Capital is rotating aggressively out of tech and into financials and as anxiety over massive AI cap sparks a short pull back in mega caps like Microsoft and Meadowbank stocks have captured the momentum and outperforming tech over the past 30 days.
But beneath the surface net interest margins have fallen for six straight quarters, leaving lenders. relying on investment banking fees as well as private credit.
Now here to weigh in on the true winners as well as losers in the sector is Chris W, chairman of Wing Global Advisors.
Chris, good morning.
Thank you so much for joining us while earning season officially kicks off tomorrow and there are a lot of earnings expectations that are running.
And when we take a step back and look at the money that banks make from regular loans, that has dropped for several consecutive quarters in a row, and JP Morgan can survive on giant fees, but not so much for regional banks.
So if the Fed does indeed keep rates higher for longer, which banks are in trouble here?
Well, I think most of the banks actually are going to benefit from higher rates, Remy, um, as you pointed out, and we've been writing about this for a while, earning assets have been falling.
In other words, the spreads on loans, uh, and also funding costs have been falling.
And yet, as you know, since the end of the 1st quarter, the narrative has changed, and now we're talking about higher interest rates.
The bond market went up all by itself even before the Fed acted.
So my sense is, is that the Wall Street side of most big banks is going to continue to do very well.
Margin loans have exploded.
There's all sorts of ways for them to make money on deals, but I think the interest side of the house is also going to start to benefit after a long period of kind of a gentle decline.
The decline came because of demand for assets.
There's a surfeit of cash out there, and it's been relatively easy for banks to slowly work their funding costs down.
But at the same time they were earning less on their loans, uh, and again this is just about an incredibly competitive market.
Non-banks are out there competing with traditional banks, and I think, as I say, you're gonna see earnings get a bit of a lift here.
The key question is, will credit continue to be relatively. credit costs have been falling since the end of 2024 and I think that, you know what we are looking for this quarter is any banks that continue to show an uptick in credit costs, people like Capital One, for example, which went up in the first quarter.
Uh, Morgan Stanley had an unbelievable quarter in the first.
Uh, quarter of this year driven largely by margin lending and just general activity across their platform, they're the biggest asset manager in the group, so I think that the Wall Street side of the equation is gonna continue to do very well, but I think, uh, banks are gonna start making money on money again after a long period of decline.
Yes, and Chris, while I have you here as we head into the trading week, not only will we be hearing from the big banks, but we'll also be hearing from the regional banks, and it's also a big week for US economic data.
We get PPI as well as CPI, and we will be hearing from Fed Chair Kevin Warsh tomorrow in the nation's capital and several.
Fed officials will be speaking this week, so that will give us further insight into the rate trajectory for the central bank here.
But given the fact that we've been paying attention to the big banks as well as the regionals, First Hawaiian Bank announced its plans to acquire Trico Bank shares.
So tell us why the large scale bank mergers can potentially pose a challenge to investors.
Well, you're not gonna see most of the top 10 banks buying other banks.
Uh, they're pretty much precluded.
The, the one exception, of course, was US Bank, bought Bank of California a couple of years back.
They've largely assimilated that.
US Bank has been performing very well.
If you're looking for M&A opportunities, I think it's gonna be in the next 25 below the top 10.
And there has been some activity there.
We had 5th 3rd Bank America, uh, and you know, again, you're gonna see consolidation in the industry for the simple reason that you, you can't run a small bank anymore.
You know, small used to be 5 or $10 billion in assets.
Now it's 25.
So I think in that group from 25 up.
To 100, 150 billion in assets you're gonna see a lot of M&A opportunities.
How much are they gonna pay in terms of premium?
It varies.
It could get upwards of 1.5 to 2 times book, uh, but I would be careful with those transactions because that's usually not gonna generate a lot of value for the shareholders of the buyer.
And finally, Chris, before I let you go, I do want to ask you very quickly about risk mispricing as we head into the official earnings season for the latest quarter.
So which of the big banks, which of these giants is actually the safer bet, and can you tell us why?
Well, the House of Morgan has the most robust business model, half interest earnings, half fee income.
Uh, the biggest per you know, best performer of the group, Remy, has been Citi, uh, which has kind of been a, a, a, a fixer up improving story.
Uh, the CEO Jane F uh Frasier has done a, a very good job, uh, fixing the bank.
Getting their costs down, uh, but to me, you know, the, the, the top 5 is really not where you're looking for value right now, uh, other than the big Wall Street houses which I think again are gonna have great quarters, uh, in the 2nd quarter, uh, you, you really are gonna have to look for smaller institutions to get the kind of value creation that I think a lot of investors would like to see.
And Chris, very quickly in less than 60 seconds you mentioned value, so where are the opportunities?
I just, uh, picked up some Schwab.
I think that they were relatively, uh, cheap compared to the growth on that platform.
They've managed to bank nicely.
The one big, uh, area where they need to improve is their bond portfolio.
They still haven't restructured.
Um, among the other top banks.
You know, Wells Fargo is still a bit of a laggard.
I'm waiting to see them get into line with the rest of their peers, but I think the best of the top 5 really is US Bank.
They are a great institution.
They are buying a broker dealer.
They're starting to broaden the business model.
So I think it's an interesting story.
Well Chris, as earnings season gets underway tomorrow, a lot to keep our eyes on, so thank you so much for joining us and as always, thank you so much for sharing your perspective.
Thank you.
