Banks Reveal Concerning Credit Deterioration: Peabody

at Bloomberg dot com. This morning, JP Morgan and Wells Fargo kicked off earnings for the biggest banks, and in some ways the divergence between these two behemoths really highlights the bifurcation of the banking industry. Right now, joining us to talk about that and just the results in general. Charles Peabody, president of Portala's Partners ll l C, Thank you so much for being with us. Charles, We always

love having you on. So let's start with JP Morgan shares up more than four percent after reporting better than expected earnings benefiting from consumer banking and the gap between how much they pay depositors and how much they're earning from loans. What was your biggest takeaway from the report? Well, you're right, it was a very solid quarter and You're right, there is a real bifurcation between what JP Morgan and

Wells reported. In the case of JP Morgan, this is a company that has been investing in its businesses and growing revenues. In the case of Wells Fargo revenues are shrinking. UM. The biggest takeaway I think UM going forward is that this is probably the peak year over year quarter and net interest income UM number one, and that's your highest pe source of revenue. And the second biggest takeaway is you're beginning to see credit deterioration. Okay, so let's let's

unpack both of those issues. That this is the peak year for net interest income, so quarter this peak quarter. I'm trying to figure out whether that is simply due to the Federal reserve being on hold, or if it has to do with the rate of loan growth slowing or or what you're seeing there. Yeah, it is a combination. For example, JP Morgan was growing their core loans at a seven to eight percent rate in the first half of eighteen. By the fourth quarter of eighteen, their core

loan growth was around a six percent annual rate. Here in the first quarter it slowed to five. Now JP Morgan's doing that on purpose, and it is very wise and prudent of them because of where we are in the in the economic cycle. UM so you're getting less loan growth driving an I I. The flat yield curve is also going to put pressure on net interest margins UM.

And so for example, in this morning, um Wells Fargoes stock started up in the morning, but as the conference call went on and they lowered their NII growth forecast to a you know, a fall of two to five,

then the stock tanked. So one other aspect of net interest income that I want to unpack before move on to credit deterioration is this idea that banks have been able to The biggest banks have gotten away with not passing along the extra yield extra rate UH that they get from the Fed funds rate as well as just in general on loans to the depositors, and they paid their depositors almost nothing, even as online firms credit unions

have offered higher yields for that money. I'm just wondering at what point you're going to actually see some kind of migration of deposits away from the biggest banks to some of the smaller ones that actually are paying them for their money. I think that's a very good point, Lisa, because the more bullish analysts are saying that the deposit beta will slow as the year progresses because the FED

is on pause. If you look at JP Morgan's projection for deposit growth for the industry this year, they're expecting to slow it about two So there's going to be an increased um bidding for the quidity in the form of deposits. The non bank system and the small regional banks are the ones that really need the liquidity, and so I think you're gonna see much more aggressive bidding for those deposits from those two entities, and I think eventually the big banks like JP Morgan are going to

have to pay up, which I don't expect. The depositated is slow as much as others do. Interesting. Okay, so let's move on to the credit terieration. Where in either Wells Fargo or JP Morgan's earnings, did you see this in the most in the most pronounced way, and how significant is it? Well, you saw it on a number of fronts, and I think it's very significant. You know, we've been waiting for signs of credit deterioration for two years now, and I think we've grown immune to those

early signs. But I'll tell you where I saw it, all right, Net charge offs and long lost provisions for both Morgan Wells, Fargo and p n C, which report this morning, came in higher than expected non accruel loans, particularly on the corporate side. UM rose in the is the second quarter in a row that it's rose. UM p n C raised their future for guidance for UM provisioning levels by about twenty five million. That doesn't sound like much, but it is significant, and all three banks

added to their reserves for future losses. In the past, they were releasing reserves. So you saw it on so many fronts. And then prior to this quarter, you were beginning to see the inflow of new problem masst's starting to outstrip the return to performing status and that was a sign that there was organic credit detriation starting to take place. Where are we seeing the detrioration most pronouncedly? In other words, is it corporate? Is a consumer? Is

