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 moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's talk to John Murphy. He does this stuff for a living. He's Bloomberg Intelligence analysts. He's based in London. He's trying to help poor Sam Fazelli, you know, with his research. We appreciate John joining the team a few years ago. John, talk to us about Prometheus. Here, what is MERK buying for ten point eight billion dollars?
Yeah, sure, nice to join you. Yeah, what are they buying. They're essentially buying one product, and it's a bit of a gamble, some people might might suggest. But what we've seen is we've seen phase two data in two indications that both ritable bow disease indications Crone's disease and ultrative colitis. Those data look very interesting, they look very competitive for an see viewpoint. If and this is the key thing, if they were to repeat those data in phase three.
Were probably not going to see that data till mid twenty twenty five. And assuming there's a good safety profile, then you're going to start seeing analysts put multi billion dollar numbers in there in their spreadsheets. You're going to start seeing high single digit billion dollars in their spreadsheets, on which basis, ten point eight billion dollars will look like a great, great deal. The converse is clearly true here.
Hey, John, just give me kind of the broad strokes. How does a biotech analyst value a company like Prometheus? I mean, before you know, like your close Friday with an equity value a little over five billion dollars, do you guys just go out there and say, hey, I think the size of the market potentially is this, and I think this drug could get X percent of this market, and therefore I sign a multiple that way?
I mean, how do you guys do that?
Yeah?
I mean I think early on, a lot of this is finger and the air stuff, right, and early on, you're you're looking at the management team, you're looking at the mechanism action, and you look at the disease air Later on, and this is where these guys are now. Later on you're looking at the clinical data and you're comparing it with other products out there in the marketplace. So we know in IBD there's a lot of big drugs out there, Humera right nor to twenty billion dollars
for example. So you look at the data and you compare and contrast there and versus those products. At the moment, this looks pretty competitive. So that's kind of where you are now. The next step then, of course, is a company like Prometheus is going to be able to get out, going to be able to do the Phase three itself,
it's going to be able to market the drug. Now they've got a big guy on board putting their arm around, and they've got Merk on board, and so again people are going to start allocating greater value to the products and to the company on the back of that.
Well, can we talk about the Merk side of this deal here, because we're coming off I think a couple of months ago Pfizer and Ciegen was the big biotech deal that everyone was talking about. From when it comes from Merks perspective, this is not probably going to be the last acquisition that they make. How much cash do they have on their balery. How much root do they have to work with to diversify their pipeline.
Right, that's a great question, that's absolutely spot on In terms of the commentary, I think, first for context here, the key thing is Mert this year is going to have the world's biggest selling drug, key Truder, a cancer drug that goes off patent in twenty twenty eight when it's going to be selling thirty three billion dollars. It's about forty four percent of merk sales. So if MERK doesn't have some products to replace that, it's going to
have a massive hole in its earnings. So we saw, for example, MERK did a deal with acce on spent eleven half billion dollars in twenty twenty one. You'll remember they missed out and see gen Fires have taken siege and now we've seen Prometheus today. There are going to be more deals to follow from Merk because their strategy or part of their strategy, is to make sure they
have additional growth legs when key Truder goes off. Pattern in terms of how do they pay for these things, what goes on in the balance sheet, Merk's throwing off over twenty billion dollars of operating free cash flow annually. So these sort of deals are deals they can very straightforwardly do. They may pay cash, they may raise a bit of a debt in the marketplace, but it's not the sort of thing that's going to impact the credit rating of a company like this.
John, you know what we've all been dealing with in the macro over you know, the last you know, you know, six months, maybe even more, is just a tightening of credit out there, tough to raise capital, cost of capital going higher for everybody in the marketplace. What does that mean for the biotech space? If I've got a really cool drug idea, or if I've got the science, can I go out there and raise money for the early early trials or is that a real tough go these days?
It really is a tough go these days. Absolutely, and it's and it's tougher and tougher. And you can look at it from two points of view. You can say, if you're that biotech, what you really have to have, ideally is you have to have hopefully some clinical data at the very least, you have to have a very good concept and a strong management and a credible management management team in the absence of it becomes very, very tough, and that's when you look at the other side of
the coin. Then big farmer starts looking down and they can start to maybe cherry pick some of these better assets because, as you rightly say, they're raising capital in this market is a real tough ask. Of course, for the farmer guys, they're so cash generative, it's something relatively straightforward for them.
Well, when you're talking about just M and A activity in general here, I mean, it feels like it's always going to be in these bigger players' best interests to diversify. We're hearing it from Mark, we're hearing it from Pfizer, Maderna as well post COVID vaccine. But is the M and A activity in any way indicative of kind of the macroeconomic conditions that you're seeing or is this something that's very specific to biotech.
Yeah, I don't think it relates to the macroeconomic side of things. What I focus on really is the patent cycle. Remember that drug companies are when they bring a drug to market, a drug has a twenty year pattern life, it's probably taking ten years to get to market. That means every ten years, on average, half of them business
they have to regenerate or find from somewhere else. And what we're seeing is between twenty twenty three and twenty thirty there's nearly four hundred billion, four hundred billion of annual sales potentially exposed to generics. So you've got a lot of these players, some of the ones you just mentioned there, you've got fiser merk of artists for example.
