BB&T, Suntrust Merger Follows Key Fed Rule Change (Podcast)

media spotlight is back on the US regional bank business. Uh, given today's big deal BB and T is merging with SunTrust Banks in a twenty eight billion dollar deal, creating the sixth largest bank in the US. To help us break it this deal down and what it means for the sector overall that, we have two interesting guests today that will help us do that. First is Chris Whale and chairman of Whale and Global Advisers. He's on the

phone in New York. And Arnold Cacuda. Arnold is a senior credit analyst carving the global banking sector for Bloomberg Intelligence. He joins us in our Bloomberg eleven three oh studios here in New York. Gentlemen, thank you for joining US. I'll start with you, Chris, what do you make of this deal? Why did this deal happen? Why did it happen? Now? I think mostly this is about cost savings. Uh. These are two very consistent performers. They're big, um, they're probably

two of the largest banks. It would be allowed to do a deal by regulators right now. U S Bank could also do a deal if they chose to. But they like the size they're at, which is roughly where these two banks are going to be. And you look at the asset and equity returns and like I say, they're dead center of peer group one, which is all the big banks and anything above ten billion in assets. So you know to me, they're going to consolidate the

back end. They're going to keep doing what they're doing. They have slightly lower funding costs and the big banks, and they're good CNI lenders, kind of middle market lenders. RESI is not a huge part of their book in either case. Although sun Trusts used to be very big in residential lending before the crisis. UM, But unlike a US bank, they don't have that big trust business at big off balance cheap component that would make them a money center. So there's still a big, big regional bank.

Now if you look in the evaluations one point three one point four Tom's book about the same. So Arnold, come on in here, Arnold Cucuta of Bloomberg Intelligence. Is there a risk that when banks start to get very big through consolidation, that they start feeling compelled to take on more risk and go global? Is that sort of a concern from a credit perspective or is this wholly

a positive? Well, so far it looks like, um, you know, the combined entities, Uh, they're they're asset quality, credit quality is going to be you know towards the better end appears, and you know they're not talking about you know, taking on more risk if anything. You know, they have a good um you know, synergies overlap in the mid Atlantic.

You got you got UM B, B and T more mid Atlantic focus and then um UM sun Trust who has more of a Southeast and mid Atlantic so you know, taking out costs the first thing, and then that's going to help their effigiency ratio, which is basically your costs as a percentage of revenue, which is going to be pure leading exceeding even lower than even US bank corps, which should bring their returns their profitability to the highest

of the peer group. So you know that that's something that you know, really that's what the equity trade on, is profitability. And if that's going to take that higher than US Bancorp, you know, there's a lot to like, and I think you see it in the stock reaction today. So Chris is interesting to note that. I'm sorry, Chris, No, they are efficient. They're very good at what they do, especially BB and T s I I described this as an exemple are getting together with a very good UH bank.

You know, BB and T as far as lending and overall operational efficiency is great. But what they don't have is that huge funding advantage you know, forty plus basis points the US Bank has because of their their float from their custodial business and everything else They're They're funding costs is half of the average for peer group one, which is extraordinary, and that's because you have a lot of employers and a lot of other customers who just leave money on deposit with US Bank. Chris, I mean

both you as well as Arnold. Both of you are talking very positively about this transaction. The stock but to your question, Yes, the answer is yes, but we have to chase bigger loans, yes, no question. In other words, take more risk. Yeah, and they don't bank the way a community bank banks. So bank at the community level knows our customers. Once you see these large mergers, the ability of the branch managers of those banks gets constrained because the Fed starts to look at them like a

big bank. To your point, right, they end up in a world where the law of large numbers governs their production more than know your customer. And that's why the small bank is much better at managing credit. So Arnold, is that is that consistent with what you've seen in terms of smaller banks taking on a bit uh perhaps risk, but they actually know who they're dealing with, whereas at big banks, customers become numbers and there can be more

sort of holess stick credit concerns. I mean, there is a concern with that right where you know, they say scale helps profitability, but then again, well, if you're having a fewer eyeballs or technology to kind of look through something while your revenues increasing, things can fall through the track. Cox.

But you know, then again it's uh, you get efficiencies and technology, right, so you know, the more you can invest there and then you have a bigger based to kind of offset it over then then yes, definitely, I think I think that helps too. But but more so I think, um, you know, in terms of added oversight, um, you know the two fifty billion there, they're both exceeding that, right, Yet you're taking to two billion banks pretty much doubling

the size. You're gonna go over two hundred fifty billion. But a key thing I think that is driving this merger and that I think will drive even more regional bank mergers is uh this October proposal by the FED which really lowers regulation for the regional banks, and so kind of the new threshold to look at I think in terms of big regional banks is seven billion, right, and so US bank Corps four than seventy billion, and you still got a long way to go from that.