a specific consumer loans? It's definitely corporate. And you know, it's hard to say that there's a theme in terms of industry, but you're seeing it in manufacturing, you're seeing it in retail, and you're seeing in commercial real estate. That's so interesting at a time when credit is still so free and certainly equity markets reflect a certain enthusiasm. Does this give you Yeah, I'm perplexed by the lack of reaction to what I see, as you know, the

seeds of credit cycle developing. Um you know. To me, today's action is somewhat curious and it doesn't have the steel of true institutional you know, Corbine. It has the feel of someone goosey in the market in terms of banks docs. Charles Peabody, thank you so much for taking the time with us. We always love your insights. Charles Peabody, president of Portala's Partners, joining us in our Bloomberg intera

active broker studios. I'm so pleased to say Tara Chappelle, who covers all things media and deals and telecom for Bloomberg Opinion Tera, I find this deal fascinating. They unleashed Disney Plus, which is the answer to Netflix. But can we start with just how limited is this offering? At first? Right? I mean this offering it's six a month, and a lot has been made of the price, but it's because there's not gonna be a whole lot on it to

begin with. If you're a really big Star Wars fan, perhaps there's a draw there because they are going to be able to have all the old Star Wars films, which wasn't a sure thing. We didn't know that. There was a big surprise last night because Disney It actually sold the rights to those movies to turn her a while back, so they probably had to pay a big time to get those rights back for the Disney Plus app.

So if you like Star Wars, okay, you've got that, a Star Wars series is going to be on it, the Mandalorian, and then a lot of old Disney movies. So if you have young kids, perhaps it's good for that because we know kids don't mind watching the same movies over and over again. It's a great way to to keep them busy. But other than that, you know, it's spilled a sort of the family app complement to ESPN Plus and Hulu, which are this, you know, sports

and more of the adult content. I guess you could say, but to me, it really is for super fans of Disney, and at six, you know you're really not getting a whole lot for that price at first? What's the vision for Disney Plus. I think Disney Plus is sort of the the product at the center of the future of Disney,

which is kind of amazing. And I made the point in my column today that, you know, that's why the name kind of concerns me, because Disney Plus implies it's sort of like an add on, a supplement to the real Disney, when really they're staking their future on this app, and it's not going to be profitable into until two thousand twenty four, which is going to be a few years after CEO Bob igor who's leading this mission, is

long gone. He's retiring in one So there's still a lot of questions about what this is going to look like, how it's going to disturb the rest of the empire as an increasing amount of content goes to the app and not to Disney's other properties. How is this going to be the future though? I mean, is if I assume that eventually it will have more content. You're talking about the limited offerings in the initial rollout, What is the content eventually and how does this end up being

the monster revenue driver that Disney really needs? So I think what they're envisioning is, as we've sort of seen this balkanization of the TV industry, that Disney is increasingly going to keep anything that comes that's made by Disney on Disney Plus. That's where you're gonna have to subscribe to to get it, or to ESPN Plus and Hulu, and maybe there'll be some sort of bundle of those

three apps. But basically, if you if you're a Star Wars fan, if you like Marvel movies, if you want Pixar movies, if you want national geographic content, you're going to have to subscribe to Disney Plus. So they're really sort of uh, monopolizing that content for their own app, and it's not going to be available in other places. I mean, you can still you know, big big films will still go to the movie theaters and and maybe people will still pay to go see those, you know,

Marvel big productions. Maybe that still draws people out to pay and go to the movie years. But at the end of the day, I think what they're saying is the app is going to be the new home of Disney, and you need to subscribe if you want anything Disney. So people are focusing on Netflix today and Netflix shares are are slightly lower, but to me, the real losers

here are potentially the big cable networks absolutely. I mean, Disney right now is very dependent on the traditional bundles still, and you know, they're not fully moving away from that by any means with this Disney Plus app. Yet they I was hearing from Kegan part of SMP Global Market Intelligence that Disney gets about fifteen dollars a month per subscriber from its top twelve TV networks, which is a ton of money, and they're gonna have this app for SI.

They generated about three billion dollars in box office ticket sales last year from its films and Avengers endgame opening later this month could be the biggest opening ever. So they are still very dependent on these former revenue streams. But I think Disney Plus will accelerate this cord cutting trend because if you are such a Disney and why would you subscribe to cable at you know, a hundred dollars some hundreds of dollars a month or you could

just get Disney for six nine. And I think that's what they're really hoping for, Although can you really get it for six nine? My question is when they actually start to incorporate more offerings onto Disney Plus, can they possibly stay at this price that undercuts Netflix. I mean that's the reason why people kind of were so odd by it, because it just you know, blows Netflix out of the water in terms of in terms of discounts, right, I mean, they've left themselves a lot of wiggle room

to raise the price. At six ninety nine, it's much cheaper than Netflix. But again, Netflix has more i would say, diversity of content for adults at least um. But yeah, they've left themselves a lot of room, and I would imagine the company hasn't said anything about this, but I would imagine that over time, as bigger hits make it to that app and there are increasing number of originals, they will have both the wherewithal and the need to

raise the price. Okay, So going forward for Netflix, what is sort of the key test about whether this will actually draw people away from it? Yeah? Because I think right now that the draw with Netflix is that it's good enough for the price. Right. You know, maybe it doesn't have always the best quality movies, and you know, it doesn't have some of the TV shows you like to watch on cable, But at the end of the day, at you know, thirteen dollars a month, it's kind of

a great deal. The question is, over time does it lose that appeal as Disney Plus comes on board, and then a T and T launches some app around HBO and the other assets it bought from Time Warner, and then there's all these other free, ad supported apps coming coming out now this year, And that question is, you know, do people still need to pay for Netflix? I think for a lot of people, it's going to be sort

of the base case. It's kind of like what you need and then what else can you afford to pay for? But for others, you know, for parents, maybe Disney Plus solves a lot of their problems and they don't need Netflix, And that'll be interesting to see over time does Netflix lose sort of that that premium. I honestly want to use that quote for the rest of my life. Maybe

for parents, Disney Plus solves all of their problems. There are a lot of Chapelle, Thank you for being here with Sarah La Chapel is a Bloomberg opinion columnist focused on deals, telecom and media. Disney Plus definitely giving a lift Disney shares. When you look at the global outlook today, there are a lot of concerns on the horizon Broxit, you have the European unions slowing down, you have rising strains of populism threatening uh the trade backdrop, But really,

how bad is it? Joining us now to discuss Mike Buchanan, Deputy Chief Investment Officer for Western Asset Management Co. Which is an independent affiliate of le Mason and overseas about four hundred and thirty billion dollars. He joins us from Pasadena, California. Mike love having you on. I want to start there. Do you think that there is just too much pessimism baked into risk assets right now? Even as they continue to rally? Do you think that there's still is too

much pessimism baked in? Yeah? I would say that there's certainly a lot to worry about, and those worries get a lot of attention and a lot of focuses. We think they should um But as you said, the markets continue to UH to march in a positive direction, and actually I think that's that's validated. I think when you look at fundamentals, when you look at valuations right now, when you look at relative value UM. We still think there's a pretty compelling case for riskt risk assets within

fixed income. Obviously, we had a very very strong first quarters, so you know, the magnitude or the trajectory of the rally is unlike unlikely to sustain. But I think, you know, from where we are now through the end of the year, I still think you can get reasonable returns UM and a lot of the risk sectors within extinct. Okay, are you talking about US hild bonds, Uh, that would certainly

be one US high yield UM. You know, we have been uh favorable on US high yield we uh we thought that that sell off that we witnessed in the fourth quarter, where you saw spreads go from you know, a little over three hundred basis points over treasuries at the beginning of the quarter all the way out to almost five D and fifty, we really felt like that created a very uh compelling buying opportunity, and in a lot of our portfolio strategies, we added to HI yield

late last year, early in January UM. And again, you know, we've been surprised at how quickly the market has recovered UM. But even where we are right now, Lisa, I would still say, you know, again, you're you're at a yield north of six percent UH. You know, defaults very very low UM fundamentals, like I said earlier, very strong. So I'm looking right now at us HILED that returns of