I being very very vocal indeed about having to do deals, not huge deals, not like the ones that we saw in the late eighties where that were buying other large companies, but really deals that bring in product portfolio and late stage assets and more lock on deals. But we would expect to see a lot more deals in this kind of high single digit billion dollars going forward. But we don't think that today necessarily marks any sort of sea
change at all. This is very much in keeping with the strategy the murk of an announced to the market already.
Hey, John, if I'm a merch shareholder, do I care whether they come up with the next big drugs internally through their R and D or they go out and buy it.
Do I care?
No? Short short shop aren't, So no, I don't think so. I think some investors like to see it coming through internally, But at the end of the day, why does that matter. If you're the smartest out there in terms of accessing new technology or accessing new part line, that's as good as doing it in the house yourself.
I mean it's interesting. I mean because there's Mark spending thirteen billion on our R and D.
Yeah, thirty seconds, hear very quickly. What about the regulatory action. It feels like the consensus here is that this is going to have zero hurdles, So I.
Think, yeah, that's a very important point. Regulator in FTC and FTC have clearly looked like they're going to be more aggressive. However, there's no obvious overlap. Pier MERK doesn't have a big presence in immunology. Slightly different to when you looked at, for example, when we looked at fires a siege and we did see some potential over that learing bladder cancer. But this looks like it ought to be clearing regulatory hurdles without any major issues.
All right, John, thank you so much for joining us. Really, I really appreciate getting your insight. John Murphy, longtime pharmaceutical analyst on the street, spent a lot of time in Gold and Sachs. He joined Bloomberg Intelligence fore years ago. So they've got a top notch healthcare team at Bloomberg Intelligence, got folks in the US, in London with the Sam Fazelli and John Murphy, and a good team in Asia as well, So we got it covered all over the
place from every angle on the healthcare side. John Murphy pharmaceutical anamals with Bloomberg Intelligence based in London. MRK buying Prometheus biotech company ten point eight billion dollars. Nice little trade for a Monday morning.
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Earnings are happening. Focus turns to earnings, folks, also turns to dividends. A lot of folcus saying we need to pay more attention to dividends and focus on them going forward in this higher industrade environment. Austin Grath, founder and CIO of Opal Capital, joins us. Austin talk to us about kind of how you guys view dividends, How does that factor into your investment thesis.
So we view dividends as a critical component to investor returns, and we do that for a number of reasons, but I think the biggest reason is just the dividends of contributed. You know, depending on when you look back in the past, it's contributed anywhere between kind of forty and sixty percent of returns when you look at dividends and the reinvestment of those dividends. So we think that investors that tend to look to those parts of the market will end
up benefiting over time. We think the reason that that exists is is because it's the good signaling mechanism for management teams. Management teams that are willing to distribute some of their cash fload to investors in the form of dividends and grow that distribution over time tend to show that they're confident and their business going forward. And the business is that do this also happen to be a
relatively high quality company. So we think it puts investors in a pretty good kind of section of the market if they focus on dividend paying companies.
Talk to us a little bit about that phrase high quality company. Are we looking at it from a kind of cash perspective? How much cash do some of these companies have on their balance sheet? For example, I think in twenty twenty it was Techo was all the rage because of that liquidity option. How do you value high quality at a time when that cash is diminishing.
Yeah, so high quality is kind of subjective and everyone has a different definition. Some people say high quality is just high free cashual yield, and you know that that can be true in some situations, but company pre castule yield can vary over time, and so we really look for companies that both have found balance sheet, they have the ability to generate attractive free flows through the cycle.
So it's not just kind of commodities companies that have a ton of free cash flow because they're in the right part of the pricing cycles for the commodity. But we want companies that have that balance sheet strength and stability to pay a decent dividend through the cycle and
also grow the dividend. And then finally it comes down to the really subjective measures is speaking with management and understanding kind of what their ability and willingness to pay dividends is so companies like some of these tech companies that have a lot of cash, they may be considered high quality, but then they end up putting that cash into a bunch of kind of moonshot projects that may
not be that helpful for investors. And so we like to focus on companies who are focused on investing for the long term, but also focused on putting money towards investments that have high returns on capital and aren't just kind of kind of shooting for the moon hoping that you know, whether whatever it is, kind of flying cars or you know, space exploration or or whatever they're putting money into, hoping it turns into a proper business at some point in the future.
Austin, speaking of dividends, the banks have begun reporting earnings, and you think about some of these big banks and they have did with dividend yields of three to four percent. Here, what did you see from some of the bank earnings so far? And have you changed your view towards the banks?
Yeah, So the bank earnings is really interesting because it kind of highlights what we think is going to be a theme through the first quarter reporting cycle. So a lot of banks didn't really so the economy or the economic data was relatively positive for a little over two thirds of the quarter, and so when you look back at what banks are reporting, they're reporting on the first quarter,
which was a relatively positive economic environment. We think most banks and most companies will actually turn in relatively acceptable reports in the first quarter. We think investors should really focus on what management teams are saying about the quarters to come, as the dislocation in the market seem to have started in March, and we think management teams will start preparing for that and start preparing investors for that with some of their commentary, and there will be kind
of winners and losers. We saw JP Morgan was one of the big winners from the dislocation, and some of the smaller banks are not necessarily reporting catastrophic results, but they're alluding to less earning power going forward, and we think that the risk at current valuation levels.
