Surveillance: Big Bank Earnings

the data as it comes out. Ken, I want to go immediately to use of cash and that they did a four point three billion share repurchase coming out of this pandemic. What did these banks and what does Mr Diamond do with the reality of all that cash? So it's a return of capital, um Shaney. Diamond has said that we're over capitalized the fat last months. By July they'll be able to increase their dividend and also buy backs.

That would be a big change since the last twelve months. Um. So the return of capital is a big theme for being an investor in banks. Ken. Right now, the headline coming from the CEO of Jamie Diamond of JP Morgan, loan demand remains challenged. That's the issue right now. Ken, Do you see that persisting through the early part of

this year into the middle um. It's incredibly important because loan volumes are and loan balances both for consumer and for commercial, UH is going to drive the delta for performance for the bank. We've already almost maxed out in terms of the investment bank. For JP Morgan, about fifty of revenue comes from the investment bank over the last five years. Though JP Morgan is the only bank that has positive net interest income compared to the other large banks.

That's an incredible mobile fact that in a low rate environment we also first need as the loan activity. So I don't think UH JP Morrigan on the earning school really wants to talk about net interest income given that it's such a difficult challenge, and that was the time to talk about the investment bank just for a moment.

Can another headline crossing the investment banking revenue coming in at two point eight five billion dollars the estimate two point four six billion at least have just going through the training numbers right now. Fixed sales and trading revenue five point seven six billion, the estimate five point zero two billion. Upside surprise that likewise on equity sales and trade in revenue to three point two nine billion the

estimate two point three two billion. I think it's fair to say the first quarter was pretty decent for JP Morgan, Lisa, they crushed it, which is the reason why it's surprising the shares are lower after beating expectations. Just to give you a sense of how much they beat fixed income trading up fifteen percent, which beat intimate stock trading up

forty seven percent. Ken, it is not about this, As you said, this is not the area that people want to see the growth in because this is fickle and frankly we have It's already seen trading volumes come down dramatically. We've seen deal volume up. People were expecting that, and yes, JP Morgan crushed that. What are people actually looking at

that you sending shares lower? Is it the fact that deposits rose this and that loan growth was a easily one percent On this backdrop, I think it really relates to growth and return of capital um. JP Morgan has done incredibly well. Uh. They tend to outperform the other large banks, and I think when you look ahead to the rest of the year, for the analysts, the concern always is the first quarter is typically the strongest quarter

um and seasonally it begins to ease. So I mean to put these kind of numbers together for the next quarter and the quarter after that are going to be challenging. And that's why I think they're going to talk about return of capital because investors out there want total return. I want to go there can, but I think so important is a headline buried in here. We're gonna put these headlines up, folks, because JP Morgan does a great job of laying out the overall bank and then these categories.

Is well, kenn Leon, you know this is all about technology, and buried in the stream of headlines is mobile customers up nine percent? I'm taking that almost as a revenue proxy. Can you move that over to a bank that's going to deliver high single digit revenue? Stream out thirty six

or dare I say out sixty months? You know some mobile applications and we've had tom through the years the discussion of you know, bricks and motor and branches, but it's almost like a home depot where it's omni channel shopping your ability to do banking, and most consumers are now able to do it through their mobile phone um. But additionally, a lot of banking gets done coming into

the branch, particularly for small business owners. And they're also increasing the number of their financial centers and branches UH in markets that they really don't have a present. That's why I think Army channel gives them that capability. As you've noted with technology Ken, fantastic to catch up with you as always always going to see you too, Kelly on there of CFR A the global director of Equity Research. If we've got the right guess to talk to Joannifer

all right now about summoning all this together. Jeff, you joined us now being y Melon senior strategist. Jeff, can we just go back to that final point that we made with Allison there the fiscal support has disrupted what is happening with traditional lenders here in America? How do you read that, Jeff? Well, you can read that in two ways. One is the government now being the primary source some of them demand, you know, the primary engine

of an economy. If that's so they can raise money through a non loan channels, are you they're going to access are funding directly from investors and from a capsule market. So but secondly, there is a fear of a displacement effect, right and the fact that fistal has to do the work. It means there is no private sector loan demand or very limited private sector loan demand right now, so banks are stuck in that sense. So ultimately it's a chicken