eight point two percent so far here to date. It does raise a question, especially as yields go to the lowest UH since October of last year, or tracing all of the losses, are all of the rise and yields and the and the in the decline in prices that we saw over November December, how much more upside is there? Though? Yeah, I think with with high yield, you know, it's it's not necessarily about more spread tightening. So you know, one of the great things about high yield is that it

is a really nice carry trade. If you just have it on, you're clipping a you know, a nice coupon, You're you're clipping a north of six percent yield. So I don't think you necessarily need to get UH spread compression or spread tightening and capital gains. I think just simply holding it and earning that carrier, earning that yield UH still translates into a pretty good return profile in a in a world where you know you looked at UM, you know there's over ten billion of negative, negative yielding

assets out there. What about emerging markets, Uh, We've liked emerging markets, continue to like emerging markets, uh, in in many different forms. Local currency probably our most passionate overweight within the spread sectors. There, we just think, you know, you've got very high nominal yields, you've got inflation trends that are trending lower, just as they are in developed markets. And then when you look at real yields, the differential

between developed markets and developing markets that's abnormally high. So we think that's a very attractive sector within emerging markets. But we also have some favorites in the hard dollar e M space as well, the dollar denominated So I see that you just spearheaded the firm's new global outlook, which is very beautiful. So congratulations. It has like not

lots of pretty graphics. Um. The most contrarian call that I thought in here was that people are too pessimistic on Europe, and this has actually gone from control are into a little bit more accepted that that already there's so much negativity based in baked into asset prices in

Europe that there could be potentially opportunities there. Where are you seeing opportunities in Europe given that backdrop, Yeah, I think you know that's that's rightly so you said it the right way that um, you know that it's just really about the bar being set so low in Europe and the outlook is so gloomy that the likelihood that um, you could see some positive surprises we think is very real.

We think you could get a a catalyst once if we get a trade agreement worked out with China, that that could have some follow through for Europe and Germany in particular. UM. But we would really say this, we would say the opportunities, um that you get by identifying a stronger Europe aren't necessarily in Europe. It really it's really about how that translates to global growth, and Europe

is a is a key component of global growth. So our story really is that, you know, if you put the main ingredients of global growth together, whether it's China US Europe, that Europe is that one piston or that one cylinder that you know, everyone has a lot of doubts on and we just think that it could be

a little better than very gloomy expectations. So given all of that, and it seems like you're pretty optimistic and constructive just generally on all things risk, I'm trying to understand whether that necessarily translated translates into higher developed market government bond yields, because right now we're not seeing inflation tick up. You do see that negative yielding debt backdrop,

and that's kind of what's driving the risk asset rally. Right. Yeah, that's a fair that's a fair question, and I do think that, um, when you look longer term the prospects for for for rates within Europe, certainly, you know, you have to think they're going higher. It's it seems like they're at unsustainable levels where they are right now. UM, But we do think there's quite a bit of time

between now and when that ultimately takes place. The FED has been very clear about, um, you know, they're they're dug in right now and very very unlikely we think to see a hike anytime within two thousand nineteen UM. And we do think that Europe. I mean, you know, you're talking very very slow growth, so you know, in inflation that's well below target. So you really have to get those factors moving in the right direction, but before you'd have to be overly concerned about, you know, an

upward trajectory in the overall rate environment. So not a thing we don't think. So we think, you know, you're probably looking out you know, past two two thousand, twenty or even later for rates become a real material risk to the upside. Mike Bikannan, wonderful getting your point of view. Thank you so much. Mike b. Cannan's Deputy Chief Investment Officer for Western Asset Management UH, an independent affiliate of Like Mason, overseeing about four hundred and thirty billion dollars

from Pasadena, California. How does one value Uber? This becomes important as it prepares it's initial public offering that is expected to raise about ten billion dollars. Joining us to discuss Shia Ovid, a technology columnist for Bloomberg Opinion, joining us here in our interactive brokers studios. So, Serre, we got the S one filing, so we got some financial information for the first time about Uber. What did it show us? Well, it showed us that Uber is a

