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Let's stick with earnings. Zion's reporting a beat on earnings with a NETT income of two hundred and twenty two million dollars despite a fifty million dollar loss from an alleged fraud. The former Barkley CEO Bob Diamond writes the following, The dislocation in regional banks stems from a few single bank specific issues, but doesn't change our view on the opportunity. We remain very bullish on regional bank consolidation. Bob. John just now for more pub Good morning.
Morning, John.
It's going to see it. So a few years ago we had some problems managing interest rate risk. Can we avoid it with credit risk in this segment now, I think.
Broadly in regional banks, as you've just quoted me, we're very bolish. I think, you know, both the interest rate dislocation that started with SVB or was recognized with SVB and we were really a function of rates going from zero to five and a half percent is in the market. I think the you know, the regional bank area has some really strong banks and some that are not as well managed. So of course some have more exposure for example,
to commercial real estate than others have. And if the commercial real estate is in Iowa, it might be different than if it's in la So we look at all of those things. But as a sector, this is a really really strong sector of the banks. There's four and a half thousand. It has the support of Secretary of the Treasury Vessent that consolidation is necessary. Makes the banks more competitive, it increases the roes, it makes them just better,
better investments. And I think four and a half thousand banks the United States of America, it's just it's the wrong number. And so we see this going over the next two to three years to closer to one thousand or fifteen hundred. And we think, also, John, I think this is really important. The thesis here is one of consolidation and taking costs out. So many of these smaller
community banks are just too small to seed. They're very good banks, but to get a positive ROE with technology costs, with regulatory relation costs, virtually all of these banks have the same technology platform. So you eliminate one technology platform. Many of them or all of them have regulatory relations staffs. You can eliminate one of those. You don't really need too So if you add the cost synergies, which we've proven in back testing really come out and are real,
and you add the increase in ROE. Because when a bank buys another bank, there's purchasing accounting and you have to mark to market fully through the p and L the bank that you're acquiring, you're putting capital in. Automatically, the ROI goes up because the asset prices are different. So when we look at the cost savings, we look at the increase in ROE, we look at four and a half thousand banks, we look at too many or
too small to succeed. This is probably the best investment we've seen where the downside is really really protect and there's good upside.
It's happening, your full cost is happening. We've seen it with Fifth Third and Co America. You'll suggest in this More to Come you talked about how region specific some of these issues can be. It's there a common threat in the consolidation so far.
I think what we have seen is where the synergies are most clear is in state and close to state. So when you have a really good front office, meaning you have a good business around deposits and loans and a similarity in terms of region where you're really adding clients and customers in taking out costs, those are the best opportunities, but not in terms of where in the US. It's more that in state and close to state is the preference.
There's been this fear that some of the biggest banks have really taken the wealthiest and the highest credit ratings in terms of customer base, and then mid tier banks are stuck with everybody else, and that that's where the credit problems have really come. Has there been anything that you've seen that proves that to be true.
No, We've seen idiosyncratic issues. We've seen certain banks that may have a specific name issue. But the truth is that you know, forty to fifty percent of lending to small businesses in the US come from the regional and community banks. They don't come from the big banks, many of the Big four, many of the larger regionals just don't have the cost structure or the attention to service
smaller businesses. So we think the credit quality on balance and lending is very very good across regional and community banks if there's.
No real weakness that they're seeing with respect to consumers or smaller businesses. Does it make sense and does it really help the case to have the Fed cutting rates at the same time that inflation is still a concern.
I think the cutting rates. I mean, if you think of the go forward environment, so let's say a regional bank buys a community bank, you get the synergies, you have an ROWI and now you're focused on additional acquisition, and what's the go forward? The go forward is terrific. I mean, the Treasury, the FED, the SEC are encouraging consolidation. They're talking about simplifying capital rules, They're they're talking about,
you know, endorsing these mergers and this consolidation. And then you have rates at four to four and a quarter percent likely coming down this month, potentially again in December. You have one hundred basis points between twos and tens. You can't make a better environment for banks going forward than this. So if you strengthen through consolidation, and then you look at the go forward obviously assuming that the economy stays stays stable and strong, it's a great environment for banks.
But you're forecasting at least that forty five hundred number to be cut in half in the next three years.
Is that right?
More than that, more than that.
How is that possible?
I think one of the situations we faced prior to this administration is there wasn't quite the same support for approving mergers, was it. Elizabeth Warren and Bernie Sanders a little bit on the edge, Like, I'm very very surprised Anne Marie that Elizabeth Warren would come out and say we shouldn't approve consolidation in banks. And we're talking about putting additional capital and banks, making them stronger, making them better competitors with JPM Morgan in City, and yet she's
against it. And that's the politics of being a liberal and saying no, no, no to anything that looks like it's positive for business and positive for profits. This administration has been very clear it's going to make the banks stronger, it's going to make them better competitors to the big banks.
It's going to provide more lending. In a way, it's getting more it's kind of monetary easing, right, It's getting more money into the market for businesses that need to raise money, small businesses to expand their expand what they do.
Well, if we've got thirty seconds left with you, which is not enough, I know, Oh come on, give me more. The meyoral race in New York City. Yes, the beating heart of capitalism and the socialist has ahead. What's your brief take of what's happening in this city?
You know, I think the city is at the strongest it's been since pre COVID. You know, I live in Midtown. We have our office in Midtown. I walk to work in the morning for eleven blocks and I have never seen so many people on the streets every morning as we've seen in the last couple of months. The city was really hit by COVID. It was really, really tough. I think we all kind of, you know, struggled through, not quite able to admit this is really bad, and
it's really good. The city's back, new restaurants, new clubs, people excited down in the village. My son and his family who live in London are moving to Brooklyn. They're really excited. I think the city has a lot of buzz.
You mightswer that question without one. He's that twelve time with everyone