Can We talk a little bit about buybacks here, because it feels like a lot of companies again who are still sitting on cash and issue ins etc. That they had from twenty twenty and twenty one, are actually still buying back their stock despite talking about risks and layoffs and kind of macroeconomic gloom and doom. What happens to buybacks.
It's an interesting question. Some of the biggest buyer backs of shares for the large technology companies, and they tend to buy back a lot of their shares to offset dilution associated with compensation for employees. There's actually no we could talk about the tax on buybacks. There's no tax associated with the return of the buybacks for share for management compensation. There will be a one percent tax on buybacks that actually reduced share count. It's more of a
discretionary payment. So we think if if the economy really does turn south, you might see those buybacks slow down or even stop in many situations. But you do have a lot of tech companies that are kind of forced to buy back shares to make up for the dilution that will take place if they don't buy back shares just because of the way that they compensate their employees.
So also when you look at a company like Apple, here's a company one hundred and sixty five billion dollars of cash on its balance sheet, annual free cash flow of about one hundred billion dollars a year for the next couple of years, yet they pay no dividend.
Yes, they have a massive buyback, but no dividend.
I mean, does that surprise you because it seems like they could put out a two or three percent dividend yield and attract a whole new group of income seeking investors. When you see a company like Apple, how do you kind of view that?
Yeah, we look at that as management doesn't really value a dividend. They value buybacks more than dividends. Over time, we think that that might change. One of the changes we see is potentially with the buy back tax that was put in place. There has been talk about increasing that. I think that President Biden mentioned it around the State of the Union speech, to the extent that the government
starts to increase buy back taxes. We think that dividends become relatively more attractive because you don't have the significant difference in tax situation between dividends and buybacks, and we think more companies will start distributing cash flows in the form of dividends going forward. One thought on the Apple situation, and actually many tech tech companies out there, is just they haven't necessarily hit a point in their life cycle
where investors are expecting them to distribute that cash. We think over time, if investors pressure for a higher dividend, you will get more serious consideration for management teams.
All right, Austin, thanks so much for joining us. Always love talking about stocks and dividends and companies dividend policies, because a lot of folks are saying this next decade is the decade of the dividend.
We've heard that a.
Couple of times from a couple investors. Austin Graff, He's a founder and CIO of Opal Capital. Before that, he was an equity analyst at PIMCO.
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If you think about over the last year, year and a half, at least, to me, the most widely used term reference on Ernie's conference causes has been AI. Every company's talking about AI, artificial intelligence, how it's impacting their business, how they're using it, and I think most investors don't even know what it is. They're trying to figure out what is it? How does it impact the companies that I invest in. We figured we go to a professional
here who does this stuff, Ashley Still. She's a senior vice president and general manager for creative Cloud and document Cloud at a little tech company out in California called Adobe. Ashley, thank you so much for joining us.
Let's just start off.
I would love to get your definition of what is AI and then how does it apply to some of the businesses that Adobe is in.
Well, first, thanks for having me, and you know, at Adobe, our mission is to help everyone bring their CreatiVision to life, and we certainly believe that AI gives us a huge opportunity to do that, for professionals and non professionals to like. So, you know, AI simply for me, is when algorithms kind of are aiding software to do tasks, and it often helps automate repetitive, monotonous activities that traditionally humans have undertaken.
And one of the areas that we're really focused on right now is an error of AI called generative AI, and that enables people, you know, it's services like chat GPT or Dolly, and Adobe just introduced a service called Adobe Firefly that enables you to simply just enter text and the models and algorithm produce images based on the text that you've written. And so obviously this enables a huge opportunity for people to express their ideas and create content in new in different ways.
So how does that align with kind of just the broader text space. I guess I mean, I'm thinking of it as chat gpt is the easiest example of it. It kind of makes sense that alphabet would hop into what the Microsoft would happen to it because they have search engines and that makes it kind of an easier alignment. But then how do other companies within the tech space adopt it? It feels like AI and chash ebt even is a very wide umbrella. Can you give us some more examples?
Absolutely? So, you know, for Adobe, we see this is a huge opportunity to aid editing. If you think about what our tools do, whether it's video or imaging or photography or design, our tools enable creative professionals or marketers to produce content. And they might do that with starting with images or graphics that they've created themselves, or you know, if you're a large company, you're probably licensing content as well.
This is a huge opportunities another source of content. Think of it that way, where if you're in Photoshop and you need to add an element to a design that you're working on, instead of going and and you know finding it in your files or from a colleague, you can literally just produce it on the fly. So it
is again a powerful tool to help with editing. On the marketing side, again, it enables marketers in more text examples to create copy and and you know, one of the big trends in digital and for companies is personalization and a lot of content and experiences are being created in order for businesses to have more relevant experiences for
their customers. And humans can't produce enough content to get to true one to one personalization, and so AI is going to be a really important again tool in the in the tool chest to achieve true personalization and and unlocks the power of digital.