So I think as long as you stay under seven bill, you're still going to get this you know, less regulation that that that's going to come into sex right October. It's size, but it's also the composition of the business. If you have a lot of touch points with many other financial institutions, then even somebody is boring his Bank of New York. I love them, right, but they're custodian. They are very significant in the grand scheme of things.

US Bank has much more street exposure. And then another one that you know we could have talked about in this group is P and C. P and C is much more Wall Street exposure than a BBT or a sun Trust. You know, these are two commercial lenders. They come from the Southeast, which was a tough area. It still is. The the off market areas still haven't come back in the Southeast. So you know, it's an interesting merger.

But I agree with my colleague. I think could cost savings is driving this um and there was nothing else to do. They could buy a smaller bank, but it's not going to move the needle um sold. The street barely cares about this transaction. Let's be fair. We all love banks, but you know it's not that big, right so Arnold. So the obviously the equity markets like this deal. Both SunTrust and BBT stocks are up. There's a credit

market support consolidation in the banking sector. Well, um, you know, unlike M and A and other space where you know, typically you'd see huge bond deals, sit to finances. This is an all stock, um, you know merger, and then you know you don't need that financing. And and the thing with that is, you know, banks are highly regulated. They need to keep their equity ratios you know where

they are or you know, at at high levels. And and even post merger, you know, they they're still targeting a ten percent common equity at one ratio, which is you know, still pretty solid. So um and and and the thing is, you know we talk about size. They're increasing in size, but they're not going to become global systemically important banks, right. Um. You know, you know, Chris talked about kind of the state streets the US bank course,

but I'm sorry, I'm the being hy melon. But those guys, even though asset wise they're not that big, they're huge custol Global custolial presence makes them highly systemically important. Right, So that's why they're they're considered gesip's higher equity and debt requirements. So this is not the case for you know, the merger that we see today. Well, I'm sure that we will have you both back on when we announce er.

We discussed the next merger between a two regional banks that will inevitably get to announced based on this backdrop. That makes a lot of sense for them to do so. Chris Whale and chairman of Whaling Global Advisors, and Arnold Cakuta, senior credit analyst of focusing on the global banking sector for Bloomberg Intelligence, joining us here in our Bloomberg Director Broker Studios. Both of you, thank you so much for

being with us. So Earlier this week we were speaking with the head of fixed income for JP Morgan's of a Bank, Tom Kennedy, who said that when the FED talks about being patient with raising rates, it means they're not going to raise rates for the next three months, but then they're gonna be data dependent again. Joining us now to weigh in on that and all things fixed income is Kevin get Us, Executive vice president and head of fixed Income for Raymond James, joining us here in

our bloombergiddera active broker's studios. So, Kevin, what do you make of that? Well, I would say that it actually goes contrary to what Robert Kaplan said today about being patient. I think patient uh to the FED is longer than a three month period, So you know when we started the year, UM, we thought that June could be the next rate height and they would be on the sidelines

until then. It seems like that's now pushed to September at a minimum, And some are saying, you know, and if you look at FED funds probability index UM, the next double digit chance of anything is the FED lowering rates in January. So I actually think it means something longer than three months, and I think the Fed will kind I watched this market for the next uh probably six to nine months. So alright, so the FED is on the sidelines. What do you think gets them back

into the game, if you will, to re engage. What do you think are the data points that they are focusing on. It centers around inflation um, whether it's wage or price. So as long as you know the latest even the wage, our greatest hope for inflation came from wages, right average early learning slowly ticked up during the course of eighteen UM. Yet more recently it's appears to have stopped um or you know, up one tenth or something

like that. So until we see really any wage inflation UM price inflation will get numbers next week with further definition it's just not there. The interesting thing is, and somebody else has made this point, so I'm stealing it. Just full disclosure. But last year the Federal Reserve hiked numerous times, and the expected inflation over the next decade plummeted. It fell off a cliff. There was no inflation pressures last year, and yet the Feds still raised rates. So

what changed? What changed for the Fed? Yeah, they realized they made a mistake by raising rates too many times. And think that they realized they made a mistake. Yeah, two out of the three mandates were met a long time ago. The mandate of inflation has yet to be met. And we touched two percent basically once for a short period of time and then fell back slightly below it.

