Surveillance: Big Bank Results With Cassidy

RBC Capital Markets. Gerard Cassidy, I want to go to cost and geographic reduction as expense control. When you give up on retail in Vietnam and in Bay Wren, is that nothing more than a closeted cost reduction, Tom, I think it is. And when you take a look at the markets that they're exiting, the numbers that they've provided

really do not have a material impact at the bottom line. Now, you might recall some years back they exited a handful of these consumer markets and they obviously didn't go all the way. And Jane Fraser with our first strategic move is trying to make the company more profitable by exiting these markets. Where they really don't earn very much money.

What's left. What's more Today, it's gonna be interesting because this has been the one area that focus for many investors that they needed to really trimm down their global footprint on the consumer side. They just didn't have the scale in certain markets. So then the next question is, you know, how do you build up scale in the

United States? When you take a look at two of their biggest piers, JP Morgan Chase in Bank America, they had consumer banking franchises in the United States have return on equities return unchangeable common equities of over thirty City does not match that number, so City, we'll have to take a look at how do we get bigger in

the US? If we asked this question of sale and she answered it delicately, and you can answer it a little bit more recifuly on matching because here at OLYMPUG we have to be slightly diplomatic, of course, But do you see this as a big change from collbat to

fright up? Absolutely? And you know she indicated on the last call, when she participated in the fourth quarter earnings call, that there were changes coming and were expect to hear more guidelines on new targeted return numbers, what they're going to expect to be able to achieve with these strategic changes. You know, City has a lot of work to do, a lot of heavy lifting, but now with the new leadership under Jane Fraser, I think they're gonna be a

bit to accomplished new and better numbers for shareholders. Gerard, so far, who's winning in the capital market space? I mean, all of them have been beating across the board, and people have been talking about the frothy markets, But who's winning? It looks like so far when you compare all the numbers, Goldman Sacks came out on top in almost all the different categories, whether it was E c M, D c M, or in trading in markets for FICK or equity. They seem to have by far the best numbers out of

all of them. But to your point, they're all very strong numbers, and there's a question of how long this can last. And I was looking at a headline about City groups incredible equity trading numbers following on the spack of spaka blos or whatever you want to call it. How long can these trends last to continue supporting their earnings. It's going to be more challenging as we get into this year unless we get continued volatility and strengths and

the markets and they're that's hard to predict. But we should understand that the spack E c M business that has started to obviously slow down because the number of the investors and spacts. They've already allocated the money for that and there's not as much money to go into spacts. So now we need to see the de spacking. That's when they actually do the mergers. So that's gonna be a lift to advisory businesses as we get into the second half of this year. George Cassidy, we talked to

Thomas Show. Do you know well from KBW earlier were reminisced on Bank of New England long ago and far away the ultimate roll ups that you were directly involved in. Do you presume another season of roll ups because of the technological superiority of these winners, Tom, I think you're you're right. We are going to see more consolidation. It's already started to pick up. As you might recall, Tom, when you and I were young men, we had eighteen

thousand banks in the early nineteen eighties. Today we're down aft. We expect continued roll ups or consolidation to to continue over the next two to three years, and it will be small community banks uh like probably in acquiring USB one last year out of New Jersey, but also the big deals like we saw with M and T acquiring People's Bank of Connecticut. So we're going to see big regional deals, we believe over the next two to three years, and the Canadians will likely get stronger in the US.

Stron Dominion has indicated they want to get bigger in the US and South. Gracious with your time on morning slid this morning, can I just squeeze another one in just rent for the quarta? We had Bank for America early this morning. It's we have the likes of Goldman JP Morgan too in the mix in the last twenty four hours. Who won the quarta? I would say, so far, you gotta put Goldman Sacks at the front of the list.

They have won the quarter. But when you look at the universal banks, we've had three of the JP Morgan city in Bank America, and I would say JP Morgan probably came out they had, but they all had the same trends. John which is these loan loss reserve releases are very meaningful. They're gonna continue throughout the year and that's gonna be the bridge until we get loan growth and higher revenue growth in the second half of the year. Jed, I've gotta half from me, say, I know you gotta

run J Cassidy that vom PC right now. My conversation of the day, I'm banking with Thomas Mchode. Thomas showed chief executive officer of Keith Briott in Woods, a stiffer company, and we're thrilled that Mr Michode could join us this morning because he knows you walk into a banker's office and you start to talk about consolidation. Tom, you guys invent of it. Back into it are all day and all that Tucker Anthony r all day and the merger

