it at the JP Morgans of the world or is it at the M and T banks of the world.
Yeah, sure, so it's more at the M and T banks at the world and increasing and higher as you go lower in scale and size for banks, right, So the smaller community banks have more commercial real estates, and it sort of grows as you become a large regional bank, and then the banks like JP Morgan have more diversification. So it really we parse the numbers looking at office commercial real estate. It's about two percent on average for the banks that I cover, the large regional banks, so
it's a fairly manageable exposure. It really does create a lot of headline risk, and when you see a when the bank's reported in the fourth quarter, for example, there are a couple of flagged non performing loans in office commercial real estate, so let's spook the market a little bit for banks like ZIONCE and P ANDC for example.
Right, all right, so where are we in terms of the earnings recovery for these banks? Have we seen trough earnings? Do you think ors are still risks to the estimates out there?
Yeah, I think that's going to be a good question for banks heading into earning season over the next couple of weeks. The banks have talked about, even before the expectation and of rate cuts in twenty twenty four, that Nandager's margins would stabilize because there hasn't been any rate hikes in recent quarter. So that's something that's been beneficial for banks to stabilize their margins and not have their funding costs increased like they did in most of the
twenty twenty three So that's helpful. And if you do get rate cuts that would even alleviate some of the pressures of higher deposit costs and banks happening to pay up to attract deposits into regional banks.
All right, M and A. I bumped into my buddy on the train today. He's an M and A banker for an investment bank that specializes in banks. He has deferred his retirement for a while, much to his wife's chagrin, because he thinks he's going to print money over the next couple three years putting these banks together on the
MNA front. I mean, I guess what I learned during the regional bank crisis from last year from reading your research, is that there's four thousand regional banks around the country. I don't know if that's a big number or small number. It seems like a lot. It seems like maybe there's ripe for some consolidation. How do you think that plays out?
Yeah, we do think there's there's it's an industry that's very ripe for consolidation. That will happen over time. Regional banks, in particular the ones that I cover, are facing higher regulatory scrutiny, tougher regulatory costs, so that all entails a need for scale, and the banks have talked about that collectively, me saying that when costs are higher, especially on the regulatory side, you need scale to really absorb some of these costs. And so that's something that the banks are
open to. Really, it depends on a couple of factors. One, the regulatory response for M and A. The Biden administration has been pretty cautious on bank M and A and and you've seen the FED be very slow in and approving bank deals over the past several years, So that's a factor. It creates a lot of uncertainty for the banks, for the buyer and acquire to deal with an elongated
regulatory approval process. And number two, interest rates. When rates were as high as they were, it does create a bit of a challenge in putting the two banks together when you mark to market the target's balance sheet. So the merger math doesn't make sense right now. But if rates do come down even more, I think you'll see more and more conversations and potentially that's a twenty twenty four event.
All right.
So if I'm looking at this group here, do I stick with what I consider to be the high quality ones? I'm thinking again, an M and t A P and C bank the names I know or maybemight go down to some of the smaller cap names and maybe I get some better valuation here. How do the clients you talk to, how are they playing it?
Yeah, I think at this point you're you're seeing some more appetite for some of the banks that felt more challenges in twenty twenty three. So banks like KeyCorp, like Comerica just got an upgrade earlier today from an analyst Western Alliance. Those are banks that were a bit more challenged by the rate backdrop in the falloff from the SVB and First Republic signature failures, and you've seen more of a bid for those banks over the past few months.
So that's something I would point to as something to look at.
The good news is we haven't had to talk to you much yet, and that means we haven't had much or anything really any notable failure or stress in the regional bank business. So with a little bit of hindsight, can we say this was kind of a handful of one off kind of issues or is there something that's going to have to change in the industry level?
Right, I would point to the fact that the banks that did fail that I mentioned earlier, they had very different business models. They were fast growing. So I think what we learned from the turmoil last year is that it's maybe an oxymoron to say you're a fast growing bank.
Maybe you don't want to be that because you're introducing a lot of risks to your balance sheet when you do that, risk to potential deposit flight when things go awry, and interest rate risk, especially when rates were lower and you were, you know, burdening your balance sheet with with securities that then were underwater when rates rose. So that's something.
Those were the lessons learned, And the other regional banks in my coverage universe are much more stable in their in their strategies and business management and balance sheet management practices. So I think what happened was the the banks that had tougher business models were flush out.
Penn State, you're Penn State, Grab. How how did you grade the season?
I would say a bit of a disappointment going heading into the season, we wanted to win at least one of the games against the big two Ohio State or Michigan. That we failed that. Unfortunately, our offense let us down. Our defense was actually the number one defense from the in the nation.
I don't know if we have a quarterback. I'm still not convinced.
Yeah, he's a.
Five star guy, but he seems a big jitter.
Is Dan Ives, who's a huge supporter. He's been No, he's our guy, He's guy. I'm like, I'm just not sure he's our guy. I don't know. I have to see, but anyway, I mean, the good news is with the new teams coming into the Big Ten, we only have to play Ohio State Michigan only once, right, you know, we don't have to play both each in the season, so that'd be good news. Herman chen Bank, analyst Bloomberg Intelligence. This is Bloomberg.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Faull Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.