So you know, they got to their target. They said, okay, here we go, this is the launch and and you know around every corner is another brick wall for inflation. So I think the world has just changed for us to calculate inflation in the way that meets the FEDS real mandate, and I think that they just missed it. In fact, part of the global slowdown is because of that.

I want to push back a little bit because some people could say you're like, all right, bring it, because some people could say, all right, the inflation expectations were falling last year, the Federal Reserve still raised rates, and inflation has continued to accelerate, albeit not at the pace that people would like to see. But wages are still going up. Doesn't this say that they didn't make a miss stake and that they were right to raise rates

to normalize? Yeah, I mean you can. You can certainly make that argument. It's the problem is is you know where are we now? UM? We're we've peeked and turned back down UM or slight increases UM, it's not UM, it's not hurting the job market, but it's not creating wealth. It's going to help the economy. So you know, I would say that um, the fet is going to do more harm to the economy than meet the mandate of inflation. UM,

and I doubt will be at two percent all year long. So, Kevin, as you're out and about talking to your clients, institutional and retail clients, what are they doing? What do you sense? It is the risk appetite. They really embraced this market and are back in, you know, maybe allocating more of an investment rate, the high yield and maybe going out on the risk curve. What are you hearing from them?

You know, we've kind of UM, we've we've taken this UM approach that UM, they needed a shortened duration last year, UM, and UH still invest in quality and stay away from some of the risk here aspects of the fixed income market. UM. And that proved to be pretty true until the end of the year. And then UM, you know, the Fed put the brakes on the dollar UM. UH made some some real fundamental changes, and UM it felt okay to go back into risk. I think that what we're saying

this year is stay with quality UM. But you you have the ability to go back out on the duration curve UM with your investments without getting hurt. This is so interesting to me because you're seeing this in et F flows two and other people are doing this as well. UH. Two funds that are actually they've seen the biggest withdrawals year today in the fixed income space are too short term US debt funds. In other words, it's a reversal of the flight to cash last year, coming out of cash,

going into duration and going into risk. How long is that gonna work? You know? It could work for a while. I think, Look, the fundamental change of the bond market actually actually occurred with the elections, which gave them the Democrats back the house. So you know what what the

market was worried. If you remember, the MENI market was um kind of on its heels for the first part of the year because of the tax uh rebates and things that they that were taking them away from what was gonna fundamentally be able to finance in the state county municipal market. That went away with the election, and then so money started plunging back into the meuni market is actually driven spreads tighter as well as some risk

and a lot of investment grade credits. So I think, um, I think you have a real opportunity, um, and we're not part of it. This is not a credit crisis that we're in. It doesn't appear to be one in the future. You don't have inflationary pressures that are gonna gonna hurt the long in the market. You can swim for a while out in the open water right now, So just real quickly, any place you're telling your clients

to really just avoid. You know that this is a we We've had about a five year stretch for yield and UM. The offset to that is a down and credit trade that UM still makes us nervous. UM. There's a been a lot spoken about the legers woman market that that index itself dropped pretty hard, then it came back up UM. But we're still We're still a quality UM quality buyer right now. So if you're going, if you want to go along end, avoid triple C. Yeah. So so long if you want to reach duration, you

reach it in your knees. If you want to reach for yield, reach it inside of five years in corporates, got it? Kevin? Kevin Gettish, thanks so much. Kevin's executive vice president, head of fixed income from Raymond James based in Memphis, Tennessee. But he joins us in our eleven three oh studio today. Facebook's advertising model it's coming to our attack, you know. Yet again it's particularly in Europe.

So what we've had just recently in Europe is German antitrust regulators have ordered the social network to overall how attracts its users internet browsing smartphone apps. This is once again, I think if you think about Facebook and they're advertising

model and social media in general list. They're really kind of coming under some increased regulatory oversight that investors, I think in the back of the mind really have as a risk factor here, they do accept shares are not down that much, which is really the question I want to ask Alex web about his European technology columnists with Bloomberg Opinion joining us from London. Alex, why do shareholders not care more about the fact that Germany is taking

a much harder stance with them. I think there's probably two things that play here. On the one hand, it might be prized into the share as already. You know, we've seen this Facebook stock take a huge pummeling since the middle of last year when it first said that it was going to have to that its margins were going to be impacted by some of the measures they're putting in place to reduce the amount of dangerous content. But equally, the this German UH decision probably will take

a while to play out. You know, there's going to be an appeal process. It could then you know, ultimately be overturned and and for now it's only in Germany. What really becomes significant though, and this is the issue with the German decision, is that Germany is seen as the model for the rest of Europe. Germany was almost given this as a test case by European authorities to do the legwork and see what needed to be done,