and egg story. The hope is fistal kickstarts the economy, generates the private sector demand, and then banks can be happy again, which steeper your curves of course, Jeff, can we get inflation true inflation if banks are not increasing their lending again, it goes down to the chicken and x Lroy. Banks will only believe or only start to lend when they believe there is sustainable inflation driven by demand. So that's what central banks have been saying, Where is

the demand going to come from? And we want to see inflatent on a sustained basis right now. They don't even know how much economic scarring it is going to be. I Left talked about a five year window. It could take that lodge if that's pretty much jump in it um. The absence of lending is not because there is an absence of demand. There's an absence of demand for loans because there is an abundance of cash. The retail sales on Thursday term are going to be absolutely stellar because

people are spending. They're just not going to the banks for that money. That's the story. I would separate John the traditional banks from the big international banks, and Jeff, you this is an unfair question to you, but I'm going to ask it anyways. With your years of work in London, is the next frontier for our successful American banks to take on Europe into game market share on the European continent. I'm not sure that's a fair fight, to be honest, and because on what Europe is pushing for,

it's actually banking union. US has a banking union, it was formed them that way to Europe, but before Europe can actually have a full fledge banking union, I actually don't think that is competition between equals. But if you can actually see lenders from the emerging markets from Asia start to scrawl overseas that there haven't been that successful so far but for the US banks, so they should actually probably watch their rare, you know, rather than just

focus across the Atlantic. Jeff, let's get a market call. What do you like right now? So right now, I think markets are really looking for risk again, looking to carry trade right, and Europe really is the one in focus on. We're seeing euro dollar push up against one twenty again the view that Europe is no longer a problematic case in terms of recovery. It's only question of delay.

They will get back to need to and they will hit the rates of the UK and US will get and then with the fiscal you will see European reflation. What you funded out of I like to find it out of Swiss frank maybe some highly valuedation currencies like the Taiwan dollar. So these carry trades taking out the US dollar angle are the ones I'm looking for. So the Euro is no longer the funding currency Jeff. In this environment, the Euro has now seen probably the reflation currency,

and also just taking a step beyond that. European assets and if markets are looking for value, there is a sensor that Europe is where you want to go in terms of equities. But again that margin expansion, that investment lift has to come from mg EU, has to come from governments, and the last fourt year hours we finally seeing the European Union move on that front. They've announced the parameters and announce the issue in summers. Hopefully the

money starts to flow soon. This idea of Europe being the reflation trade is born out Vice Stephen major Over at HSBC who says that even FED tapering is already priced in to where we are in rate and the dollar. Would you agree, um, so a lot of I would say good news is in the dollar right now, and that of course relates to the US monitory policy path.

If we look at our own custodial eye flow data, for example, over the past few weeks, actually investors are buying back and the treasuries, so it's a sign that the selling treasuries create a price in a stronger US covery that is in the price right now. So what I'm watching for is where is the money going in terms of other markets? Is it going more to Europe?

Is against emerging markets? We want to see a risk on environment, but clients are going to be very selected about where they want to be risk on, and Europe looks a good candidate right now. Jeff, this is a question I normally wouldn't ask, but I think it works today. What is your parsing of the inflation dynamic? The separation

of services and goods the industry. The industry parsing in the forty seven different measurements of inflation that we have right so you really need to separate the distribution of that in terms of if there is good manufacturing demand right now, and we've been seeing that for several quarters now, at least since the last the end of Q three two thousand and twenty, that will continue to drive prices.

Now on the consumer side, I think what the FED and other policymakers, they want to get past this hump. They want to get past this base effect driven inflation, and then they will start to see whether it's sustainable. Aren't that The second point, which is crucial. We talk about cash, We talk about consumers and house is having a lot of money. Who has it in the UK as well? It's concentrated and let's just say the upper

death stiles of the population. So you want to identify baskets where perhaps you see greater spending amongst the lower desciles. If that, if those items are not being bored so low value bad staples for example, then you're just seeing inflation driven by the rich, driven by the wealthy spending. It's not trickling down there's a problem there as well. Jeff going to catch you up, always going to hear