Hey, Ashley, you know, as more and more companies and individuals for that matter, embrace artificial intelligence, there's concerns out there about control, having control over AI, what it can do. How do you guys at Adobe think about that and manage that risk.
Yes, So it is incredibly important as content is produced in more and more ways, right by both humans as well as algorithms and machines, for to have transparency. And again I think there's whether you think of it as control or transparency. Ultimately, consumers have to trust the content that they're seeing, whether it's from a brand and a
marketing context, whether it's from news organizations. And Adobe founded along with you now nine hundred partners an initiative called the Content Authenticity Initiative, And what this really focuses on
is transparency for digital content. And we do that by adding metadata to content as it's being edited and produced, and that enables news site, businesses, et cetera to provide that transparency to the consumer to just be clear, was this content created with the help of generative AI, How was this content edited?
Right?
Is it real or is it fake? So we're really focused on transparency with both AI, but just in general with digital content, are.
You all worried about regulatory pushback or scrutiny from Washington or even scrutiny from kind of your demographic as well as more and more people are talking about adopting AI, it feels like there's privacy concerns associated with them. How are you thinking out that?
Well, one of we believe very strongly that everybody participating in I in AI needs to take a responsible approach and so, for example, at Adobe, what we've done is we only train our models on content that we have a license to right or content that's on the Internet where the license has expired. And we believe this is really important because a lot of people don't want their
content to be used in training. You know, we represent the creative community, and there are many people in the creative community who don't want their style kind of quote unquote stolen from them, and so we do believe it's
important to take a very responsible approach. And there's also parts of the law that are very unclear right where you know, copyright in the age your AI will evolve right now, again with generative AI, if an artist produces work through text prompts, there's no ability to copyright that work. So there are definitely areas where the law will need to evolve, and we think it's important as well that companies are responsible and how they're sourcing data for AI.
Hey Ashley, Thank you so much for taking the time to join us. We really appreciate kind of getting the benefit of your wisdom on AI artificial intelligence. Actually still senior vice president, General Manager Creative Cloud and document Cloud at Adobe.
You're listening to the team Ken's are live 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.
We're in a thick of bank earning season that means talked to Hermit Chan. We talked to him a lot. I'm kind of tired of this guy, but he covers the regional banks. He's really really good at one of the top guys on the street. But we're also joined now by Neil SIPs, equity research analysts the Bloomberg Intelligence He's a proud at University of Dayton flyer.
Neil.
The last time I saw you you were in Asso shit working with Alison Williams. That they promoted you to analyst.
Yeah, that's right, that happened. Yeah, And you know, I think many years of kind of getting into the details of some of some of those bigger banks you get a lot of experience and a lot of understanding, you know what all these business lines are are driven by and ultimately how these businesses are positioned.
All right, So what did you see from Schwab today?
And then you know, I'll ask you for your thoughts later on kind of what we saw Friday from some of the bigger banks.
Which would you see from Schwab today?
Yeah?
Sure, so I think from Schwab, you know, from the from the start, you see the strength of their business. You see return on equity and access to twenty percent, you see pre tax margin above forty percent. Ultimately saw the net interest margin decline this quarter sequentially, and that's the biggest question for investors is what's going on with deposits. Ultimately what we saw as deposits decline on the platform by about forty billion this quarter.
That accelerated from the That's huge, right, Yeah, that's huge. Of anything's big, but I mean when it's money, that's really.
Yeah, And for Schwab specifically, I mean that's that's sort of the proposition of how they make money is ultimately the uninvested cash in their clients accounts is what ultimately gets reinvested. Into securities on the balance sheet, and that's really the driver of net interest margin. When those deposits leave, you start having issues on the liquidity front, and that's kind of the question and what the you know what.
The CEO was trying to quell some of those concerns today with of how they're going to provide funding going forward as deposits leave.
Herman hop on into this conversation. Herman again, that guy her Hobbins is the conversation talks to us a little about what we can actually expect from these earnings. I think Thursday is the big day where we're getting the majority of the regional banker earnings. What is or is there a kind of one bank or two or three that you're really paying attention to. Last Friday it was all about JP Morgan. Obviously, I think tomorrow it's going to be off's a bit all the big three, But
on the regional basis, what's what's on your radar? Yeah?
Sure, So Wednesday and Thursdays are the big days for the regional bank reporting for the first quarter. We had mm T report today, PNC on Friday. The biggest issue in the focus is going to be on deposits. As Neil mentioned earlier, where are we on deposits? How do they stack with the rest of the group. The best so far has been JP Morgan and then M and T was actually showing steady and stable deposits, which is
a great sign. We're still waiting on some of the others that the numbers look maybe a bit poor on, which would be somebody like Western Alliance and banks like First Republic. But we're probably hoping to see pretty stable the maybe down a little bit for deposits across the group.
Can you up on Friday some of the big banks reported I was not here. I was driving all over the central coast of California. I missed it. But it was the story there for a lot of these bigger banks. And will it continue to be this positive net interest margin stories? That one of the key things that you're looking at.
Yeah, and I think the question is still just surrounds deposits, and particularly when you're looking at some of the some of those larger players, the JP Morgan's Bank of Americas of the World, they're the ones who are perhaps you know,
winning some of that share of deposits. As you see things kind of reshuffle between institutions, and so ultimately the question is that and obviously as we have you know, objectively higher interest rates, now the question is what's going to happen with loan growth as you you know, get to these elevated levels on short term interest rates, and then particularly when you look at investment banking, that continues to remain slow, whereas trading was benefited by some of that rate volatility.
Well, Neil a follow upon the loan growth story because it feels like there's kind of this cash twenty two on the one hand, and it's this big influx of deposits that Jamie Diamond, I believe on Friday, Paul, you missed this part. Jamie Diamond had.
A lot to say.
I'm sure on Friday, but Jamie Dimond said, look, by the end of the year, that's going to reverse. This is a temporary measure. But then on the other hand, you have the loan growth, which is also song. So that does that mean by the end of the year everything that's being viewed as a major positive for the big banks is just gonna fade away?
Yeah, Well, I think it's it's it's sort of difficult to say. I think there's a lot of variables between now and the end of the year, and a lot of that's going to ultimately play out into what we see in terms of loan growth, what the benefit of interest rates is. And I even think you know, Herman Chan may actually have you know, better insight on that as it relates to kind of the loan growth that you're seeing, perhaps more so at commercial versus consumer at some of his banks.
Yeah, I would say that commercial lending is still fairly strong. You saw some growth from M and C in terms of C and I growth, so that's a positive sign. We're still waiting on guidance furmenty the calls going on right now, but that'll be the big driver a sentiment going forward. Overall, it seems like credit availability could could weaken a bit given the fact that we're seeing higher deposit costs and banks needing to pay up for deposits
to retain those relationships. That probably could spur some weaker demand going forward, and we've seen that across some consumer lending types already with auto loans, those rates on the auto loans are already driving something to the effect of seven percent, which creates some sticker. Stock Shop for a lot of the potential buyers of cars these days. So that's something that we're looking into going ahead for the rest of the year.
You know, what are the big banks saying about kind of the capital markets business? Are they kind of saying, you know, don't get your hopes up for twenty twenty three, We'll think about twenty four.
Yeah. I think unfortunately, it's sort of been a kicking the can down the road on you know, we expect it to continue to get better at some point, but when that's some point is you know, we're not too certain, and you just look at kind of metrics of volatility, where interest rates are, the uncertainty around interest rates the economy,
it's just challenging for capital raising to happen. It's challenging for deals to take place when there's still not clarity on ultimately where interest rates are going to be going forward. And so I think, you know, twenty twenty four is sort of where they're starting to push those you know, those guidances of you know, potential for hope.
All right, Like many people, Neil, I'm I'm a fan at Jamie Diamond, but his stock just went up another notch.
In my mind, telling his managing.
Directors to be back five days a week.
Has there been any what's the feedback that you've heard, maybe even on the call Jamie Diamond's comments to it.
Have you heard any feedback there?
And we'll expect other banks to follow suit because a lot of times Jamie kind of leads the pack.
Yeah. Yeah, he can tend to be a bell weather. And I think you know, to that extent, perhaps it's it's more focused on that senior talent, and you want to have those people in the office, particularly for the benefits of those that are junior below them, because ultimately that's you know, that's how you're going to foster that culture, which we know is incredibly important in investment banking, ultimately
driving relationships for the business. And so as you ultimately see you know, work from home being phased out a little bit, it may start at the higher ranks and ultimately feed down into the lowers. And of course, you know, we'll see if this does bleed into the other banks and others, as ultimately that can sort of be a competing factor for talent.
The only reason Paul Swen is a fan of Herman Chan the only reason because he comes in five days a week.
Yeah, he brings it.
The best ability is availability.
Oh well, the best ability is availability that one.
Put it on a shirt to it on Paul's forehead. Herman, your take, then, I mean, let's just continue with that thing. And that's the take from the big banks. Is it that important for the regional banks in.
Terms of folks coming in? I think there's still a lot of work from home mentality So well, we haven't heard directive from the CEOs on down. So if the Jamie Diamond issue of making folks coming in, at least from the MD level, you could see some of the regionals sort of follow suit, But we haven't heard of any of the more mandated coming into the office, at least not yet.
Herman, really quickly, I want to ask you about buybacks specifically. I think I asked you this last week. I had a fantastic answer. It's worth repeating. When you're looking at some of the valuations of these regional stocks, they are trading far below their kind of normal or average price to book ratios. Isn't that a no brainer for these regional banks to buy back their stock.
It makes it really enticing because our group, the regional bank group that I cover, it's training about one times tangible book value adjusted for the AOCI, so really low levels attractive levels. We're still in a bit of uncertainty though. PNC came out on Friday and said they were halting buybacks until they get more clarity on maybe uncertainly from the market and also from the regulators. So until we see some of that clarity uppear, it seems like there
could be some less activity from a buyback standpoint. There are others that have really strong capital ratios that we cover. M and T is one. East Wests is another that really have strong capital and operating really well that could continue to do buybacks. So it'll be a mix, all.
