Surveillance: U.S. Consumer Banking Very Strong, Cassidy Says

the numbers from JP Morgan. Allison aggressively going through the press release. So let's talk about it. The top line for you, Allison this morning. So I think the top line is the bottom line, the return on tangible equity, which to us is extremely impressive. JP Morgan is already executing at the top end of piers and that shows that they continue to do so. Looking at the guidance, I would say what's most positive is the expense guide, which looks like it's coming in a little bit lower UM.

So again, it's a lot of data out there that we need to sift through, but um on the surface that's positive. On the net interest margin or net interest income is similar to last quarter, um. However, recall that intra quarter they did sort of guide down UM. But again I think I wouldn't make too much of it, too much out of it one way or the other. They were saying fifty seven plus or minus. Then they said, oh, maybe maybe it might be UM, you know, closer to

fifty seven. I think in general, uh, interest rates is sort of the one situation that matters most of banks, but where we'll probably get the least clarity this quarter, just because of the dynamics driving that are really things beyond the bank's control. Let's talk about an interest income

just briefly. Then the stock is filmed in the pre market, but I run about two percentage points net interesting income less than fifty seven point five billion dollars is to a rate across for the other big banks on Wall Street. Was still too early to tell, Allison, I think it's a little too early to tell. We haven't sort of gone through to see, um, what's happening with mix, and I think that's could be the one area where we get positively surprised and we could see an offset to

some of the margin pressures. So if we looked at some of the weekly data that comes out consumer loan growth UM has been doing better. That's higher margin and to the extent that you have that influencing your portfolio, UM, that's obviously helpful to net interest income. The other thing fixed income trading, which is actually more important for City and Goldman. It's a bigger share their earnings will hear from them shortly, but that coming in much better than estimates.

We allcome, all of you worldwide and coast to coast. It's a too big to fail day for me and John Farrell, and you can do that with Fred Cannon of KBW of course part of Stiffle as well, with decades of experience, including being on the inside at Bank of America years ago. Fred Cannon, these banks can't acquire other banks, they got deposit issues and that they're just

gonna organically grow. Do you see the too big to fails growing at nominal GDP less than nominal GDP or they all blended gonna get JP Morgan like seven eight nine pc per your growth? Well, I think in terms of top line growth slightly slower than nominal GDP, the small banks and FinTechs are going to pick up a bit of market share in terms of asset growth, so that keeps them down and you're seeing that in the numbers that said bottom line growth. How do you get there?

Operating leverage, keep the expenses down, and buy backs, that's the key. I mean, I I thought Mr Diamond's comments and of course there'll be much more in this John as well, But Allison, I mean the comments were all upbeat, upbeat, up beat, you know, the usual boilerplate and investor relations guy would put together for Mr Diamond. Where's the gloomy here? I'm in a gloomy mood today. Is there any gloom in the JP Morgan story? I can't find it so

not so far. But you see any gloom? I don't see a lot of gloom in this, but we wouldn't expect at this point in time, John, you see any stalks up nineteen percent through the way people talk about the banks freadits and if they've had a terrible year, what's going on? How do you reconcile the sentiment around some of these big names with the performance in the

equity market? Well, I mean the year to date is a tough one because remember we had such a bad that applies to the whole index that applies to the whole index, That applies to the whole of the SMP five hundred. You look at it on the year, we've done nothing. But what a difference a month make, of course, but let's talk about this. If you ask people about how stocks have done this year, they feel like stocks have done well. You ask them how banks have done

this year, they feel like banks haven't performed. So what's happening is that the banks have made progress, especially on the bottom line, and the multiples have held, and that's

allowed for this growth. And we're still trading at fifteen year lows on on multiple on pe ratios for the banks, and so the fact is that they're bouncing along the bottom evaluation and continuing to make some progress in terms of the bottom line, and that that has allowed some reasonable UH money to be even the bank stoxes here.

Just in terms of ivise effects, Allison looking back twelve months for this quarter, is that when we see somebody out performance and fick redative to equities, it's a big base effect to play here. So that'll be the story next quarter. I think the story of this quarter is though, that embody comparisons are easing, so we really strong half that sort of faded in three Q. But I think for FICK, and again we're gonna want to dig into the details, but September was a really strong month for

credit issuance. It was a strong month for credit trading, especially in high yield. We know that's more profitable. UM. You know, we had good, good spreads, We had a good, good bond price movement. So I think that might be what you're seeing play into fictual quest. The question is with FICK, is going to be sustainable? Allison, I have a question and it is a light question, but it's also serious as well. I looked through quickly as sped

read through all their stuff. I don't see we Work mentioned, and you know this is in the headlines, and I would give us the I know, I agree, but for our listening on its give us the amount of we were Is it like literally a drop in a lake? I think, you know, WE Work, I think is a broader you know, people might say perhaps a reputational issue. It's not something that you know, perhaps there might have