and other European nations might start following suit. So, Alex, what do you think is the risk that again, this will be more of a European wide issue. We've seen again just coming from the EU regulations against the facebooks of the world's and the Googles of the world, and just US technology companies in general taking a much harder review of US tech. What is the risk or the concern at this point that some of these issues may

become more European wide. What the problem that Facebook has in Europe right now is that user engagement is declining. There's been a huge amount of antipathy towards its platforms, not just Facebook itself, but Instagram and WhatsApp. That means that it's under more pressure therefore to increase its average revenue per user. That means that um even if the number of people who are using the website declines, it can still grow revenue because it's getting more AD dollars

for each user. Now in order to deliver that. They've got to have more compelling, more granular data on the users they have and being able to tie together what'sapp, Instagram and Facebook, which is what this ruling is all about. That people have to consciously opt into that rather than finding a way to opt out. UM that damages their ability to find that granular data and therefore expand their their average revenue per user to set off the declining

user growth. So, Alex, we should really go over what exactly this German ruling said. Basically, it was it's an overhaul or it's forcing Facebook to overall how it tracks its users internet browsing and smartphone apps. So in plain English, why does this matter? What happens right now is if you visit a website and anywhere on and you are a Facebook US sir and frankly even if you're not a Facebook user, but there if on that website there's a button which says like this page or share this page.

Irrespective of whether you click that button or not, that website will send a cookie to Facebook servers indicating that either you the user or be this particular computer UM has visited this website. And that's the way of tracking you know how people navigate the internet, possibly what the interests are, and building up you know, these very complex

models of what people's interests are. This stops their ability to do that, to do that without people opting actively opting into it, and therefore, you know, poses a huge risk to Facebook's advertising model. So, Alex, is there a what is your sense of regulatory oversight? It seems to be obviously focused on Facebook, But how about Snap, Twitter, Google? Are you hearing that there is a growing sense that maybe these companies as well need to be monitored? Frank

frankly Snap on Twitter, No, these are small companies. You know, Snap has about hundred and eighty million active users. Twitter, as we learned today has about a hundred hundred twenty million. That's global daily active uses. Now Facebook has one point six billion daily active users. It's a whole different realm they're operating in. Nonetheless, it is a threat for Google.

Google has a similar thing. They also find you can get cookie sent to them from every website that people visit, uh and therefore build up these profiles and what your interests are. That then feeds into the ads that you get served on YouTube and Google Search, and so they are highly vulnerable to being the next company that comes

into the firing line on this privacy front. I want to go back to where we started and just to wrap up the conversation with this idea of you know, how much of a financial risk is this to Facebook, to the behemoths that capture the great majority of the advertising dollars and the eyeballs. And I'm just wondering, because right now you said perhaps it's priced into the shares that there will be more regulatory oversight. How does one put a price on this? How do you know what

it actually is priced in? It's very very difficult to pass. You know. Ultimately, this is a multi stage process and

we're still very early in that process. Um that means that people, you know, even with some of the difficulties Facebook's had over the past year, revenue has continued to grow, and I think there might be a sense that Facebook somehow finds a way now it's it's when the inflection point is It's very very hard to tell, you know, if if those fines start getting imposed and we actually start seeing Facebook implement these measures across you know, huge

markets like Europe where it's three million people something like that, that that is a huge threat to Facebook's growth opportunity. Now, it's whether in the growth economies like Asia and Sub Saharan Africa, if their regulators are as tough and often they do follow suit for what happens in Europe, that that's that that would be the bigger concern for Facebook's next leg of growth. Alex web thank you so much for being with us. Alex Webb, European technology columnist for

Bloomberg Opinion, joining us from London. Lisa, you and I've been talking about just just today on the strength of the consumer and how strong I mean, we just had the guest on talking about retail sales forecast growth of five percent in nineteen. So we're right in the midst of a bunch of consumer companies reporting earnings over the last couple of days. And help us kind of break that down and what those results mean about the consumer.

We want to bring in. Ken Shay Ken is a senior analyst covering the global food, beverage, and tobacco industry for Bloomberg Intelligence. He calls in from Bloomberg's headquarters in Princeton, New Jersey. Ken, thanks so much for joining us again. Tyson reporting today Kellogg's reporting today. What are some of

your takeaways, uh from some of these big consumer products companies. Yeah, Hi, Paul, Uh Yeah, today Kellogg Insison report, you know, to Bellweather companies within the package food industry here in the US. I think the broad takeaway to investors is that top line sales growth remains elusive for these big companies. You know, a lot of it is secular in nature. That is, there's just not many more new mouths the feet of

the US. You know, population is pretty steady. Arguably, these companies have not innovated to a degree that's exciting people to go to their products, um, and it's really suffering the bottom line as well. You know, it's hard to grow when the top line is not growing. And that's kind of the broad takeaway for both Tyson and Kellogg

this round. All right, So let's start with Kellogg, which is near and dear to my heart because I've struggled through breakfast with two kids, getting them at the door in the morning, and that seems to be the demographic that Kellogg tries to cater to. Kellogg shares now down five point four percent after disappointing earnings earnings result and you have to wonder talking about breakfast, how much are they shifting gears away from sugar heavy, carb heavy types

of stuff. Is that really part of the issue in sort of reshaping the view on healthy food. Yes, highly so, that's exactly you know. Kellogg Is, to its credit, has been really cutting costs dramatically over the last few years. One of the leaders I would i would say was in the packaged food space. However, you can't really cut yourself the prosperity. The new CEO, Steve Callahan knows that he's come aboard and say, you know, we're gonna pivot now to grow our top line and we're going to

get there by investing a new product innovation. We're going to make some selective acquisitions. Uh. Those are the two key ways anyway. Um, but the challenge it has is it's just over indexed the heavy carb products. I mean, if you think about breakfast cereals and pop tarts and pring goals and Jesus these are all some are growing better than others. But at this end of the day, you know, that's not really in sync where many consumers

are going today. They're pursuing mes like protein u natural products with no artificial ingredients contemporary new brands, and that doesn't really fit well to where Kellogg is right now. So what is the strategy. There's the strategy to diversify and try to chase the organic, healthy moving consumers. Maybe you know, go go buy some of these startups. Or is it to try to introduce new products or maybe

even be more aggressive on promotion. Well, they have done a little bit of that call they recently to their credit, but um Our x bar it's one of the UH products that is doing really well in the space if it's a convenient, health oriented or natural snack bar that caters to a lot of the themes that I mentioned. They're also chasing international growth. UM. They've bought a just Food distributor in Africa and Nigeria is doing very well and they're going to try to capitalize that and grow

their international exposure UM. And that's great and it's really they deserve credit for doing that. The challenge they have though is really twofold and doing that, and that is first of all, they're not the only big packaged food company trying to you know, expand to growthier markets outside of the US. So it comes at a healthy price

tag to do that. And second, when they buy these new assets, it requires a lot of management time and investment, so they don't really carry the weight in margin in the near term. So you know, we we we haven't touched on Tyson yet, which is the chicken manufacturer distributor. UH, and we talked about them earlier about possibly buying a

sort of organic, locally sourced California Northwestern Chicken company. And right now it shares down nearly three after showing that they are disappointing on their earnings and on their expansion, and they are also looking for, to use your word, can growthier pastures. But I have to wonder, if you take a step back, how much Kellogg's and also Tyson are both symptomatic of a larger protest and shift away from big food that is more processed. Well, I think

that's part of it. It's hard to quantify that, but clearly, UM, we know that millennials today in particular are not brand conscious as as many of their parents were. We know that they like to eat healthier. Um, they have more information on their fingertips than with their cell phone or their smartphone, I should say, uh. In terms of ingredients that are in these products, so they are a less or should say, a more pickle less brand loyal crowd.

Then many of these legacy package food companies are accustomed with. Given that that's the case, who's benefiting well? I would say some of the companies that are carring to niches um uh comes to mind. Mandolie for instance. Although Sweet Snacks doesn't seem a cater to this, um, they are doing a good job in a brand innovation. Just to take a look at their OREO reinvention and explain and you know, the different flavors. That's actually catching on with

a lot of consumers. Although it sounds counterintuitive a sweet snack like that, it's actually doing pretty well. Um. Pet food companies are doing well. That's tapping into the increasing trend of consumers that treat their pets like children and there will just spoil them with high end premium products. And that was behind General mills purchase of Blue Buffalo last year. So that that that's a growth business that's doing pretty well. They paid up for it, but nevertheless

the business is doing well. Yeah, Ken Shay, thank you so much for being with us. Ken Say senior analysts focused on the global food, beverages, and tobacco industries for Bloomberg Intelligence. Thanks for listening to the Bloomberg PL podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney and Lisa bram Woyds I'm

on Twitter at Lisa bramwoits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio