Ken Leon, Global Research Director, CFRA, explains what bank earnings might reveal about the economy and market trends.
Transcript:
CAROLINE WOODS: Joining us now is Ken Leon. He is Global Research Director at CFRA. Ken, Thanks so much for joining us. Great to have you.
KEN LEON: Great to be here.
CAROLINE WOODS: So Ken, bank earnings season kicks off next week. We’ve seen this really impressive performance from the Big Bang since the April lows. What’s next. What are you expecting to hear from some of these banking giants?
KEN LEON: Well that’s true. And what a change from when they last reported in April when there was tremendous uncertainty in the markets in the world and what that could be, which was mostly banks telling us of a cloudy outlook. Today, quite different in terms of where we are. We’re expecting the banks to have more confidence, not only in reporting what we think will be strong second quarter results, but also the outlook for the second half of this year into next year. There’s a lot of factors that go into that confidence that we have as well, which is especially an improvement in the capital markets. Also, the US economy is not falling off the table. We’re seeing economic growth, which is good both for loan growth and also less concern about moving out of the normal range in terms of credit risk or delinquencies.
CAROLINE WOODS: Not as cloudy of an outlook, but still some uncertainty out there and stock prices that have run much higher. So how high is the bar and which banks do you think will clear that bar?
KEN LEON: Well that’s right. So at CFRA we have an overweight on the financial sector. The banks are of six of the top 10 constituents are the large global banks. What we’ve seen and where I sit here looking at all the markets around the world, is increasing confidence about the capital markets. And here it started in Hong Kong with IPOs. We’ve seen some high profile IPOs here in the US. Additionally, we’re beginning to see the pipeline come to market and mergers and acquisitions, which has been really very quiet over the last 18 to 24 months. There’s the beginning of M&A activity, not only corporates, but about 2021, 25% of those transactions are driven by private equity firms, which have $2 trillion of owned companies that need an exit ramp so they can finish all funds and do fundraisers on new funds. That will be a big part of the story for M&A and investment banking over the next two years. So I think to your question, which banks we think the delta is those who are more exposed to the capital markets Goldman Sachs, Morgan Stanley, even Citigroup less so maybe for the regional banks or Wells Fargo. We did downgrade maybe a couple of weeks too early. Bank of America from buy to hold. Also JP JPMorgan Chase probably should have waited. But those banks have two factors one more exposed to the general economy, to loans, and then also interest rates on net interest income. Just to be an analyst for a moment, those banks, the latter 5,560% of their total revenue is net interest income Morgan Stanley and Goldman Sachs well under 20% So again, I’m coming back to the capital markets. That’s part of the bull case scenario for the second half of this year and confidence for next year. One other area or two that we should talk about is the Trump administration and public policy to open up regulation. Then of course, the Fed.
CAROLINE WOODS: You’re obviously turning more cautious then with the downgrade a few weeks ago on JP Morgan and Bank of America. As you said, you made the point that it could be due to net interest income. But is that also maybe a red flag about the strength of the consumer as you think about the back half of this year?
KEN LEON: Not really. I mean, these are still holds. We’renot negative. It’s more so, you know, these stocks are up over 30, 35%. The valuations are a little bit stretched. That being on looking at price to book value. You know sometimes crossing 2 times you know. So overall, what I’m saying as an analyst is how do we support current or future valuation. It’s going to be earning those earnings, which again, I think there’s more of an impact or contribution from the capital markets. Also, those banks, Goldman or Morgan Stanley, have superb leading franchises and asset management and Wealth management, which give you durable recurring revenue and of course, mark to market with elevated market prices here in the US and around the world, that’s going to be great fee income for them and for the other banks.
Subscribe |
Earn. Live. Invest. |
TheStreet Pro |
#Investing #banks #earningsseason
source