into KBW. You guys literally invented the modern consolidation with the Bank of New England. Are we going to see a reduct in this bank boom of consolidation? Well, Tom, that's a great memory. You do remember a long way back, we did work on those deals for Bank of New England. But um so the industry has been consolidating for UH for many decades, and the question is what's the pace. But consolidation is an important theme here and we think it is going to continue, and we think it's going

to continue for a couple of primary reasons. UH. Number one is it seems as if, for the first time, at least in my thirty five year career, the bigger banks are more profitable. You look at our earnings models for next year, we see them earning about two bass points more return on tangible common equity, and it feels like it's going to be consistent. It's not just a flash of the band. Those scale seems to be working.

That's number one. Number two is we're in a really slow revenue growth environment and one way to grower costs out. And then the third reason is we thought fintech was important pre COVID. What we've learned during COVID, it's even more important than we thought. All the trends that we were seeing were accelerated by the pandemic, and that's going to try Even for investment, you're going to see more consolidations. So I knew you. I knew you were going there.

I want to go, folks into some inside baseball here and we do this on Global Wall Street. What is the profitability Tomas showed of a digital dollar of revenue versus a traditional consumer banking or business loan banking dollar revenue. Is it like technology where it's not to the bottom line, where the competition the old technology is fift to the

bottom line. Well, the way I would answer that question is I look at the efficiency ratios of the online banks versus the traditional what are they and they may end up being lower uh than the more traditional bank just you know, just in a big picture of you, once they hit a critical mask, you will see that they drive much lower efficiency ratios. And that's going to be the key, and that's why you're gonna see more and more branch rationalization around the country to try to

get those costs out it's own. Kane. I think that's what's so interesting about the last twelve months, the holdouts to people that didn't do want to do the online banking, the digital banking. They were forced to do it something they had no other choice. Thomas show, you've talked about the rationalization. Just how big is that going to be and how many jobs will be lost? Well? There will well, there will be consolidation and lots of jobs out in

those facilities. At the same time, you're seeing an incredible amount of hiring happening in the I T groups of

these companies. Uh, and so I do think that head count will come down over time in the banking industry, but it will be somewhat of a mixed shift at the same time, Tom Kane, that has been the story, hasn't it the rationalization that loss that your help, Yes, you're right, and we all see that at the four branches on the five corners of any I should say, the five branches on the four corners of the street. That's when young mchowd came out of Middlebury and we

were over banked. Tomas showed to John's point, is it one for one? What's the ratio? Because because we're just talking about one half of the equation, John, which is what's happening at the core the traditional banks. At the same time, you look at somebody like Galaxy Digital, what's happening at that company? I I've heard a quote from the CEO that in the last few months they've hired

over seventy people. These companies that are standing up as competitors, we didn't even know about three or four years ago. They're hiring, hiring like crazy, so and they're still within the financial services industry. So it's all about a shift that's occurring, which I think in some ways it's healthy, that's evolving as the economies evolved. Tom Tomma show. One thing you talked about was the big question is how much can they actually increase profits going forward? That really

will stem from loan growth. We've heard from a lot of the big banks already that has been a challenging area. How concerned are you about the lack of loan originations, the lack of demand as a result of cash flush consumers and corporations. You hit the tension nail right on the head because that is the question. So just to set up what the tension is, I think with investors in the market right now, is credit quality far better

than anyone expected, and results continue to exceed expectations. Negative low loss provisions. I saw some banks recently had practically zero net charge offs. Remarkable. Capital is building eighty years strong, balance sheets getting stronger. There's eight hundred billion dollars of excess liquidity we think in the banking system right now, that's the fuel for we think a lot of growth.

The problem is you're not seeing it right now because the demand for for credit from the private sector just isn't there. And so if the economy is as strong as many people think, and we think what the industry is saying is some of this excess liquidity will will will be soaked up, and we'd like to think that by the end of the year you'll start to see revenues begin to grow as core loans begin to grow.

