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One of the big stories on the Bloomberg terminal today and how US banks finance their own competition to the tune of one trillion dollars. I'm talking about financing, priving, some financing to non financial kind of institutions, thinking private equity, private credit, that kind of thing.
Herman Chan joins us here. He is Bloomberg Intelligence. She covers all the banks.
Herman, what are the what are the banks, the US banks doing in terms of, you know, lending to maybe some non traditional financial institutions like private equity, like hedge funds.
How big of a business is that?
Yeah, it's It's really interesting because the Federal Reserve has just recently require hired banks to disclose more on lending to these non bank, non bank financial intermediaries. And what we've seen is that some banks that we cover, like Bank OZK, Western Alliance, that could basically mean over fifty percent of their commercial loan portfolio is to the shadow banks.
So it's an area that is growing where you see traditional businesses are a bit wary in this current macro environment which still elevated interest rates, a lot of uncertainty with the economy. But lending to non bank financial institutions is an area of course.
So explain shadow banks.
What is that topic?
So it's interesting the regulators have broken out shadow banks non bank financial institutions as institutions like mortgage lenders, private equity, private credits, financial institutions that lend but don't have the depository component to their operations.
So I kind of view these what do you call them nd fi's, so non depositive and institutions. Aren't they competitors to the banks themselves, So why am I lending the money?
They are increasingly competitors. What we have noticed is that the participants that are borrowing from these non pick financial competitors are are a bit more riskier, and so they are viewed as more high yield. And these are areas that the traditional banking institutions don't want to lend money to. So a way to get around at is to lend
it to the sponsors, and that's something that's happening. What's interesting is that the banks themselves will say they're not competing with the private credit operators head the head, but we do see a bit of a hallowing out of
the tradition business borrowers. Because if you have private acway coming in and leveraging the balance sheets of the companies they borrow, inherently these companies are not going to be good customers for a traditional bank, So a lot of these customers continue to go away.
So I'm hearing the industry watched our dogs are worried about the increase in bank loans to these DFIs. They're thinking that it can make banks more vulnerable to liquidity or credit shocks. What are the developments there.
Yeah, well, it remains to be seen, right, So it's continuing to be a larger and larger portion of the loan portfolio for these banks, but it's still in the grand scheme of things. A lot of the banks remain very diversified, but we haven't seen a downturn with such a fragmented market where a lot of the lending is going outside of the traditional banking system. So it's something that continues to be monitored and something that we're assessing quarter by quarter.
Do you like this business as an analysts? Do you think it's a good business for some of these banks right now?
It's it's a way to demonstrate some better growth. We just looked at the numbers before joining and traditional commercial and industrial lending, it's about in the first quarter, it's about half a percentage point growth. If you look at the lending to non big financial institutions, that's up five point seven percent in the quarter. So if you have a bit more exposure to that, you can juice your growth, which in this current environment you're not seeing a lot
of activity there. But again you need to have a very diversified portfolio.
All right, Herman chen, you're the expert here. We're going to go with you.
Herman Chinn, Senior analyst for US regional banks. We usually talk to Herman when something's blowing up, but we want to talk it's crazy, something's gulpin' right. Here's a new source of potential long growth for some of these banks out there. Herman Chann, senior analysts covers the regional banks for Bloomberg Intelligence, Joining the heres joining us here in our Bloomberg Interactive Broker Studio.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Applecarplay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
It's got a Steve Man. He's a Global autos and I'll Steve.
I know you've got earnings models out there for a lot of these big auto companies. Are you adjusting your earnings models for tariffs? Here?
How's that can impact some of these big global automakers.
Yeah, we are actually going through that right now. One of the things we did publish this morning was the auto sales forecast for the US. You know, we were initially looking at down half a percent. We're looking at being down at least three percent now for the year. But you know, we are going through the model. One thing that really stood out for us was really Ford.
Ford.
Look, you know they they're losing Armin and le like on on ev sales. Uh. The the popular Mochi is actually made in Mexico, So like for us, if you tack on another ten ten grand on the price and it goes through the bottom line. You know, it could hit another you could hit five hundred million dollars on earnings. That's ten percent of their earnings. So those are some of the things we're looking at.
Steve, What are the names that you're seeing are most exposed here?