complex business, which we knew. But the S one was three hundred and fifty some odd pages, including financial statements, which is, you know, pretty meaty. And so I learned a couple of things. One, did you read the whole thing? Okay, skimmed a lot of it, but you know, I read the important bits. So a couple of things were evident. Look,

this is basically two businesses. Two main businesses, the on demand rides, which is eight percent of revenue, and then Uber Eats, which is their food younger food delivery business, which is fifteen percent or so of revenue. And the on demand ride business is large, but also not growing very fast, at least by kind of current tech startup standards.

That the the it's in the sort of twenty plus percent range right now, which is again maybe not the growth rate that investors have come to expect from young companies going public. We also have to remember that look, Uber is basically not a startup by any conventional definition of that term. It has eleven plus billion dollars in annual revenue. It is going to be valued at something like a hundred billion dollars, which is a pretty unheard

of range. And despite being pretty big and pretty old by startup standards, it lost It had an operating loss of three billion dollars last year, So what's the mitigating factor here? I mean, I was also reading about how their actual ride sharing business, which is the mainstay, is slower. It is indeed it isn't it's it's now kind of growing at the twenty plus percent range. So I would assume that that is going to be a significant concern for investors. And the thing I wonder about is how

big is demand really in that business? And I think I had the same question coming out of Lift and is it economically viable through the unit economics work, And I don't think we have I don't think we really know for sure about either one of those um, either one of those essential questions about the on demand ride business.

So then the question really becomes from the investors standpoint. Uh. There was a law out of talk earlier in the week about the incredible enthusiasm around the Uber ip o, how this is going to be the biggest one of the year. UM, and now we're looking at LIFT shares down another four percent today. Uh in US trading. I'm just struggling to see whether there will be the same demand that people had expected for Uber's IPO. I think

that's a really good, great question. The thing I can't figure out is, you know, is what we're seeing with lifts trading that the I p O went well, but it's it's traded down significantly in the aftermarket since then.

Is that a reflection of Look, there's a relatively small percentage of shares available to trade, there's been kind of more short interest activity than we typically see in a company like this, Or does this reflect doubts about Lift specifically, or lift relative to Uber, or does it just reflect doubts about the viability of this whole category, which of course affects Uber as well. Right, I think these are

really good points. So moving onto Uber's business model and Uber eats the whole food delivery system, how profitable is that? I mean, is that the holy grail? Right now? We don't really know because they don't necessarily break out the profitability of Uber Eats, but I think it's fair to say that that business is kind of the incubating business, one of the incubating businesses inside of uh inside of Uber's basically, look, all of their businesses are unprofitable, but

Eats is more unprofitable than the others. Okay, that's not great, not great. So not great, bub not great. Yeah, I guess that one person fast, but rowing fast. And look, there is there is some some comparisons out there for food delivery businesses. Right in the US, we have a company like grubhub, which is, you know, a fast growing, quite profitable company that does the same thing that Uber

eats does. Okay, so just quickly um an existential question, which is can rod sharing companies be profitable without self driving cars? I don't know, that's my answer, Okay, right, but I don't know, But like, isn't that essentially the question here because that's sort of the what these businesses are predicated on is that they don't have to pay a driver, correct, I think, so they're gonna two things have to happen. At least two things have to happen.

One is the fares for on demand rides need to come down, and some of that is technology, some of that is driverless cars. But they can do other things to write push more people into these kind of car pooling services like uberpool, um make more efficient routes, get more efficient in all aspects of the business, and drive fares down and get people out of cars and onto

scooters and bikes. But I think that is an open question about whether this whether delivering a ride on demand with a driver um is going to be a nicely profitable business. Ever. Sure Overday always wonderful speaking with you. Sure Overday is Bloomberg columnists covering all things tech. She's fabulous. Follow her work Bloomberg dot com, uh slash opinion. She is a terrific column 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 Woyit's I'm on Twitter at Lisa abram woits one before the podcast. You can always catch us worldwide on Bloomberg Radio