If it doesn't happen a year and I think it's a question of when, not if, And that's what investors are looking for right now because you're not seeing it right now in the industry. But the industry is in great shape to grow when that demand comes back. That's the next leg at this rally. But the rally we've had since last September is the credit improvement rally. The next rally is going to need to be the revenue growth rally, which really hasn't started yet, but people believe

it will. And this is the tension right now, this question of how hot can the economy run if that loan demand doesn't pick up materially by year end. What you're saying is is different from what I'm hearing from other analysts. You're saying that if it doesn't pick up by your end, it just as a matter of when. It's not a question of whether the economy is truly

hot or not. Do you think, for example, that we are going to see banks be able to profit from this hot economy in a way that perhaps people are discounting as a result of not seeing that loan demand. Yeah, I I do. I do think that banks will participate, but I think that you're gonna really start to see

a separation between the winners and the losers. And I really believe that if you're an old school bank that is in an area that's not a faster growth area and haven't really invested in a lot of the new engagement of technology platforms, there's a chance your growth curve could be left behind. But I think that the major players, and that's why you're seeing the consolidation. You're seeing bigger banks stand up so they can compete with really the

non banking challenge that's happening. And I think that's the big surprise, and that's what Jamie Diamond talked about in his annual letter to shareholders. I do think the growth will be there. I think it's a matter of when, not if. And I think the banks have done a good job of keeping their companies in good shape to be ready for it. I tell me, it's always tried to catch out with these sets. Get you throw us on this sector. Always appreciate your time, you know that.

Tell me show that of KVW. Right now, we're gonna digress. And this is exactly who I want to talk to you about all this coin based stuff, and that is Michael Wolf. He has a wonderful cross section of experience and new technology. There is a tilt to entertainment, has acclaimed books on entertainment and technology. But we're thrilled at the gentleman from activate UH could join us this morning. Michael Wolf. I look at coin base and as Cathy said, it's a distributional force as well. It is set up

based on an invented scarcity. Bitcoin has a structured scarce asset feature. How does coin based deal with the fragility of an invented scarcity? How are they going to deal with that strategically forward? Well, the way to think about about point base is as an exchange and it takes half a percentage on point on every transaction. So the real comparison is to the is the New York Stock Exchange nazac UH. And in fact, by the way point basis valuation is UM is about the same as the

other two's added up. So so it's not a question that we when we look at point is we should not be worried about the volatility the underlying cryptocurrencies. We really should be looking at is the number of transactions which are likely to increase. Michael, how much we'd be worried about regulation? What regulation? There's there's a lot to be ironed out, and one of the issues is is tax treatment. The I r S is said that bitcoin

is not currency but rather property. Um the the regulation has always taken a while to catch up with technology. In this case, it looks like it's keeping keeping paste. The bigger issue is that this offering is really more about the sort of coming out party, or the first public listing of of a currency, which is going to be an inflection point for the rest of all digital currencies. Michael, I gotta say, I hope I have a hundred billion

dollars party coming out to some new America. I wonder though, going forward, just generally, whether the whether the valuations are incredibly inflated based on everybody trying to get ahead of growth and the next big thing. How do you parse that out at a time when you've got banks flush with cash looking to buy fintech, when you've got individuals

looking for the next way of making efficient payments. The what what what's fascinating a backcoin base is this is the first way in which individuals can take to take part of this new market for cryptocurrencies without being subject themselves to the volatility of those currencies. So I think we're gonna see that the coin base is going to be held widely at this market cap, It's going to be held by index funds, and so it's going to allow smaller investors as well as individuals to take part

of this entire move towards cryptocurrencies. Michael Wolfe isn't like an eBay equivalent of years ago, where there's been a structure, there's been a launch, there's been a huge price repricing, an advancement in price, and now basically it's dead money forward. I don't think so. I think that this is once again this is an exchange, it's likely to be one of the few exchanges that dominates this business. It's actually um, the second largest exchange world Why the largest is a

company called by ITTs and UM. And so this we're going to cease so much more activity. We've only seen so far Bitcoin as as really a vehicle of investment and speculation. It's only beginning as a vehicle of payment. Good to catch out, Michael, as always gonna hate from me, said Michael jay Will of activate joining us right now. Andy Barr, he was a congressman from Lexington, that would

be the sixth Congressional district of Kentucky. Andy, I first got to go to the most exciting two minutes in sports. You are going to do the Kentucky Derby on May one. Tell us about the crowd they're given the pressures of this pandemic. Well, Churchill Downs is excited to return the Derby to the first Saturday in May. That's the traditional day. It's always been run, with two exceptions, uh, once in nineteen during World War two and the other was last

year during the pandemic. So we're excited, even if the crowd will be a little limited because of social distancing requirements. Maybe half maybe a little less than half capacity, but still the most exciting two minutes in sports will be returning to Churchill Downs on the first Saturday and May Karison Bar. Some of my ancient ancestors were named after a gentleman named Henry Clay. There were two generations of