been a mark in the portfolio. There's a big headline number about how much UM they're invested, but that's across their private equity funds, and they do have a very big portfolio. The question I think is more um, you know, I guess softer in terms of, you know, what are they doing from here? And so I'm not necessarily saying that there's a reputational hit. I'm saying that, you know, people are going to want to know, like, what is

what's JP Morgan doing? Um from here? They're gonna just want to hear a little bit and a little bit more about that. And that was really something for for I think the call all along, it's not necessarily something you would see in the press release unless there was

some outsized hit. We're looking ahead for it. I just wander, from your perspective, the hangover from the we work saga for I p o s for the back end of this year, for investment bank fees, how do you think we set up for the back half of this year at the back end of this year. I'm pretty cautious on that. I mean, what we're seeing is these unicorns in the just cannot get their private market valuations in the public market. I mean, we work you think is

a one off, but it's continual. In other words, we've we've seen this story before of these unicorns having these huge private market valuations and they just don't come through. And that's a tough story to to build up your I p O pipeline one. Just to fund a word on the Allison, how difficult Q four might be because of some of the big dramas, the big sagas that we've had with some of these prime profile I p O s. So, so I'll say two words and for

earnings easy comps. So that's what we'll be talking about in January. But I think that you know, the I p O question, I think is a is a bigger question sort of I think going into and I think what's also interesting is that this while you have sort of we were canceling their deal, you have paloton um, you know, disappointing, you also have all these conferences going on in Morgan stan Ley Goldman getting into these conferences where the private investors are saying that they're not getting

enough money. So I think it's sort of and perhaps talking about the circumventing the banks and is there a way for them to sort of get more of the economics, which in a way I think highlights sort of the role of the intermediary, right. Some people think that they're

overpriced something they're overpriced underpriced. So that's that is something we're gonna look to hear more about in the call to two of you thank you so much else than you can thank you so much for being with KBW before they write up their banking combine and write up reports on four banks, so they somebody who's run out of ammunition? Is the week company we did? Did you read the whole prospectives? Right? John? I didn't, but nice

when he did. We are down to Coupan with what's called an equity kicker in the trade to guarantee I say, a thirty percent return. This is like you know this this transaction they're trying to structure. So there's two options. Either the soft bank bailout all ultimately JP Morgan leading a group of bankers and securing some debt for them. JP Morgan's turnishing their reputation, including including a two billion dollar note payment and kind note coupon almost double Tom

what they've paid last year. I'm real has never written that larger coupon or that large and equity kicker. You talked to adults, What do the adults of Wall Street say when they see fifteent coupon and equity kicker on warrants promising thirty percent return, it's a tough environment to get that done. Obviously, what ever, right ever, let alone in the market that we're in right now, they're talking to everybody and their mother to try to get this done.

But whether they can or not, if they do, it's a real hail Mary. The myth maddox here is what's called a cramdown, which is if you do a coupon, and you do that, you cram down to value where it kicks right over to the new investors. How many billion is the is the diminishment here to get this thing done? I mean they're trying to get two billion of this done, right but I mean everybody that I talked to is saying, oh, it's it's it's a tough one. It's a stretch, and you know it's a lot of

a lot of money. Billion. What's the thing worth right now? I have no idea less than ten Probably it's a distress nesset now, that's what it is. Who's making the decision? We work? Well, they have two new CEOs now, right, and so Adam Newman is not the one here saying that we prefers off banker. We don't. It's the two new CEOs. I've got to say something. So they are supposed to run out of cash pretty soon, right next

month exactly, and so um, remember their restructuring. Restructuring is expensive, right, They have to fire people, which is expensive. They have to get sell assets, which is expensive. They have to try to get out of some leases, which is expensive. So they have to take they have to spend money before they could even ever think about making money. And so if you're somebody who's betting on them now through, even with the coupon, at what point they actually turn

around is a really tough question. Two options were on the table, and it looks like from our reporting this morning, they're exploding exploring the JP Morgan lifeline over the soft bank lifeline. Why do we have a hy at this point? So, if you think about it, if you take the debt right, you still have a more institutional base. If you get more equity from soft bank, soft bank owns you, right, and it's risky you're sharing all your income with soft

bank rather than paying them down a coupon. Oh well, so that's the real problem with UM, you know, taking the soft Bank money. Remember soft Bank already owns almost fort of the company, so it's a real tough one when um, you know, they already practically own you, and they own more than Newman himself. But what about I don't mean to interrupt it, you just you just did.