from you. Make Jeff you there out of London b and wa Melon Sadia strategist an historic move again in this original economy seven Vigor has seen this before. Argus Research or Director of Financial Institution, Stephen, thanks for joining us today. Who will provide the use of cash pressure if if you're at a given bank and John's focused on Goldman Sachs, which part of the process says, wait a minute about dividends, wait a minute about share buy backs, and wait a minute with what are we gonna do

with the cash? Well, it's always so it's a good problem to have, right. I think the SEACAR results mid year are gonna you know, answer a lot of those questions. But banks are you know, certainly flushed with cash right now. They've had moretoriums on on dividends and and shared buy backs for you know, for over a year now. Uh, And I think we're gonna have you know, pretty strong

shareholder return figures come out with CCAR results mid year. Stephen, do you prefer Goldman Sacks Morgans only the broker focused banks, the ones that are less susceptible to loan demand at a time when people do have so much cash as

a result of government intervention. Well, I think there's a natural sort of you know, conclusion at some point to the big capital markets banks were favorable on JP Morgan Morgan Stanley on Bank of America for you know, for the strength that we've seen the investment banking, the trading has just been phenomenal. Uh, and all the things that are in place that you would expect to see. Uh.

You know why why are those numbers so strong? M and A activity more companies coming to market is because of the high CEO confidence, the record stock market values, the easy financing that we're seeing. So so I think there's another quarter or two probably of you know, really strong numbers coming out of investment banking and trading. But you know, as you've been talking about on the program,

the anchor a bit has been that interesting. U, there's been the net margin issue use obviously is the you know, we're going to start to lap that as the FED from one year ago reduced rates to zero h So the year of the year comparisons will start to get better. But you really need loan growth, you know, for a bank like JP Morgan of revenues we expect are coming from that in just income, so those capital market side

is only going to go so far. So we we do think there is you know, silver lining for regionals, uh in that the as as margins improved as the yield curve stepens as those lost reserves come back into profits. So you know, I wouldn't count out the regional banks just yet, and we'll go to the regional banks in a bit. But I want to stick on loan demand because that really is the story today. Is a lot

of people pass out? How much is this a lack of demand resulting from people perhaps not able to hire or not willing to chart a new business after what they just experienced, or is this just simply because people have so much cash. When does it start to matter that loan demand is tepid when it comes to the

economic prospect. Well, I think later this year, the expectation, uh certainly would be that as as vaccines do their jobs, as more people come back out into the workforce, as uh, you know we have we've already seen strong demand and housing and cars which are too really strong uh segments for for consumers in terms of you know, just pure

dollar volume. But they have found that they don't need to to take lending out for a lot of other things, including credit card debt, which has been actually reduced over the course of the pandemic as the stimulus measures and others, and people have just been spent less on services and other things. So so I think that the worry begins later this year. Um, you know, we've moved down from unemployment down to six percent, so the next tranche of

that is going to be harder to come by. I don't think we go from here to you know, to the previous low three and a half percent anytime soon, so that that kind of takes time to work off. In fact, you know, many jobs may not may not come back at all. So I think it's just a testament to the how strong the consumer balance sheet is today. They feel they don't need those, uh, those dollars for

for lending. Uh. And I would happen to agree with Jamie diamond and at his comment about long growth being challenging. I think that is the case and will be the case for the next few quarters. Here, what do you think the pressure looks like to drop standards for lending right now, Stephen, You mean, what is what are the head winds to lending? Well, these banks is sitting on a ton of deposits. There's a lot of money that needs to get put to work if they can, Stephen.

So I'm trying to understand if the demands not there from traditional sources, where do they go. Well, traditionally banks would you know, if given the strong shape of consumers and businesses, they would lower lending standards and uh and and try to push it that way. Um, you know that always has the counter effect down the road of

higher charge offs. So um, I think it's yeah, the dynamics you mentioned very true on the on the deposit we're just seeing, you know, we've seen phenomenal, uh record growth in deposits, and I think that's one thing that needs to be where down. I mean, if you have ten in the bank, you're probably going to spend that first before you you know, go take out a loan. So I think that does have to wind down before we see that long growth and that's and that that's

just an additional headwind. Uh So So no, I don't I don't think they have a simil bullet here to try to increase lending growth. They again could go out to the credit quality spectrum, but that tends to come back to bite and it's probably not a good idea at this time, you know, given were we are in the recovery process. Stephen. As a way, Stephen, think of that, Augus Research director, a financial institutions reset away from fee generation is the reality that it's all supported by a

boom economy. Seth Carpenter ubs has been wonderful. Wonderful I should say about parsing uh this boom economy. Seth just gribe how opaque it is to get out beyond Q three this year. Oh my gosh, there's so much uncertainty at that point. I mean, we're pretty optimistic. We think UHO is going to be a pretty solid year, coming in just under four percent, but boy, that could go wrong in any number of ways. We still have fiscal policy.