Henry Clay. Keen. You went to the Henry Clay High School in Kentucky, and it is a symbol of the tensions of race in this nation back well over a hundred years and forever. Please discuss reparations and the tensions that you see between the two parties as we engage

this debate again. Well, no doubt there's so much partisanship in Washington, and you know President Joe Biden, who is a member of the other party for me, gave I think an uplifting inaugural address calling for unity and bipartisan solution. It's unfortunate only ever since that speech we've seen a president governed from the hard left, as Uh Karl Rove

observed recently in the Wall Street Journal. Uh, this so called infrastructure plan, which is really more of the Green New Deal and tax increases with no real effort to reach out to Republicans. It's really solidifying President Biden's reputation as the most profligate and partisan president in history. That's a strong statement, but unfortunately there's really not been any

genuine outreach to the other side of the aisle. Look, both parties deserve blame for this, but I would like to see this president and congressional Democrats in the majority

reach out and just at least entertain some of our ideas. Congressman, you said, both parties deserve some blame for this, and this does seem to be the playbook that every time there's a new president, the other side says it's not bipartisan at all, and that president goes it alone and says, well, we couldn't get anything done if we actually tried to do it in a bipartisan level. What could re Publicans do right now? Better to actually move closer to a

bipartisan solution. Well, look, this is not an infrastructure bill that the president is proposing. It's a three trillion dollar left wing wish list. Only five to six percent can be adequately described as financing roads and bridges, which is what both parties say. We need. The most generous definition of infrastructure, which would include things like high speed internet, broadband, ports, airports, uh,

even electrical grid reliability upgrades. Those kinds of infrastructure investments I think would earn bipartisan support, but in this bill only account for about thirty percent of the total spending. We have a new definition of infrastructure, including the care infrastructure, which is really just a massive expansion of Medicaid. And then you have some of these other unrelated items green

New Deal items that were included. But then on top of that, there's no consideration of Republican ideas on financing public private partnerships and streamlining of permitting and regulatory reform. None of those Republican ideas are being even entertained. It's just more big government tax and spending, and unfortunately, a huge, massive tax increase that will bring us back to the bat old days of corporate inversions, moving jobs overseas, stagnant wages,

and I would argue much lower wages. The National Association of Manufacturing says we're gonna lose a million jobs in the first year if these corporate tax increases go into effect. Congress Banner, if there was some sort of agreement that was smaller, saying eight hundred billion dollars six hundred and fifty billion dollars. Some Republicans are asking for bipartisan infrastructure built targeting the areas that are more commonly thought of

as infrastructure. Would you be willing to raise taxes to pay for it? Well, I think we we ought to consider user fees as a way to finance infrastructure. That's the way we've always done it in this country. But to make America less competitive by not just increasing the corporate rate from to but taking our corporate tax rate to a level, uh that's higher than the tax rate in communist China, raising it to a level that's the highest among all developed nations. Because remember, it's not just

raising the rate from that the President is proposing. He's proposing to do so without removing the base broadening reforms that we put into place in the Tax Cuts and Jobs Act. And when you add on top of the federal income tax rates, the state and local corporate tax rates, that's where you push American corporations into a very non

competitive position. Congress, And one final question, and I do this after President Trump gave support to the Senator from Florida a few days ago and a course, with your lifelong work with Senator McConnell, I want you to frame for us how you perceive your Republican Party right now. So much is it's the party of Trump? Is it? Well? Look, I mean I think our party is broad and diverse,

just like the Democratic Party is. These are abroad enveloping coalitions, but we are still the party of limited governments and free enterprise. And what we've seen a troubling trend is that a big business wall streets ceo s have kind of aligned themselves with the woke left. And um, maybe that's a reaction to the Trump phenomenon, where the Republican Party is more gravitating toward main street small businesses, farmers, a rural America. We represent the grassroots American people, and

large institutions are letting us down. Uh, wall streets, Um, and look, I believe in free enterprise. But if if we're in this battle between capitalism and socialism, and the CEOs of the big banks, through their e s g agenda is aligning themselves with the socialists, where are the capitalists in this country? I think we need people who really believe in free enterprise, and that's main street, small businesses and entrepreneurs of cross this country who really believe

in limited government. Congressman, you are a skilled media operator, because you must know I've only got forty seconds left and can't ask any follow up questions. Andy, can you come back so we can pick up where we left off place some really important points we need to talk about, Congressman Andy bar the Republican from Kentucky, Thank you said. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene and this is Bloomberg