Surveillance: JPM, Goldman Kick Off Earnings

Forget about that statistic. What's the model dividend growth that JP Morgan can deliver? I think, Tom, when you take a look at the excess capital that these banks have, including JP Morgan Chase, in their core revenue and earnings growth, that divotting growth should be considered into the high single digits. I think that's reasonable anywhere from six to These are not double digit, you know, dividend growers. Now, there are periods like the one we just came out of where

some banks increased dividends by double digit rates. But you must remember last year dividends were frozen because of the pandemic, and there was a catchup. I think in the recent announcement about dividend increases. So when you overlay share buy back on that, are you starting January one with a JP Morgan cash on cash return above eight percent? Dare dare I get out to eleven and a double digit

share by back dividend combination? I think time you can see that the combination of the share repurchases in the dividends could easily exceed earnings Donchester JP Morgan, but for the industry as they again have this excess capital, So that would suggest, yes, we could see those types of numbers that you mentioned from JP Morgan as well as some of the other banks in the large bank universe.

There is a high bar, and they met that high bar in almost everything, with the exception being fixed income, commodities and currencies treading, And yet the shares are lower and pre market trading. What's your response to that, especially given that the only other disappointment that I'm seeing right now is that interest income. It's gonna be interesting because the total revenue revenue number, as you guys have identified,

was a little better than expected, and that's important. Um. The other factor, though, is the supplementary leverage ratio fell to five point four percent from the prior quarters five point six. Now by regulation they cannot breach five. Internally, they have a five and a quarter percent internal model

that says they can't go below that. So the deposit growth you saw, once again, very significant deposit growth because of the monetary policy this country is pursuing with quantity and easing, and it's forcing these wholesale banks balance sheets to basically busted the seams. So I think maybe there's a little concern here that this leverage ratio is getting Parisley close to their required minimum that they have set,

which is five and a quarter percent. And now one morning slightly this we've got to ask the question LinkSA, but we aren't down one point to seven per cent after a look at the numbers themselves fram this appropriately, I understand that. Still, when you see beats pretty much

across the board, it's such huge numbers. It is interesting that the knee jerk responses, that's all you got for me, and you have to wonder what people are looking at to see that, especially given the fact that there have been losses to some of the big banks over the past few weeks, which are just a final question. JP Morgan at the Gate first. Now we're gonna have the compare and contrast in the next couple of days. What are you looking for based on what you've seen already

this morning. I think what we're gonna see, John, is that their fixed number was It was slightly blow expectations, but it was still a very good number. So I think we have to keep an eye on the other banks. Big fig trading, but equity trading, as you put it out, John, was better than expected. So I think from Goldman and Morgan, Stanley City Bank America we should expect equity trading numbers

maybe to come in better and sleep. The investment banking number, as you identified, was also better than expected, so I think the others are going to have similar numbers. And as I think we least have pointed out, um, they are taking market share from their European competitors, and I think that we're showing up again in the numbers we've seen so far this morning. The JP Morgan setting the bar for government sacks will hear from them in a

round about thirty minutes time. Gerard. I appreciate your time today this especially it's nice to work through the numbers in real time with you general cassidy there of OURBC capital markets. The economy is much more open than it was. Why is there such a rapid increase and why are not people investing that elsewhere? Let's ask that question to our Stagia amorro So and a new CE capital network. The chief investment strategist joins us right now on the stage,

you're gonna catch up. Let's go there. To Lisa's point, we're all projecting this big boom in growth this year, and that's largely developed through the first half of what the consumers do with their cash has been slightly confusing. What's you'll read on things? Yeah, I think the consumers have been venturing out into the real economy and they have been gradually putting that cash to work. I mean, I definitely think we see that in some of the

reopening categories. For example, we see hotels that are pretty much back. We see restaurants, we see the travel services that are pretty much back. The consumers have also been switching from the durable goods to the services, and so that's what we're seeing now. But to Lesa's point is to come back to the banking sector, I think some of the strength and the consumer that we're seeing and the credit card spending data that's going to start to

shift to the business sector. Part of the really weak spot in loan growth for the banks is actually the commercial and industrial loan growth is just not been there. But as the economy comes back online, as the CEO cefos are increasingly comfortable with where things are, they're going to start to boost their capex plans and that's gonna need to require some loans in financing. So I think that's what we're likely to see for the banking sector

over the next few quarters. Um I think JP Morgan is a sign of kind of things to come for the banking sector. Broadly. This is a solid result, but nobody is surprised. Everybody is already expecting a hun increase in this quarter's earnings year over years, so nobody is surprised. I still think though there's more cattalysts to come for the banking sector, and the stage are a little bit off.

You're remitted I capital, but you've got fabulous experience, maybe like no one I know on the street of moving from stodgy old bank to massive fintech advance like it I capital. Do these big banks just have the high ground because they're so large and they're so technologically advantaged over all the other banks. Well, so given the balance she's and given the tech budgets for some of these banks, absolutely they do have the advantage and putting them money

to work and accelerating UH the innovation. So the question is how much is the pace of this innovation accelerates and are they nimble enough? Are they quick enough? So while I like the banking sector, the reason why fin techs are so attractive to us is because the big banks are not seeing a little growth. These smaller banks are seeing rapid UH market share acquisition. And you know, you look at neo banking, for example, digital banks with

no physical branches. The revenues of that sector today probably twenty billion dollars. In five years time, that twenty billion goes most likely to four hundred billion dollars. So this is a significant growth and I think the fin techs can definitely capture that opportunities that in a more pure way than a traditional bank sector can. Anastasia, are there any real data points within these earnings that matter right now?

Given the fact that so much of people's view on banks really just hinges on what will happen later on perhaps Q four. Yeah. I would say there's two things to note about bank results today. First of all, where's the strength, where's the bright spot in these result it's actually investment banking, advisory fees, advisory revenues. If you look at the strength and the equity capital markets is just stunning. For example, M and A had a banner quarter. Uh, the volumes are up about I p o s have

had a banner quarter in a banner year. They're up close to two in terms of volumes. So the investment banks are absolutely reaping the benefits. I think that's going to continue for some time, for a number of quarters because if you think about the preconditions that have been put in place to support this market, yeat zero rates, which lurwered investors into areas of higher growth and innovation economy.

That's not going to change. Look at the fund flows they're going into, thematic funds, thematic ETFs, anything from robotics to space tourism to a gene therapy. That's not going to change. So as a result, the public markets are offering premium valuations for some of these high tech, high growth stocks and who's reaping the benefits of those higher valuations are rid at companies. They're tapping this I p

O window. They're going public, and as a result, they're probably getting evaluation that's three and a half times more the last private round after the first day of trading. So the private equity investors are reading reaping the benefits, but also the banks, of course are reaping the benefit through those advisory revenues. So I think that's going to be an area of strength force time time to come now, Lisa. The other point of this is a lot of optionality.

As you say, we don't know what's going to happen in the future, but we can tell what's priced in and we can guess where that may go. Loan growth is flat today, that's likely to inflate, inflect higher interest rates or zero Today the markets are pricing in a rate hike and a half through What if we get there a little faster, what if we increase it a little bit more. That's optionality that's embedded in the banking

sector right now. And then there's capital returns. There's excess capital that these banks have to return, so share reports, dividends, all of that is very favorable for the sector and a state you always gotta catch up. Thank you, busy morning for us, for you too, and stay amos that of on Capital Network, The chief investment strategist Stephen Biggart joins US now with Argus Director of Financial Institutions Research. Stephen, let me ask you the question, as Shannali Basik was

adamant not to answer it here. How do these book value dynamics move. Does the giant and wonderful JP Morgan come in relative to the other banks? Do they advance their book value ratio versus JP Morgan? I think they do. I mean this is an environment where um, you know, the the banks that have the best opportunity for for longer term growth, more diversification, U steady or earning stream I think are the ones that that get you know, will continue to get the premium in terms of price

the book. So you know JPM as a company that's it's extraordinarily well diversified. Uh, they do benefit when capital markets are strong as they are currently and frankly if they have been the last four quarters, but of course it's been Goldman Saxes. Uh, you know, a cup of tea In terms of the you know, the last four quarters, so we've had great M and A, we've had solid

investment banking, you know, trading results. Of course, they're starting to uh you know, pull back a little bit from I would you know, call just unsustainably high levels over the past few quarters. Do they amend or do they have a plan to diminish these sterling balance sheet ratios or do they just let it right out? Do they

manage them lower or not? Well, I think they've tried, of course, And uh, if you're talking about in terms of more sustainable capital returns, I think they'd very much like to do that, but still a precarious time for the economy. I think we uh you know, they'll probably uh you know, keep those a bit a bit longer. Uh. You know, they do have much more flexibility now in

terms of capital returns than they did um prior. Uh so you know, the FED has been less of a babysitter in terms of U you know, the actual uh dividend and shareholder uh share buy back. So you know they've got that flexibility now to uh to you know, sort of give and take between the two. I think that gives them a lot more flexibility, and I think they're you know, writing out this uh, this economic recovery and uh and seeing what they can do, you know,

sustainably for the long term. And tell me you asked the questions. So let's just look at the performance so far year today. There's twenty percentage points of out performance on Goldman versus JP Morgan so far year today on Goldman Tom JP Morgan. Look, JP Morgan's had a great year so far, just Goldman SAX has had a fantastic

year so far. Well, there's just two different platforms. John jan Hatzi is coming out of GDP estimates within the report, I believe, and what's important to me John is Sinali Basik mentioned you go back to two thousand nineteen for a pre pandemic compare. If you take two years of their estimated GDP growth, you end up with eleven point five percent growth twenty four months, which is five point seven five percent per year run rate. In America's in

the vicinity of two to three percent. Well, let's look at the forecast in the release this morning, Tom GDP growth in twenty one expected at six point eight percent. In the U s U S GDP growth in twenty two four point seven percent, So you look at six point eight percent this year, four point seven percent next year.

And Steven Bigger asked you the question that great GDP figures, is that something that some of these banks can actually leverage, because so far it hasn't translated into the long growth that the banks of JP, Morgan investors in those names were hoping for. Do you start to see that happen in Q four and beyond, Well, I think it's a second half help for the banks. Long growth as a

started to resume at this point. I mean that that's going to be the you know, the most likely beneficiary for banks, just to get the loan balances to expand a little bit where they've just been, uh, you know, sort of held back. And we think there's a number of reasons for that. You know, confidence previously had not

been where it needed to be. Had tons of government stimulus in the form of enhanced unemployment benefits or you know, the outright checks to individuals, so so Americans are were flush with cash they didn't need to borrow, but that wears off, you know, the enhanced unemployment benefits in September, the stimulus checks are are are gone now, so I think we've seen some improvement in credit card lending. We've seen some improvement in the auto ending, uh you know,

home equity as well. So I think they do begin to benefit in the back half from a from a bit stronger loan growth environment. Of course, yields have have been a headwind here with with the tenure pulling back as it has. We think that's more technical and short term and we'll get you know, a little bit uh stuper yield curvis the balance of the years goes by. So I think the lending business outlook is is a bit improved here than it than it was even a

quarter or ago. Stephen, let's go there. I often ask the question, you want to see a data point in earnings release, what does it change? Is there anything in these releases this morning that will change anything for a bank built or a bank bear for that matter, Do we resolve anything with this week's earnings. Well, it's a great question. Uh, you know, it's not a you know, a single quart or just not a terrific bank make

or or a terrific you know, industry or rebound. So I think the you know, we've had such a great rebound in financial stocks generally that you know, there could be a pause here as as we kind of get an evaluation moving into the second half. Of course, the comments on the quarterly calls here are going to be

pretty important, particularly as as it comes again to long growth. Um. You know, the in my view, the case or bank stocks is really a fold that we that we do get that loan growth resurgence, that we have a bit steeper yield curve that these uh you know, the credit quality remains stellar, not to the point of having a massive reserve releases as as we're now seeing from we saw at least from JP Morgan, and then the much better capital returns which are uh you know demonstrated after

a moratorium last year due to the pandemic, we're you know, we're seeing some nice return of capital now. So I think there is you know, it could be a pause here as as we as we look out in the second half and that's the next year. But look, I think everybody is expecting rates to move but higher. That's

going to be benefits special for banks. Um. Yeah, of course if we get that, if we get that rebound and loan growth, that's going to be critical as well, and a lot of people seem to believe that there will be that growth at rebound in loan growth, and yet we're still seeing deposits growth so much. We're not seeing consumers spend that incredible amount of dry powder that people are expecting them to spend. Isn't that concerning loans?

Loan growth will pick up, but when matters? And if it doesn't pick up until next year, won't that be a bit of a bear case? Well or a pause case? As I mentioned, I think I don't think it's a reason to sell banks when you have sort of this this flatish loan growth environment. Uh. So, you know, it is, as you said, a little a little troubling that that that consumers can you know, do continue to uh, you know, save at the rates that they have. Uh and and

banks are flush with deposits. You know, that's a double edged sword. Obviously that it's a great funding source, but you know, funding is not It's not the problem for banks right now. It's it's trying to get more more borrowers out there. And I think that's that's going to have to come with an improving economy. I don't think you can grow the economy too at the extent that we're expecting without some some benefit from that return of

long growth. Hey, Stephen, gotta leave it that. Stephen Bigger, August Financial Institutions Research Director. Let's bring in Hugh Johnston, PepsiCo Vice Chairman and CEO. Hugh, great morning to have you on. An hour ago, we had a really hot CPI for in America. A lot of that is traced back to the reopening theme that we can get into

in just a moment. But from your perspective as a company leader corporately to an America and beyond, how do you navigate this increase in prices we're experiencing state side over the last few months. Yeah, absolutely, good morning and nice to be with you all. Obviously, our company is performing very well right now, and and a part of that is navigating some of the challenges from a cost perspective.

That the biggest thing we can do in order to manage that candidly is we invest in our brands, and we invest in innovation, and by virtue of doing those things, we create products that consumers are willing to pay more for and that allows us to take price increases that that help us offset that inflation. So it's something that that obviously all big companies are dealing with right now, and frankly, I think we're very well positioned to deal

with it. It's interesting when I have policymakers on the show to you, When I have central bankers, Federal Reserve officials, they take this line that a lot of this is transitory. The bond investors do the same thing. When I talk to corporate leaders, I send something a little bit different. How much daylight you sent this between you and the policymakers making the calls down in Washington. Well, we're always a little bit conservative on this front, right so I'm

not going to assume it's gonna be transitory. I'm going to assume it's probably gonna be around for a little while, and then we'll build our plans around that. If we happen to get surprised with inflation lowering itself more quickly, that's great, we'll we'll we'll adjust to that. But right now, I'm assuming it's going to be with us through the better part of next year. We've had some talk about

sharpening cost management initiatives. You does that mean cost cuts or can you pass on a lot of this to the end consumer? It's gonna be both. I mean, as a company, we have a history of driving costs down. We we announced this morning we're extending our productivity program through a north of a billion dollars a year, and we've been taking out a billion hollars a year plus since two thousand and twelve. So we're always looking to run the company as efficiently as we possibly can because

we don't want to waste dollars in any direction. That said, when when input cost increase, we're also going to take some pricing. We do it every year, and we'll do it again as as we get to the fall of this year. Here, my colleague Kelly Lines went through the revenue mix and the company at the moment where you're seeing growth and where we're seeing a bit of contraction as well as we see the increased mobility in a

place like North America here in the United States. How is that increased mobility translating and into the change in the revenue mix of a Pepskuchi. Yeah, it clearly is moving more towards what we refer to as the out of home channels, So whether it's the food service of restaurants and the like, and also convenience stories. Mobility clearly drives those channels. At the same time, what we refer to as the take home channels are actually still growing

as well. Uh, so we're seeing good benefit across the board. The reason for that primarily is we made a decision last year that despite the pandemic, we were going to continue to invest in growth capacity. We were going to continue to invest in our brands. And as a result, now as consumers have come back where they're ready to capture that business and we're gaining market share as a result.

You and I talked about how sticky some of his consumer behavior might be shortly after the pandemic and then lockdown when reopens. You you finally got it is sticky, you finally got consumed as a snap him back to old things, old habits. Yeah, I think it's a little bit of both. In all candor, it's not an either word type of thing. Clearly, as mobility comes back there, they're they're back in the habits of sort of balancing out healthier reading and then the occasional treat or indulgence.

The one thing that seems to be sticking a bit more is breakfast at home. That that's a trend that I think people have sort of forgotten about breakfast at home pre pandemic. They rediscovered it and they discovered they liked it. So I think as we moved to these more hybrid working models, breakfast at home will remain elevated. Obviously, our Quaker business was down in the second quarter, but on a two year basis, it's up about nine cent.

I expect this to maintain some level of elevated performance versus where we were two years ago. Just before I let you go, just one final question, if I may. I always enjoy having you on the program because we get to go away from some of the core themes of the morning just for a minute or so. Let's

do that right now. In the last week, the White House came out with an executive order on promoting competition in the American economy, and one of the themes, a couple of themes that came out of that was this idea that consolidation is bad because it holds down wages and it leads to an increase in prices. I just wonder for your firm, specifically, what your message would be

for the administration after they put that out. Well, obviously there was a lot in that executive order, and most of it I don't think has a substantial impact on us. The thing we're obviously always concerned about is having a level playing field and enhancing competitiveness. So to the degree that things do those those two outcomes, we're happy with it.

To the degree that it reduces the level of competitiveness, obviously, that's something we'd wo'd be less happy with, and that was the aplomatic response I kind of expected, Hugh, it's gonna catch up. Thanks for making some time for us on a busy morning, Hugh jo Uston. That a pepskud vice chairman, and say f This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern on 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 In. This is Bloomberg