There's the debate about a new infrastructure package. There's a debate about how much taxes are going to go up in two and I think there's just the overall question of what is going to happen globally to the virus. Describe the turbulence A phrase from Alan Greenspan is wonderful. The age of turbulence. Let's take a boom economy as turbulence. Is it good turbulence? Is it a constructive churn of the capitalistic system? Yeah, I mean I think it's a

good turbulence. Depends on if you're a vultrator or not. But no, I mean, I think there's a lot here. The first important part, I think is just seeing how quickly people who are out of work, displaced from their jobs get back to work. And I think that's more a matter of survival than sort of some underlying medium trend for the economy. But I do think there are lots of trends that existed pre COVID that are getting accelerated.

Where you know, think about retail. We know that for years there is a decline in employment in retail as there was more online shopping. That trend just got massively accelerated with COVID, And I think we are going to see a continued transformation just in the way the economy works because of COVID. If there is so much uncertainty about what the shape of this cycle looks like the duration of it as well. When we came out of the last crisis, we had Muhammad ale Evan of the

team at PIMCO talking about the new normal. We had the likes of Larry Summers reintroducing secular stagnation as a theme. And I think we've got a quick understanding about duration and the likelihood that we would get a shallow recovery as well this time around. It could be anything Morgan Stanley talking about shorter hotter, others talking about a return to trend off after the less the next couple of years,

maybe back to what we saw before SETH. What are you anticipating, Yeah, I mean, I think there's no question and them right now there's a huge amount of impetus coming out of both fiscal and monetary policy combined. And if our forecast is born out, then we're going to see the unemployment rate get back down to the three and a half ish range that we saw just before

covid UH sometime at the end of SAE. And if that's right, then what that means is we got through basically what it took us a ten year cycle to do in just a few years. And I think the next question is what happens next. We know that the last business cycle was not going to end right away. It didn't end on its own. It ended because we

have this exhaugen of shock from COVID. I personally am pretty optimistic that there's plenty of possibility for more productivity gains, and I'm also curious to see just how far the labor market can go in terms of drawing people back in who have been outside of the labor market. How much is that view predicated on this idea that the cash pile that consumers have, which has actually been a problem for the banks since we've been talking about all morning,

that they actually spend a lot of that money very quickly. Yeah, so it's only partially predicated on that. We do think that consumer spending is going to pick up and be very strong this year, but a lot of that is just getting back to a more normal relationship between consumer

spending on the one hand, and income. Consumer spending is still very very depressed relative to, you know, what you would normally expect given where aggregate income is, especially consumer spending on services that's down six seven percent relative to pre COVID levels. If that comes back over the next two or three quarters, that's just a huge increase in spending in in percentage growth rate terms, and if we're right, that's going to be the initial of it is to

pull thing, pull people back in. Sure, there's probably some spending out of that pent up savings out of everything that people didn't save last year, but what we know is, you know, savings, if it's kept long enough, becomes wealth, and we know that consumers tendency to spend out of wealth isn't that big. And so I think first order it really is let's get back to normal. That that that urge people will have to get back to normal.

That's just clarify again for me. Retail sales tomorrow. We've had CPI Tuesday, we've had bancounings this morning, will be lading with retail souths tomorrow. What's your number. Yeah, So we think it's going to be very very strong, and uh, you know, five is all possible in a month on month basis. What we saw in February was actually a shortfall. Part of that was driven because tax refunds, a lot of what you're driven by our necome tax credits were low.

That should be a boost this time. Then we have the fiscal stimulus checks coming in, and we also have warmer weather and falling COVID mortality, so the risk has gone. So we're looking for a really big number for March, and we think that's just the starting point for a very strong second quarter, probably close to ten eleven percent at an annual rate for Q two unreal. Seth go to catch up. Seth compt to US chief US Economist.

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