Bank Earnings, Flexible Investing and ESG

at Bloomberg dot com. Well, folks here at the Bloomberg offices in New York, I've spent the morning watching Alison Williams run, literally run back and forth between her desk, Bloomberg Television Studio and now the Bloomberg Radio Studio. Why you may ask, It's because it seems like every major bank reported earnings this morning, so she is in great demand. Alison Williams covers all things financials for Bloomberg Intelligence, joining us here on our Bloomberg and Act the Broker studio.

So Goldman, Sachs, JP, Morgan City, Wells, Fargo. You know, you've had a couple of hours kind of cut through all the details. As you step back, how do you view kind of the current environment for the big banks that you've been covering for so many years. So I think the right a new environment remains a big question, right and that relates to trade and tariffs, bregsit all

the geopolitical uncertainty. Uh. We sort of knew we wouldn't get an answer on that today, but I think where we did get an answer is who has some levers to pull? And I think that's um one place where JP Morgan is executing return on tangible equity pretty impressive. That's the best among the banks. And they showed uh, you know, gaining share and trading doing well on loan growth, so that helps to offset some of the margin pressure and then cost um flexibility the guidance coming down there.

So those were all positive. If we look across the other companies, you know, WELLS Fargo, I think it's sort of the the earnings are less important than the incoming CEO. But they took a big litigation charge clearing the decks for Charlie Sharfs, So that's a positive city group. I think, you know, that's the questions are rising regard to the

returns for next year. It looks like they're going to be able to make their target this year, but next year as a question, um, you know, twelve percent versus the eighteen percent that that JP Morgan did this quarter. City is executing around a twelve percent, hoping to make that target for this year. UM. So I think costs

remain the question for them. And then on Goldman Sachs, you know, fees coming in weaker, that equity income coming in a little bit weaker, just due to what's happening on the market, the ip A pause, etcetera, UM, and cost a little bit higher for them. I wanted to sort of go and drill into the consumer because a lot of the banks Weapen Moregan included are expanding in their consumer lending businesses and people have been looking for signs of a possible slowdown amid the consumer strength that

we continue to see. What was the reading there, So I don't think that we're seeing a slowdown so far. Uh. And in fact, you know City Group talking about the fact that you know, even though UM, you know they're keep being a tight rate no cost, but they also think, UM, they can have revenue growth and part of that is the consumer. Keep in mind, they have a much bigger

credit card business UM than many of the other competitors. UM. JP Morgan also showing some health and we did see in the government data sort of a pick up in consumer loans, especially in auto lending. Um, we're gonna hear I think more about that broadly from the banks as they come in this week. So Elson, you mentioned JP Morgan had to I guess you said return on tangible

equity about eight. That seems like if I remember back almost pre financial crisis, like and I was, I know, the bear case coming through the Financial crisis was a whole new set of regulations. They're never going to generate those kind of returns. Give us a sense of kind of the profitability and the returns we're seeing from some

of the big banks you cover. Yeah, and and so to your point, Um, you know they're they're executing sort of top of their game, and I think what's impressive is that they're doing that in an environment where they are holding more more capital um and in fact on a sort of the interesting side notes, what's been going on in the repo market that's coming up on the calls and JP Morgan talking about the fact that because of restrictions, they weren't perhaps as active um and in

that marketplace as they might have been in the past, so sort of you know, an eye towards regulation there um, but in general if you look at return on assets, so that adjusts for some of the some of the leverage and some of the changes. We are executing at a very high level, and that's what we'd expect to be because we are late cycle, and so as much as we talk about the revenue concerns, keep in mind that credit very solid. We could just continue to see

very strong results across the backs. Alison Williams, thank you so much for being with us. Alison Williams, who is the hardest working woman in Bloomberg this morning. Alison Williams, intelligence analyst covering all things bank. It is no secret people are searching for income. This has been a theme for the oh, I don't know, past decade uh and increasingly they have been turning two convertible bonds. These are bonds that have an option to convert into securities into

stocks given certain figures. Joining us now. Dave King, Senior portfolio manager with Columbia Thread Needle Investments based in Boston. Dave, you focus on convertible debt and your funds. I was looking at one of them. It's up more than fient year to date doing really well. What's been sort of the winning aspects of convertible bonds this year In the current year, it's been the recovery and equities UM. Convertibles

are typically issued by companies with growth opportunities. So when the market bounced back, the equity market, I mean from a bad queue for leadership has been smaller, grow your stocks and our world is that world. Those are the underpinnings of the bonds and preferreds that we buy. So it's been good equity performance in areas like software or rebound and semiconductors, and then just isolated good performers in other areas that have led to charge for us and

for the market. So Dave, when bankers go in and they're pitching a convert to a corporate issuer, you know sometimes I guess you know that maybe the argument could be, we'll just sell equity here. What's the what's the real advantage to an issuer? Uh By issuing a convertible bond, well compared to issuing equity directly, the process is much quicker to do a convertible. They can be issued under