I was busy, you know, like the fan mail is coming in, and I just had to talk to Michael from from I don't know, up North, very very quickly. Here they need Kendall Roy. I mean, the answer is they need somebody like Kendall who was going to fly in and save this thing. All a succession, Oh, I wish Kendall Roy could be the person. Spoilers, No spoilers. I didn't watch Sunday Nights. We're in the new episode. Just no spoilers. You're like you did this week Game

with Thrones. Don't ruin this for people. There's no different. Succession is the same as game and thrown. Seriously, who was the white Knight to come in? Buffet is not going to come in works on a seven or eight percent coupon? Here were percent coupon? Is this like Steven Schwartzman comes in and black Stone. No, well, yeah, even they might even be messy for Stephen Schwartzman. Right, you gotta think like somebody who likes to stress a little

bit more than that, like an Apollo. But I doubt that. Okay, what what are the adults should Apollo do when they see what Jillian Tan and our team wrote about. Yeah, I mean, I don't you're talking about Steve Schwartzman, for example, very similar to Apollo. Steve has spoken about we work publicly before. He said that he doesn't understand where the

economics came from in the first place. By the way, over the weekend, I had bankers involved in all of this deal, all of these deals saying oh, we probably should have seen the writing on the wall a while ago. It's a little far gone. That's the problem. Tom. We're working. We can. We thank you all for listening. On the week Company. There have been any number of stories over

the last forty eight hours. Really, Turkey and Syria front and center, and of course all the bank earnings as well in the financial world, and Brexit has become a state of confusion. Theresa Raphael writes brilliantly on this, and particularly writes on a relative basis and has a wonderful essay on what the United Kingdom will look like after Brexit or non Brexit or no deal or deal Brexit,

whatever the eight flavors are. And what fascinates me to reason your essay is the Europeans are sort of afraid of what a separate United Kingdom will be like. Why is Paris, Berlin and Brussels afraid of what this independent, newly independent United Kingdom will look like? Right, So this is one of the fears that you hear from Angela Merkel in Germany, also from Makron, that an independent UK will look a little bit like a Singapore on the

Thames River. It will cut taxes, slash regulations, open, uh, you know, put itself to the world's banks and businesses, and you know, actually become, um, you know, such a formidable competitor to the EU that that Brexit, uh, you know, encourages other EU countries to maybe try to join Britain's orbit. And so, you know, one of the balances that has to be struck in Europe is they you know, now I think very much would like to be rid of

the UK. Uh. It's the Brexit negotiations have dragged on and on, but they want to do it in a way that that uh it seemed to hurt and doesn't give the UK of some trade advantage that they will then come to regret. Okay, but the feasibility of this, I mean, there's been the Norway on the Thames, and Singapore and the Thames in Toronto on the Thames and

the rest of it. I don't hear anybody except the wishful hopeful, actually linking the culture, the ethos, the geography of Singapore with what we see in a more northern latitude. Yeah lately, I mean, I think the people you know, worrying most about Singapore and the Thames really haven't spent a lot of time in the UK. You just can't compare a one party city state of six and a half million to a country as large and geographically diverse

and politically pluralistic as the United Kingdom. And you know, the main um reality of British politics now is it's going in the other direction. Even the Conservatives, traditionally the party of you know, fiscal prudence and low spending and low taxation, are turning it on when it comes to offering voters much enhanced public services, more spending. They still want to keep tax rates low, but they don't have that much to cut really kind of realm of corporate taxes.

You know, I looked at the photos of the Queen and Prince Charles and all that. I didn't see Boyd George there. But you know I I I looked for as at the speech and I you know, read through some of those stuff and I get that. But how much the Queen is supposed to voice what the Prime Minister wants, how much of it is like actual policy, and how much of it was if I'm elected free beer? Yeah, I mean it is obviously he the the government rights

the Queen's speech. This one was you know, it was a bit of a joke because the government is meant to be setting out its agenda, but it doesn't have a majority. It has a majority of minus forty five, so it's not a legislative Agenda's effectively an election manifesto. Uh so it is a lot of you know, sort of free here. There was lots of talk about social care and other spending programs. It's basically telling voters, if you elect us, this is what will you know, this

is what we'll do. Um, and so it was very controversial as well. Well you're you're a great student of the press. There was was a feeling that Queen was put in a compromising position. Yeah, there was a lot of scrutiny of the decision to prorogue or suspend parliament even for the short period and have a queen speech. It was very performative. It doesn't serve any uh, you know,

any practical function. But you know, we are now in the realm of you know, the ridiculous, I think, in the view of many people, and this was just par for this new course that you know that everyone is on. Well, thank you, truths revel with a really good essay folks, sing Singapore and Attams. For those of you in Newport, Rhode Island, it's Singapore and Thames. But I don't understand the Thames Thames, Singapore and Thames. I'll try to get

that on Twitter. Bloomberg Opinion touris Raphael with us this morning. Let us pause and do this over the next good half hour with Gerard Cassidy of RBC Capital Markets, who said two years ago, I know they're going nowhere, but at some point they'll move. If patient investors the banks moved, Gerard, I looked at Golden Sacks today tenure track record three point six percent per year. I looked at JP Morgan ten point x percent per year. Does JP Morgan's succeed