Well, I think on the downside, are definitely the legacy you know, the big three autos, plus the the foreign legacy auto makers. You know, they do have a lot of production outside of the US. As you can see, you know, the peer plays, not just Tesla, Rivian and Lucid, are actually relatively performing relatively better because there's a possibility that the peer plays could take marketshare ev market share from legacy automakers if they have to increase prices on
those ev imports that they make in Mexico. The other thing that's interesting too that we're keeping an eye on is really on the retail auto parts companies like O'Reilly, AutoZone, Advanced Auto Parts. You know, they're actually bucking the trend. They're up and simply the reason is that you know, if people are not buying new cars, they're gonna have to maintain existing ones, and so you know, those DIY parts stores are are are actually doing well today.
Yeah, I'm looking at those stocks. I mean AutoZone for examples, up two point seven percent today, fifty two week Hi, A lot of the other names are two three four percent.
And Steve, I'll have you know I did buy a new or at least a.
New vehicle this past weekend, a Condon but I got a hybrid.
So how about which hon does this? Okay?
Okay, so I've got, I've got, I've got in front of the tariffs.
There are some set to go there.
Oh, you're on your way there.
So Stee, what are you hearing from the Hondas of the world, the Volkswagons, the Toyotas of the world.
How are they viewing this environment?
Yeah, you know, I think they're gonna face some cost pressures as well. You know, they do have a big chunk. Actually, the CRV is actually made in Canada, by the way, So yeah, so they're gonna.
I don't know what the big dealers.
See for Canada.
Yep.
So you know they're gonna they're gonna get hit. But the difference is that Honda and Toyota in the US, and I think globally they do have a much lower dealer inventory so you know, there's there's still a lot of demand for their cars because they're you know, known to be more reliable, so you know, you know, they're may be able to pass on some of the higher costs,
the higher pricing. The price increases the consumers, so they they would probably fare better within the legacy automaker, but the European will probably get hit pretty bad, especially like the luxury brand bm BMW, Mercedes and Audi. You know, they have a different strategy. You know, they don't they don't have multiple plants for certain models. They do have they have a global plant for for for their models.
So so for example, BMW and Mercedes mix SUVs in the US, so it's going to be hard for them to shift footprint. But the other way to think about it is, you know, if someone is able to afford a more expensive vehicle like a Mercedes and BMW, they may be able to stomach the higher prices.
Yeah, I don't know.
Coming through my BMW X three, I guess it's South Carolina. I don't know where it was built, but it wasn't in Stuttgart with the rest of them.
Steve Man, thanks so much, appreciate it.
Steve Ban Global Autos and industrials research channels for Bloomberg Intelligencies down there in a Bloomberg Princeton office. The office probably some of the best food in all of Global Bloomberg will laid out there for you right now.
Listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple Cocklay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Talking about the AI trade for two years, it's been listening. It's not just been a tech thing, it's been a market thing. It's every company in the SP five round and their conference calls they talk about AI. It's been going on for a couple of years. One of the ways to think about it is from the real estate perspective. Definitely, you can do that. John Lynn, he does that. He joins us. He's a chief business officer for Equinox, joining us here in our Bloomberg Interactive Broker studio.
John to us, what you guys do at Equinics.
Thanks so much for having me. We're really the fundamental digital infrastructure provider of the world. Building two hundred and sixty eight data centers across seventy four market.
You're the guys.
We are the guys building and connecting all of these cloud providers and enterprises making all of that data available for AI.
And it's really interesting because I was just speaking with him during the break saying that I cover US real estate stocks, I cover real estate investment trust, and that's exactly what ethics falls in that patch. This is my guy, So wonderful to have this conversation. But I think that there's often people don't really when you think about data centers, they don't often think about the people that are actually
providing the real estate forward data center. So can you talk a little bit about how Equinis differs from maybe for thinking about a data center itself, but more or less the fact that you guys are acquiring properties and doing it that way.
Yeah, you can think about it as full scope development, where I mean we're going from raw land getting their entitlements and then building the entire data center and then operating that for perpetuity essentially, and our focus is around making sure we're getting as many customers as possible into the facilities and really interconnecting their data flows together, which is pretty unique. In the data center space, which has also been a great opportunity for us to participate in the AI growth.
What are you guys seeing here?
What are you seeing from your clients, the people you talk to about kind of their needs going forward? Because right now, I think in the marketplace you look, it's like Invidious Stock and some of the other stocks that trade around the AI theme.
Twenty twenty five has not been a good year.
After obviously phenomenal extraordinary growth in twenty three twenty four, maybe before that. How are you viewing the growth here in AI and from your end of the business, the real estate side.