Rule one A and just sold to qualified institutions. So companies can get transactions done in the hundreds of millions of dollars in one day's time or overnight without the lengthy registration process. Says In terms of the contrast to issuing a bond, you often find that the bond market is a backward looking market that favors the old economy. So companies in areas like biotechnology or sas are challenged when it comes to dealing with the high yield market

dynamics and find the convertible market much more friendly. I'm looking right now at the market value of the Bloomberg Parclay's US Convertibles Index, and it's about two hundred and nineteen billion dollars of securities. And the reason why I ask is because there was a problem in the past bunch of years where convertible bonds were more popular with investors than they were by issuers to sell them. And I'm wondering how that dynamic has evolved today. Yeah, that's

a great observation. It remains a problem as far as I'm concerned. To put it in perspective, twenty years ago, the high yield market and the convertible market were similar in size. In two thousand, sixteen, new issuance in the high yield market exceeded the total size of a convertible market. So we've been a dwarf here because of the government focusing on very low yields, um quantitative easing and so forth. But can you hash that out? What exactly is the

reticence on the part of companies to sell these bonds. Well, um, they can get cheaper money elsewhere as yields have been forced down dramatically. I mean, what we discuss as being the quote unquote high yield market is a five handle market that used to be a seven or eight handle market. So even in the context of a strong stock market, it's like, why give away a call option on your equity when you can finance so cheaply. So that's been

the reticence. But the good news, as I said, is that last year was a record year for issuance, and this year actually through nine months was running ahead of last year. So there is a recovery in convertible issuance, but nowhere near where I think it will be if rates normalize at levels they were in the past. So Dave, I remember back in a financial crisis, some industries and companies that were really struggling, like airlines and autos, they went to the convert market. Um, is that kind of

you know, saving the company type of financing? Is that? Do we still see that in the market today. Well, it hasn't been as necessary after ten years of economic recovery, but it's absolutely one of the functions of our market. The main uses of the convertible market are to finance disruptive growth companies, to finance M and A, and to

finance survival of the enterprise. So when I think back to joining Columbia about ten years ago, as you point out, there were a lot of airline issues, home building issues. Ford Motor was a big issuer. They wisely did converts instead of having to file bankruptcy. So, yes, the economy cyclical. When the cycle heads down, will see a lot of issue ins in areas where the economy is struggling. Just a quick Dave, would you buy we were convertible bonds if they were to be sold, Um, well, they have

to have a stock first of all. We can't convert into nothing but the community adjusted stock. Conceptually, it would be a very typical issuer in our market if it was a public company and if they had a balance sheet problem. Um, but could make the case, and this is hypothetical, they could make the case that they have a working business model. They would be welcome with open arms in our market, while skepticism would prevail in the

high yield market in other places. Dave King, Senior portfolio manager for Columbia Thread Needle Investments, located in Boston, Thanks so much for joining us. Well, we have a risk on day today, that's for sure. The equity indices up about one percent. And to be honest with you, I'm not really sure why. Maybe a little bit of lift from Brexit, maybe some tech and healthy maybe a little tech little healthcare push pushing the market up. A mixed

bag coming out of the big Wall Street banks. But hopefully our next guest can help us provide some color here. Frank Rabinski, chief macro strategist for Eggon USA Asset Management based in Charmed City that be, Baltimore, Maryland. But he joins us here in our Bloomberg Interactor Broker studio. So, Frank, just just today we had a nice move up here. Um,

what do you attributed to having me? Yes, I think what you're seeing in part there's a macro story of this bear market in geopolitics which is really bleeding into the economics and and that's affecting markets. Right. So as as you get these oscillations of of of the geopolitical side, um, you know that you can see a quick reaction or you know, from from a day to day perspective on the risk markets. So what do you like? So we are at at this point, you know, lat in the cycle. Uh,

we have been slowly going up in quality. And I'm talking about from a from a fixed income perspective. We think, you know, going too far up in quality, like all the way to treasuries, you know, doesn't make sense. At this point. You've already had say the tenure being you know, the yield cut in half UM and we think it's more of a coupon clip from here at best UM.