Right, Gens, thanks so much for joining us. Herman Chan, who has saved our bacon many times over the last month, helping us get through what has been a stressful time for some of these regional banks. Herman Chan, Bloomberg Intelligence senior animals covering those regional banks, and Neil SIPs Man, what a strong first show on my show, Neil Safe's
Equity Research Annals Bloomberg Intelligence. We trained him up and here he is put out some great research and helping us understand what's going on with the banks.
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Looking at the Big Take story, you know, we're all big fans of the Big Takes story because they are really usually usually very very interesting topics, but always deeply, deeply reported. In today's is no different, and it goes to the headline interest only loans to Hampton's set in pale First Republic. That does not sound good there, So let's talk to Jenny surname surname Surrain. I'm sorry, Jase Shrain, thank you for Bloomberg News. She was one of the
reporters on this story. And you think about these big Jenny, you got to the ham Does not that I go there because I'm a Jersey shore guy. You think about the Hampton Is to see these big, big homes.
They're not all cash.
They're getting up some big mortgages associated with those and I would think for a banker that would be good business. Talk to us about First Republican and the business they were doing out in the Hamptons.
Yeah, no, I think you're exactly right. You know, for years and years, First Republicans really focused on banking more of these wealthy consumers. And so in our reporting we learned that a big chunk of the mortgage business that they did with with wealthy individuals was actually comes in the form of interest only mortgages. So that means that for the first ten years of that lunch.
I'm still a thing I thought that was like banned after the Great Financial Crisis.
So it's interesting because they kind of reached this level of infamy because bankers were offering them to lower income consumers who wouldn't be able to keep up with the payments, you know, once that interest only period ended. And so this was kind of a new take on maybe an old foe, and it was really meant to, yeah, be away to get their claws into these wealthy consumers and
hopefully get more of their banking business generally. So they had this large wealth management arm and lots of other things that they could offer them, and so This was like the sweetheart deal that they could do to just sort of sink their claws in early and beg more of these folks.
Also, Jenny welcome back. By the way, she was just in London for three months. I think, cool, very exciting stuff. Yeah, great pictures on Instagram just saying very well, how was that?
By the way, it was awesome, It was really good. I mean it was interesting because I was there for the first three months of the year and so watching the US banking crisis and then kind of being involved in the European banking crisis with Credit Sweeze. It was interesting to kind of have a different, different seat at the table.
Very very cool. So bringing it back stateside though, we were talking about First Republic, who fills that slot with First Public? Are there other candidates here that could maybe take some of that market share?
Yeah, you know, it's interesting. They're not pulling back as far as we know. So these guys did this more than anyone else. But other banks do offer these products, So that should be one thing we're careful about is that, you know, JP Morgan does this. Others do too. It's a big business and I think the problem with these loans now is that as First Republic looks to get a capital in fusion or potentially looks for a buyer to kind of help it shore up and get a
little bit better here. That's why this has become a problem because these loans, while they perform great and they have all these wealthy customers attached to them, carry a lot of interest rate risk, and so as interest rates go up, the value of these loans goes down, and so for any buyer that would be a problem looking to fill that balance sheet hole.
So is First repubably looking to kind of work its way out of this? Is that kind of what they've been telling people, because it seems like, I don't know, if you're buying a house in Hampton's you're.
Probably a pretty good credit. Yeah, I wouldn't mind. I could take all that risk at a certain price.
Maybe.
Well, the problem is that it's just become such a big hole. So, you know, we're in the middle of regional bank earning season, so you're hearing a lot of these guys talk about the unrealized losses on the bonds on their balance sheet, which has become a huge problem at First Republic. That's a problem too, but it's not nearly as big of a problem as the losses unrealized to be sure, on these mortgages that they've made, and so as they looked for a potential buyers, they look
at a M and A deal. What we've heard is that this is the thing that's causing a lot of folks to balk and say, you know, this is just too big. You know, even if they paid zero dollars a share, they'd still have thirteen billion dollars of a hole that they would need to fill, and so it's just an untenable deal.
Are there other regions that are seeing similar things? I mean, we associate as New Yorkers, we associate and New Jersey first, yes, on associate the Hamptons with that kind of obviously very very wealthy share. But are we seeing similar stories coming out of I don't know, Miami, San Francisco, other wealthier parts of the country.
Yeah, no, we when we looked at the data underlying these mortgages, we've figured out that they actually they had a really big presence in the Hamptons and certain wealthy neighborhoods in New York. You know, the Upper West Side was a popular destination Tribeca another one. But then yeah, beyond that, you know, we looked at southern California. There was a lot in the Wine country of California, in Silicon Valley, you know, where all these tech billionaires are
being minted. So this was definitely not just a New York thing. But yes, obviously for the Bloomberg consumer that was a popular one.