because of their best practices or because they avoid worst practices? Tom, That's a really good point, because you put your thumb on it. With JP Morgan, they know how to execute the investment banking commercial banking businesses are generally commodity businesses. There's no patents or proprietary you know, products that really

can distinguish one bank from another bank. It's all about execution, and that's what JP Morgan did again this quarter, and they're demonstrating that they're really starting to lead the pack, that they're able to deliver better than expected results because they're executing, whereas the other bank things don't seem to be executing as well. In some cases, what is executing me? You've only been doing this for four hundred years, you were and Hamilton was arguing before Andrew Jackson about there

being too many banks. What does executing actually mean? It really comes down to looking at the playbook and having a map to drive the revenues and control your expenses. So it means making sure people are following up on phone calls with clients after a client meeting. It means that you know, opening branches, you know, when you're building out new branches, as JP Morgan is doing in Boston and Washington, d C. For example, opening them on time,

having the layouts the way they wanted to. It's all these little things that really add up. You see, always set up cassidy with that answer, because I knew where I was going next. Paul, this was Jamie Diamond's annual essay, and he just he put in trumpy and all caps hard work, hard work. It's just how work. It's just jarred. I mean, it's I can't remember a day when we

had so many big banks reporting on one day. So what I think a lot of our listeners and investors are trying to do is try to take a step back and say what can we take away about the U S and global banking business from today's results. It's really interesting that you bring that up, because we are overwhelmed with bank results today and we will be tomorrow. And when you step back for a moment and look at the bigger picture, our banking system is very strong.

Our biggest banks are very strong, and they're taking market share away from the European banks who continue to struggle in the capital markets businesses. But what's also clear from today's results is the consumer banking business in the United States is very strong, which is supported by their strong consumer numbers. We see whether it's employment wage gains, and

that's now showing up in the banking results. So, Gerard, one of the narratives that I think we hear a lot as we think about global banking um is that the US banks did a pretty good job post crisis kind of right sizing themselves to the new world, the new regulatory world, the new return outlook, whereas perhaps the Europeans really haven't been as aggressive. Is that a fair assessment. That's a very fair assessment. But I wouldn't put it all on the shoulders at the banks did it themselves.

They were forced to do it by the Federal Reserve. So the Federal Reserve put a gun to these banks heads back in No. Nine intent and forced them to raise capital at distress prices. But by doing that, it enabled them to write off the problems that they were in into and they turned around much quicker that did not happen over in Europe, and that is the huge

difference between the two banking systems. Did you read in the you know, I mean everybody's mantage of the message, folks, and you know we make jokes about it, but Paul and I don't. Gerard Cassidy can read one of these press releases in about six seconds. Is there any talking there about right sizing, layoffs, all the other happy jargon that's about firing people, Tom, I haven't seen any of that. In fact, we've brought up on the call with JP Morgan.

I asked Jamie Diamond about the technology investing, how important it is for the capital markets, business and markets, and they are investing very heavily. So the one area that you could see head count reduction, you know, the trading desks. You and I both know you go to the New York Stock Exchange today and it's a museum. Basically, there aren't any many people there because technology is taken over. So we've seen it in terms across the board head

count reductions. We haven't heard that at all, the second time I've heard that this week. Somebody said earlier this week Bloomberg surveillance was like a museum. No New York Stock Exchange not not not your so so, Gerward, I mean, is it simply what are the banks kind of telling investors now about you know, the next two to three years. We hear a lot of talking just about it is just slower growth. We've got the I m F taking

down g d P numbers today. Um are they kind of telling the investors top mind, growth going forward is going to be less than maybe what it's been over the last several years. They really haven't said that that specifically. You know there there are somewhat reluctant to give out that type of guidance over a long period of time. But clearly what we're seeing is that as the economy slows,

banks are intertwined. I often say banks are products of the economy, and so if the economy is going to slowing growth in invariably that will lead to slower revenue growth for the banks. Now, we did see this quarter that net interest margin impression that we've talked about in the past. Some banks were able to offset that would better growth in the capital markets businesses and also origination volumes, particularly in residential, mortgage and auto for some of the

banks were strong. Zara, give me one small small bank we can talk about. Um. We continue to come back. I think the last time we said a time about the S one Bank Orp, s b B ACT Sam Bill, Bill, Xavier, Okay. They you continue to do a very good job. And it's interesting you bring that up because this country, we have more banks than any of the world, any other country in the world, and the small banks have a role. They're not going to get in our view. We don't

think they go out of business. They need to have a niche. If you have a nie, you can survive. I gotta leave it there. Thank you so much, greatly appreciated. Always end Broadcastidy RBC Capital Markets. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.