So we we'd be looking kind of the mid tier corporate credit because we also think, you know, looking at the triple cs uh, you know, kind of the really low end, you're you're not going to have the the the oversized growth that those companies need to really grow grow into their balance sheets. So I do want to bring you a headline just crossing the Bloomberg that we work at the board of WE Companies is reported to be working with Perelo Weinberg Partners. That would suspect suggest

at some sort of restructuring. I'm wondering, we work bonds falling to an all time low today, how much of a specific story do you think we work is and how much do you think it represents some broader potholes that we're going to see down the line with other

other companies in the up market right now. I always think it's interesting how these types of stories they don't tend to happen at the start of a cycle, right, you get these late cycle when when capital is looking for return, looking for yields, um, and you get these misallocation of capital. You know, if they think of the nineties tech, right, I mean, and I think this is on a macro level, this is similar to to that

type of thesis. Um. So again, I this is where, especially when you get into these low liquid uh type you know, you know, really low quality names. Um, the the credit analysis really becomes important because if you're just passive investing, it's really hard from a price discovery standpoint. Um. You know, having that uh, you know you can't focus on the story. It's more about the cap structure and the balance sheet and and the realistic component of that story.

So it sounds like JP Moore Bloomberg News is out with the report this morning and news report this morning that the JP Morgan is you might be shopping around a you know, multibillion dollar you know capital structure, bond up, you know, coupon payment and kind in terms we haven't heard about for such a long time. That screams kind of you know, kind of end of cycle. Just give us a sense in your portfolio, how is kind of the credit quality I guess for you know, lack of

a better terment. Does it feel late cycle to you their warning signs there or or is the overall the economy, which is still pretty strong kind of supporting most of the credits. Well, so I'll start with the economy side and then go into the portfolio side. So on the economy side, you know, definitely late side. I mean, we're moderating from peak growth, and you know, we see trend

growth in the high ones and we think we're going there. Um, we don't see the cycle necessarily ending, you know, next year, So you know, we think from that perspective, you could have kind of trend like growth um, which is not bad for certain parts of credit. Uh. We conversely, but when we talk about the portfolio side, we have been on an up end quality type mode for for quite some time. Um. You know, if we look at the low end of high yield, the triple seas, you know,

we're underweight. They're trying to go up. And if you look at at the sharp ratios, I mean, they're they're definitely being maximized and kind of the mid part of the credit structure because you've also been you know, assuming a lot of risk with the volatility you've seen on some of the lower end side of the of the

credit space. So we we've definitely been on this up and quality, but as I said before, not going all the way up and quality because we don't think you know, the despite the trade fears, uh, you know, and kind of the uncertainty around that, we don't see the global cycle completely ending. Triple c credits have underperformed. A lot of people agree with you. A lot of people have

been doing the same thing. If I were a contrarian, I would go into triple seas and say, well, for not at the end, these things are going to plug plug along. There's a lot of capital and private debt and private equity kinds of structures. So I'll be fine, what would you say to that person, Well, I hope

his credit analysis is quite sharp. I mean it's I think it's helpful when you look at this cycle versus prior cycles in the sense of, you know, in the eighties and nineties, you know, nominal growth was is six seven percent. Now you know we're we're happy with three. And you know, when you're at a slower nominal growth world, um, it's harder to get the aggregate low end of the credit space because they need growth right to to grow

into those balance sheets. So I think, will there be companies that survive and do wal and Trip will see yes. But again, I think buying a bucket of triple cs is going to be you know, you're going to be taking a more risk so that sharp race will be affected. As opposed to having me really experienced and sharp analysts who can you know, really figure out the credit specifics there, you might be buying a bucket of worms. Sorry, I

couldn't help myself. It's Tuesday, Fransky. No, it's It's absolutely nothing. It's something I just made up. So um you can. You can write your comments to lebron Woods at Bloomberg dot net. Frank Rabinski, thank you so much for being with us. Frank Robinski as chief macro strategist to Egg on asset management over helping oversee a hundred and three billion dollars of assets from Baltimore. What what what did you

call Baltimore? Charm city? Armed city? Who do po? We hear so much about the e s G label, Environmental, social and governance types of filters to invest more selectively and more wholesomely in equities, joining us now as someone who focuses on that all day long. And Marie Washer, founder and chief executive officer of Flat World Partners. Disclosure, she is not a flat earther. That is not the title of her firm. But Marie, why don't you just

start with telling us what it does do? Sure? So, Flat World Partners is an investment management firm, and we focused on custom solutions for impact and sustainability that deliver market rate returns. So talk to us about E s G investing in general. Just size up the market force the growth of E s G investing can pep sense

of how big this may be? Sure? So if we look at numbers this year, nine trillion of assets are already an E s G or s RI I negatively uh screen funds and public markets and sr I negatively screened. Isn't s R Yeah exactly. There's so many acronyms. I think that's part of the challenges of the market. But it's a socially responsible investing when you screen out tobacco

or oil and gas. The markets growing so significantly right now over a d annually uh in terms of the flood of types of funds that are launching in fun flows. So it give us a sense of performance. Um do I sacrifice performance if I integrate E s G into my investment process? Right? Um? No, The good news is you don't. In fact, more and more studies show out performance.