Yeah, First, I'd just say, you know, AI is a portion of the demand for data centers, but data center as a whole are powering everything that everybody is doing right like listening to this broadcast, you know, ordering food for lunch, you know, trading, trading on the exchange, et cetera. I mean, you need computers for everything nowadays, and that's
still continuing. I think, you know, digital transformation is not in the early stages anymore, but we're far from done, and so that is just the secular driver that will continue. From the eye landscape, I'd say, obviously, a huge amount of interest and excitement, and I think the it caught the imagination of everyone, and I'd say, right now, what we're seeing is like exciting use cases that are really
providing durable value, right. And I think it's still early stages for many of that across the general business landscape, but that's what gets me fund mentally excited. You look at a company like Bristol Myers squib a customer of ours. They're doing drug discovery using nvidiagpus and being able to
increase and accelerate their time to therapeutics. That's fundamentally going to improve like human life, right, And I think that there's so many different aspects that AI can improve based on that.
So run us through some of your biggest customers. Who do you all work with?
Certainly the cloud providers are some of our top customers. We've got over two thousand different network providers as well. The genesis of the company was really around how do we help the Internet scale? And that ended up being well, how do we help the globes telecommunications and data flows scale? And so when you think about all of the cloud providers, how do they connect to the end customers that's through
our facilities. And then as we've built that landscape, we've ended up basically becoming the place where enterprises put their most trusted assets. When you think about then, whether they have some workloads that are in the public cloud, well, they're going to have some that they're going to have ownership and control of themselves. When they put those in our facilities, it lets them glue that infrastructure together and become like one super powerful environment.
And folks, Equinics is a publicly traded company. Eqix is the ticker. It's got a market cap of eighty one billion dollars. And if you want some research on it and you're on the Bloomberg terminal, Jeffrey Langbaum was my reat analyst. He covers eqix, you can go big and that's where you find the research on Equinox. John talk to us about the global form front, and we know you guys are global here. Where are you seeing growth, stronger growth versus weaker growth?
Yeah, I'd say across the landscape, there's still quite a bit of demand for data center activity. You know, we're particularly excited about some of the emerging markets Southeast Asia, for instance, it's certainly growing quite a bit, but you know, based off of a lot of the recent Surgeon AI and kind of the use cases set up for that, just a tremendous amount of growth in the US over the course of the last two years.
So, I mean, when we think about your competitors in this broader landscape, there is obviously digital realty trust when we're thinking about publicly traded routs here in the data center space. And if you look over the past five years, we have equinic shares that have risen forty percent, but that's compared to digital realty that's risen about eleven percent. What do you think that you all are doing differently than your competitors.
I think one, it's our focus around really driving diversity of customer and like kind of having an ecosystem that we've built around the value that we're doing. And so
that's incredibly important for us. Like for the AI trade, for instance, we're focusing not just on capturing some of these large training footprints, but really how do we make sure we're getting all of these AI players and exposing them to the rest of our customer base and really again that fuel becomes additional growth across our entire portfolio.
Do you develop and build data centers or do you just buy existing.
We develop and build?
Where are you developing and building these days? And if you say Texas.
Or Florida, Well, we're building all around the world. I think we've got sixty eight current like major construction projects across it. Yeah, so we're very active.
Wow, come up to it's.
Really it's big company in this.
I mean, yeah, you guys have to come to my path.
It's a beautiful space.
So what is your you know, what are your thoughts for people who are saying that, you know, the tech rally has run too far, you know, maybe we have capex spend that's just you know, bloated. There's so much spending in this space. Is this a place to be investing right now? When we think about AI and in places of.
That regard, I think the long term trend around this is going to be inevitable, right. I think it's certainly we're creating durable value not just for you know, kind of the planet and all of our customers, but but for shareholders. I think the uh, the amount of investment in the space, and like the numbers are candidly like eye watering right now, and so but a lot of that I think is just capital accumulation rather than deployment.
And you know, compared to a lot of other markets in the real estate side, it's actually a little hard to kind of overbuild just because there's so many natural h like limters in terms of the way we want to scale, from utility power availability, to supply chain to you know, kind of just the amount of trades you need to be able to build and operate these facilities.
And so I think that that helps kind of provide more rationality than you know, in some some real estate markets where you know, you can throw up a shell pretty easily, you can you can kind of just like convert and overbuild. In this case, it's a very long development cycle, and so I think you'll you'll see kind of some self metering there.
John, thanks very much for joining us. Really appreciate you coming in.
John Lynn, he's a chief business officer of Equinox, joining us live here in our Bloomberg Interactive Broker studio. Again, another company walking into my door here in my studio.
I had no idea existed. Happens every day now, you know, eighty billion.
Dollars in market cap and of course I missed it, but a big real estate investment trust. And I know our bi Anlyst Jeff Langbaum, he's all over here. He's got research on this company as well.
This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each me day ten am to noon Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal