KBW's Cannon: Banks Will All Be Focusing on Expenses (Audio)

here's Bill Maloney. Good afternoon, Charlie. Stocks are rising again today, with the Dow currently hired by a hundred and fifty points. Sup's game thirteen and NAZAC rises thirty four. The SUP five hundred rises for a fifth day. That's the longest streak since March. Over In Europe, Italy rose one point six percent and Germany climbed one point four percent. Back In the US small cap six hundred games two points and the US ten yield at one point five three percent.

Night out of tennis be sectors are higher, led by games and financials, materials and technology only utilities foul down transports APT perform gain a hundred and three points, nasobiotexs rise eight and the VIX is down by three percent, regarding I p O S line search as high as forty four forty nine, and it's US trading debut. Down leaders included Goldman, Sachs, JP Morgan, and Apple, while United

health Group and Verizon led to the downside. MetLife jumped as much as six point to percent amid gains in the insurers, while Rim Resorts fell three percent. Shares were downgraded. Over at JP Morgan Live from the First Big News Desk, I'm Bill Maloney, Charlie all right, hey, thank you very much, Bill Maloney, and they here live breaking news over your Bloomberg Time Squawk squ a w K on your terminal.

I'm Charlie Peloton. That so Bloomberg Business Flash. This is taking stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. JP Morgan. Shares of JP Morgan Chase are higher right now by more than two percent volume more than twenty three million shares. Here to tell us more about JP Morgan's stronger than expected a second quarter results is Fred Cannon. He is Global director of Research at KBW. Fred, thank you very much for being with us. Great to be

on Tim, Thanks for having me. Okay, so uh, stronger than expected second quarter results, a surprise increase in revenue, a surge in the trading business. Let's start there. How did that happen? Well, one of the things that Brexit did was an increased volatility near the end of the quarter, and so we saw trading pick up and already been a bit better in the first quarter, quite a bit better actually the first quarter, and then we got a little surge there at the end that got us the nice,

nice beat on trading. So will that continue? Probably not. As we entered the summer months, especially August, we always see a slowdown in trading in the back half of the year tends to be slow. Plus there's some big long term pressures on that business from regulation, the amount

of capital that banks have to hold against it. Tell us about the lower expenses at JP Morgan Chase, so they can continue to cut I think the short answer is yes, they did get a special benefit in a reversal of some legal fees this quarter, and we know that's not going to continue. But overall, what you're going to see all the big banks do in this low interest rate environment is very much focused on expenses. So I think the trend at JP Morgan to control and

contain expenses. You're going to see from all the big banks and loan growth that exceeded what ten How did that happen? Annualize credit cards? It looks like JP Morgan is gearing up on credit cards. We think there's probably a little bit of market share steel from American Express that's been struggling recently. But also it looks like all these credit card lenders are willing to take a little bit more risk, go down this credit spectrum and push

growth now. Part of the conference call included comments from the chief financial Officer, Marianne Lake, saying that the June jobs report, wage growth and retail sales and housing are healthy, and that the US economy is set for continued moderate growth. Is that necessary for the results of JP Morgan and other banks to improve. Absolutely. Remember, we have a huge head wind from the interest rate environment. The market hitting record levels, but the ten year bond rate is one

point five three. I think we just heard that's a very tough environment for banks. Uh, it means that spread on their business is low. Um, So what has to happen is we have to have other offsets and so as she was talking about today. We really need this loan growth economic growth to continue at a good pace in the US, because we're not seeing it overseas well.

Jamie Diamond, the chief executive of JP Morgan Chase, said that he hopes that politicians are going to be sensible when they make decisions relating to the European Union in Britain, and that he hopes that businesses are going to get some time to adjust to this new reality. Do you think he's going to be listened to me, He's gonna be heard. I don't know about politicians being sensible is

something that we can expect this year, to be honest him, Um, certainly. Uh, you know, we can be hopeful on that, but we'll just have to see. I mean, it was a big move for Britain to exit the Union. We've gotten what one of my clients called a brolly here at the end of the Braxton vote, right, but we will see if it continues. I mean, I think things seem a little bit softer here than We've a little bit better than perhaps people have thought initially, but we have a

long ways to go to work through this. What is the best way to put a value on a bank. Uh, what we really have to do is look at the profitability to bank, and then we have to back into what the price to book value return should be. So JP Morgan makes around, you know, ten eleven return on equities. We think in this environment the cost of equity is probably nine percent. They should earn around where they are or maybe a little higher one point three one point

four of times book value. So that's the best way to think about banks. Especially remember when you're thinking about these trading this uh, fixed income trading, you can't forecast that. That's just a crapshoot each each quarter. So a lot of these things can't be forecasted, so you really have to fall back on some of these price to book ratios. All right, So I'm gonna ask you to forecast or at least roll the dice a little bit, because we're going to get results tomorrow from City Group as well

as Wells Fargo. What do you expect we expect some polls. Who remember, expectations have been reduced for all these big banks coming into earnings as a result of the interest rate environment. I think some of the things that we saw at JP Morgan should pull through for Wells Fargo. Mortgage business is a big part of their business. They won't recognize as much of that income as JP Morgan because of some obscure accounting issues, but yet that's a that's a big help for Wells Fargo, and we're quite

positive on Wells Cities a little bit. You never know, they do tend to stumble on their quarters, so we'll just have to say. And next week we're going to get results from Bank of America, Goldman Sacks as well as Morgan Stanley. Is there a standout among those three for you? Well, I think one reason you saw more Goldman Sachs be the big winner today is is some of the read across from JP Morgan it would be quite positive, both on trading and on some of the

capital markets activities and some of the investment banking. So that's the one to watch. The stock has been beat up pretty good here in the last last few months, so that's one to watch. The pop I want to thank you very much for spending time and giving us some detailed information about the banking sector. Fred Cannon is Global director of Research at k b W. Right now, the shares of JP Morgan chase. They're up two percent.

Shares of City Group they are up nearly three percent, Bank of America shares up at two percent, Goldman Sachs shares a higher by three percent, and Morgan Stanley a gain of more than three percent. You're listening to taking Stock. I'm pim Fox and this is Bloomberg coming up on taking stock. Will take stock of Israeli technology companies? Why are they leading a technology rally. We've got the details with Stephen Schoenfeld of Blue Star Indexes. That's next