Yeah, because I'm looking at I mean, in this story and people you can find the story at Bloomberg dot com, slash Big Take or ni Space Big Take, go on the terminal and you're going to take a look at this because I got some great maps, like kind of heat maps of northern California, southern California around La the Hampton's Manhattan and you guys have it kind of heat map this show kind of where the concentration is and
of some of these loans. And boy, you look at the southern California and the one that shows up the brightest on the heat map is Beverly Hills.
So I wonder who lives there and yeah, just a few billionaires.
So all right, so what's next for this bank here? I mean, is there a certain timeframe where you know they've got to do something because the markets not really buying in on it.
Yeah, no, I think you know, the big thing that we're looking forward to is their earnings next week, because that's when we'll really get the first look at just how big the deposit outflows have been in the last month. You know, you hear it anecdotally, and we talked to lots of big customers who've said that they've pulled their funds.
But at the same time they had, you know, the biggest US banks do a deposit infusion at thirty billion dollars and so that was really meant to shore them up, give them more time to eventually either have a capital infusion or find a buyer. So yeah, I'm next Monday, I think is.
Is that's when they read that's when first Republican that they dance exactly.
Yeah, So that's our first that's our next real look at under the hood and kind of what's going on with these guys, because we really haven't gotten that many on the record updates from them in the last month or so that this has been a crisis.
All right, So what other I mean, it seems like this and I really want to get your take.
It seems like the crisis aspect of this turmoil we've been dealing with the banking space in the US, it's passed or we've been to you know, too early on that.
I think it's I think it's early. I mean, I think we So the biggest thing is that a lot of the bank that we're most worried about haven't reported earnings yet. And the big fear that I think folks have is that they might miff on the disclosure aspect. So we've seen that a few times already, where a bank is even pre reported and maybe not given investors exactly the data or information they wanted, and it's kind
of caused a whole new calamity. And so I think that will be the big key test, especially I think Innesday and Thursday. We have a lot coming up next Monday obviously with the First Republic, it'll be a big key test that really, you know, do they not only do they say, you know, numbers that inspire confidence, but do they say it in the right way? Do they release the right numbers and right And so I think that's the big question.
All right, you were the former editor in chief of the Daily tar Herol, So I have to make sure, I get my facts straight. Your basketball team started the season preseason ranked number one in the country and they didn't even go to the tournament. And I don't think that's times has that happened? Oh, it had never happened before. Then, So are you guys even gonna suit up a team next year?
To face my duties or what we are?
We're gonna suit up a team. I mean, I hope it goes better this year. I honestly think that for most our Hills the season before when we will feel good for kind of at least a few more So.
I am a big fan of Hubert Davis. I liked him and when he played for Carolina, I liked it. When he was with the Knicks. What's the feeling down in Chapel Hill about Hubert Davis in terms of boy that was kind of embarrassing.
Yeah, I mean that wasn't his team, so you know that was still Roy's team. I think I think we give him a few more seasons. I mean, we're not. We don't throw babies out with the bathwater down in job Well. We give people times to season up.
All right, So you're gonna they're gonna have a team. We can confirm that. Will you go down to any games?
You know what, I don't have any plans to go down to games this year.
I need to make some he needs to do tickets.
Just come to me.
I can set yup, be all set to go. We'll put you right there, right in a defectory the Cameron crazy.
I don't think I would enjoy that.
And we have another with yeah, did you ever go to a basketball game?
No? Did you go to a football game?
No?
Wow?
I just I'm not a sports coal not even.
I mean the little VA boys get their suit and tis coats and ties on, they look.
All nice and so embarrassing.
I'm not. I'm not.
Look, I'm not a very kind of college spirit, kind of gal.
So I just never never did.
All right.
I did go to.
Plenty of soccer games though, and swim meets, because you know, all.
Right, good stuff.
Jenny Serene, financial reporter for Bloomberg News. Uh, and I think the feather in her cap is a former editor in chief of the Daly Tar Hill. That is a big job, not kidding, you know, for those college papers, and the Deli Tar.
Hill is an excellent paper.
And be editor in chief there is pretty pretty cool too, So that's good stuff. Jenny Serene big take story out there with her team. Check it out bloomerked Slash Big tape.
You're listening to the tape. Catch are 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, here's a headline that got my attention.
The pig still hasn't fully exited the python. And I think, having read it, the pig in this case is the pandemic and the you know, the economic hit from the pandemic.
So I don't know.
That's my best guest, John Authors, he's the author, He's the one to blame for this. He's the senior editor at Bloomberg Opinion. One of our favorite folks to chat with. John, talk to us about this. The pig still hasn't fully exited the python? What are you talking about?
Okay?
If you go down to I think it's the last paragraph boy of the main peace before you get my interesting piece about soccer refereeing in England in the spital Yes, it's about It's about the pandemic and obviously it's created a very big shock, big reaction, you know, like a tsunami or something like that. The idea that that that something has been hit very hard and it will create turbulence, will create waves for a while afterwards.
Uh.
And because this is being reflected through human behavior, it's that much harder to predict exactly how those waves are going to work. But it's obvious we still haven't got
through that now. The particular point that I was making their concerns and concerns tech where there was a lot of spending brought forward during the worst days of the pandemic, and that has raised some Varish people to suggest that this we like the the Y two K incidents for those who who remember it, that that when companies splurged on it spending ahead of the millennium because they were worried about what would happen when o'clock moved from ninety nine to zero zero, and one of the one of
the consequences of that was that spending was much lower on it than it had been expected several years thereafter. But that's one of the concerns at the moment that we'll find that that peak hasn't excited the python yet. That but companies are still in fact able to reduce their spending to where they were. Yeah, so that's that's that's the python.
It's quite the image. Also, Paul, did you know that when I first I think early early days of meeting John Authors speaking of pythons, I was a producer on television this is what four years ago maybe, and I would reduce John author segments and he this was during like Brexit or something, negotiations were happening or something along those lines, and he explained Brexit to me through the
lens of Monty Python. And that is my earliest memory of John Author's And then I went to go sit by him and learned plenty about Monty Python and market.
I think it was the Ministry of again both either that's all the black Knights who didn't know he was beaten.
All this rings bells for sure.
Anyway, John, listen, let's.
Let's talk about what's going on in France right now. Look, you, I think one of the best parts about your columns you kind of have a take on everything, and I want to get your take on France in particular because as I am getting more educated on the matter of kind of pension reform and the labor strikes that I've been told happen every year in France and around around the country, talk to us a little bit about why this time the pension reform is such a big deal.
Okay, the pension reform is such a big deal because, well, there are a number of different layers to this. Obviously, it's a very important test of Emmanuel MacColl who has really been the only modern style technocrat who tries to rescue ideology and certainly tries to rescue populism, who has managed to stay successful within Europe, who got himself elected the second time, and he has now staked an immense amount on this. And it's a country where the far right,
the from Nacionale, is very strong. So that's one leg of this, that is the political There's also the fact that France has always been I could almost illustrate this with you from Monty Pays. The thinking about this that that that France has always been very much more prepared to take to the streets than other Western European nations
that it's it's it's it's part of the culture. As you were saying that that that that you might get labor unrested, but they're also that much more prepared to to demonstrate and to fight, and a little bit like John Clees playing the extremely rude Frenchman addressing the knights in Monty Python and the Holy Grail, which you can
look up later and then. But I think the most important point is France has a very generous national pension scheme, but the French are much less bothered about a nanny state, about a strong state than most other of the big western capitalist nations. And raising the retirement age by two years is has really got them. And this is something that is likely to be necessary across the world because
we're all subject to the same demographics. And this is an interesting case study in what happens when you really try to bite the metal and reduce retirement benefits retirement costs in a big developed economy. That is the key
worrying point to this. That's what is what it could portend for the rest that the Macon has said, and I guess you have to say, it's the courage to do what any good technocraft would say, you need to do and try to grasp the issue of reducing pentry costs, but let's see if he can do it.
So the retirement age now from sixty two to sixty four. And initially when this was brought to attention, Aminel Macron was going to do this, you know laterally this wasn't going to be put to a vote until, of course, the protests first came on. John talked to us a little bit about any sort of market fall out here, because inevitably, if you've changed the pension reform, that has a very real impact on the French national budget, and therefore you would think on the sovereign debt as well.
Are we seeing any kind of market reaction?
What is the trade here? Not significantly, I think. I mean, what's easy interesting is that French bond spreads spreads compartments of French bonds have increased a little. But we're talking about compared to the kind of spreads we've seen it on Italian or Spanish debt at different times, countries that really did look as though they could conceivably leave the Eurozone. It's still nothing much too much to consider. You can see that it's a problem that markets are are taking
notice of. But I would say that the markets are not at this point a critical player in the French drama in the way that they have been, says most noticeably in Italy. If you have, if you have a clear cut political defeat, which I'm not predicting, but if you did, if you had to, if the pension retirement age stays exactly where it is, a Macron admits he's beaten both on the political and army economics, and that's
going to be pretty seriously bad for French debts. Yes, definitely, we haven't got there yet.
Hey, John, just you got about it a minute left. I know you're on holiday last week from reading your columns, and.
I believe you're in England. Yes, talk to us.
What's your takeaway from talking to families and friends and hanging out at the pubs housing average Englishmen feeling? Are Englishman feeling these days? You know, will post Brexit, post COVID, post all that stuff.
I mean, I've actually had sort of lots of cheerful conversations with people in the last week, which is nice to know. I think that Brexits as a whole, it's very difficult because obviously I was always against it. I think the country is very slowly but clearly coming around to the view that it was a mistake. And we'll see how long that will happen. And I think you're still talking about decades before there could be any attempt to rejoin. But there is a things have not improved.
In fact, they've got worse since since Brexit, and that's becoming more apparent.
All right, good stuff, John, Thanks so much for joining us. Always appreciate getting your perspective. John Authores. He's a senior editor at Bloomberg Opinion Scott. He writes a lot of stuff, a lot of really interesting stuff, so you can check that on Bloomberg dot com slash opinion John's work and plus all the other opinion writers as well, and also on OPI n go on the Bloomberg Ternel to get all that great Bloomberg opinion pieces out there.
Thanks for listening to the Bloomberg Markets podcasts. 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.