When you look at E s G data providers, you see that there's larger and larger gaps between UM traditional indexes and those indexes that are E s G because you're mitigating risks. Can you give us an example of kind of a hallmark E s G compliant or s RI I negative plus absolutely x three uh that you

know that that you focus on. Sure. I mean if we look at public markets, you can use an example like pg N and the outages last week, So that has been available in E s G data providers, and you've actually seen the risk assessments on E s G data increase over time, which would have given us an indication that the stock would collapse. Um, and then you have opportunities actually back up on that when I dig

in a little bit more. So please explain a little bit more what indicators would you be looking at that you would have been able to say. So, Bloomberg Terminal actually has E s G data on it, and you can see momentum scoring on whether E s or G factors are increasing or declining. That often shows an indication

that stock may collapse if the scores are declining. Okay, so was declining the most when it comes to pg N, So that often falls under governance or environmental factors because where the fire start in California are literally where they

have utility centers. So you mentioned the data. A lot of times, we've had E s G investors in here portfolio managers and they bemoan the lack of data or the lack of consistent data on E s G. It's not like going to an income statement or a balance sheet where it's you know, gap kind of data and everybody's kind of got it. You mentioned a Bloomberg terminal. We do on the terminal have tons of E s G data, But just give us a sense of if I wanted to incorporate it E s G into my

investing kind of where do I get data? What's Yeah, the E s G data market is incredibly tricky. There's about different a D there's about a D data providers in the market now, and the score is really exkew significantly, there's no consensus scores. And so we're really working on technology to integrate platforms and incorporate unique data sets like green peace, ocean and plastic contribution. This is one of

my troubles with the E s G label. I'm gonna be really honest, it's struggle with how vague it is. I mean, to be socially responsible can mean fourteen million different things to different people, and to have good governance, I mean again there are different screens and and really what does it mean to be good to the environment is if you have carbon offset but you're pumping carbon, uh, you know, into the into the environment. I mean, how how how confident are you with these screens? Really are

something significant? Yeah, So it's really about understanding how those screens are put together, that that E s G data, and understanding the managers that are building those products and how they incorporate it. All of our clients care about different things, whether it's water or education or the environment, and we want to really think about what are the key points that we need to highlight in an investment. You can't do it all. You can't incorporate everything in

every investment. So I can see how a pension fund um or maybe even a big mutual fund would care about incorporate E s G. How about the hedge fund community? Do they care? Are pretty cold hearted people will just

look for Well, we're starting to make them care. We actually just sign a partnership with Titan Advisors to evaluate UH sixty hedge fund managers and some of the larger ones on diversity issues, social issues and whether they're incorporating e s G and working with them to actually launch integrated E s G processes into their investment decision making, because again we believe it will remove risks from the

portfolio and force them to make real changes. You know, when you came in, I asked you know how much is private? You said, impact investing tends to be private investments and E s G tends to be public markets.

I'm wondering, in five years from now, do you expect the shift in money to be different than it is now in terms of where it's allocated, because the impact side of things is pretty small, even though that's really what's going to building you know, water sustainability in Africa and things like that, versus trying to to encourage companies to behave Well. Yeah, I actually think E s G and Impact won't exist in the future as a label because it will be incorporated in every investment decision that

has made. Regulations around carbon tax is being innovated, mifit to change regulations for e s G. Beyond me is an impact company. It's one of the first to truly go public, and so you'll see impact flood into public markets where stock exchanges also now require E s G standards before listing. I first heard about e s G maybe ten years ago, mostly from European investors. Yes, did it kind of start in Europe and then came over

here to the US. It actually started with the nuns and Catholic pension planning Greeks exactly, shout out to the nuns. Mr Sweetie Church exactly. Catholic school. Interesting. So, but it's now becoming more and more embraced kind of globally. It has, I think because people do see that the data providers have improved the analyst work that's being on, and there's responsibility and transparency of data. Right. If Enron happened today, you know, news coverage from you guys would have happened

in seconds, not later or Twitter feeds. All of that data and innovation has created more transparency and responsibility. Right.

Fascinating discussion. Emrie Washer, thanks so much for joining us, giving us some more content and color on E S G Investing and Marie Washer, she's a foundered CEO Flat World Partners, joining joining us here in our Bloomberg Interact their broker studio, giving us some thoughts and at least I was saying, you know, we probably have an E S G fund manager or someone like that in our studios. You know, every couple of weeks. It's becoming a bigger

part of the investment. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram Woyd's One before the podcast. You can always catch us worldwide on Bloomberg Radio