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Manulife's Mattioli on Banks: It's Not All About Energy (Audio) · Bloomberg Intelligence

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  Speaker 1: I'm Charlie Pellottat's a Bloomberg business flash. You're listening to
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  Speaker 1: Oil and banks. You think they're connected, well, they certainly aren't.
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  Speaker 1: Wells Fargo. Wells Fargo's energy loan losses rose in the
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  Speaker 1: second quarter, as the oil bus claims several of the
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  Speaker 1: bank's clients, including Lynn Energy and bright Burn Energy Partners,
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  Speaker 1: they find out more. I want to bring in Mike Mattioli.
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  Speaker 1: He is a portfolio manager for Manu Life Asset Management.
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  Speaker 1: He joins us from Boston. Mike, thanks very much for
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  Speaker 1: being with us. Thanks for having me. Let's go through
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  Speaker 1: some of the big banks that reported results today. Let's
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  Speaker 1: begin with Wells Fargo. Is it really all about energy?
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  Speaker 1: You know the things on the way the stocks trading today,
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  Speaker 1: it seems like it's all about energy. Um. When you
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  Speaker 1: just look at earnings and what they posted, it was
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  Speaker 1: they came up a bit like because of those energy
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  Speaker 1: losses um, and it's remaining a headwind the profit growth.
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  Speaker 1: But it's not all energy. If you listen to the
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  Speaker 1: management conference called guidance on net interest income was a
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  Speaker 1: bit subdued, saying that they could still grow net interest
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  Speaker 1: income even in a flatting NIM environment because they're going
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  Speaker 1: to be growing core loans. But due to what's going
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  Speaker 1: on with interest rates, both on the shore and long
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  Speaker 1: end of the curve, it's going to be pressured a
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  Speaker 1: little bit, all right. Just to give you the numbers,
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  Speaker 1: net income down to five point six billion dollars or
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  Speaker 1: a dollar one to share. That's from five point seven
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  Speaker 1: two billion or a dollar three to share a year earlier.
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  Speaker 1: And that did match the average estimates of analysts surveyed
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  Speaker 1: by a Bloomberg. I thought that more that Wells Fargo
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  Speaker 1: was the mortgage banking king and revenue there the clients
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  Speaker 1: se do you think we're going to get a wave
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  Speaker 1: of refinancings? Would that help Wells Fargo? It would certainly help.
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  Speaker 1: I was actually a bit surprised that we didn't see
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  Speaker 1: that come through. What we may be looking for in
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  Speaker 1: the third quarter is with rates so low that the
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  Speaker 1: refi activity really does come up. So it would be
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  Speaker 1: interesting to see how in the third quarter Wells Fargo
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  Speaker 1: is going to capture that central refive volume. Alright, Well
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  Speaker 1: total revenue rose about four percent. That also was in
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  Speaker 1: line with analysts estimates. Hostale banking down about five and
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  Speaker 1: a half per cent, And I wonder if you could
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  Speaker 1: contrast that with what you know about JP Morgan's results,
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  Speaker 1: which seemed to focus a lot on cost cuts and
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  Speaker 1: trading revenue. Did JP Morgan's earnings yesterday, We're pretty good
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  Speaker 1: when you look at their strong core loan growth up
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  Speaker 1: almost sixteen percent year on year, their compounding tangible book value,
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  Speaker 1: their increasing capital return. Uh, you got better capital market
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  Speaker 1: activity across the wide and diverse franchises across all their
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  Speaker 1: across the holding company. It was very good. I mean
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  Speaker 1: comparing contrasting different banks earnings just day over day. It's
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  Speaker 1: all the stocks are going to trade based on what
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  Speaker 1: people's expectations are. When management comes out on a day
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  Speaker 1: like today, uh and sort of guides down a little
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  Speaker 1: bit on the net interest margin, it's probably going to
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  Speaker 1: hurt the shares. And that's what we're seeing here, Mike.
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  Speaker 1: I'm wondering if that is also necessary for people to
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  Speaker 1: understand when they invest in and let's say in exchange
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  Speaker 1: traded fund that focus is on banks because not all
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  Speaker 1: banks are the same. You really just can't compare them
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  Speaker 1: as if they operate in exactly the same businesses. That's
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  Speaker 1: exactly right. So whether we're comparing JP Morgan, Wells, Fargo,
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  Speaker 1: City Group, Bank America, while at the end of the
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  Speaker 1: day all four of a number of banks, they have
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  Speaker 1: many diverse in different businesses amongst each other. Think about
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  Speaker 1: City Group that has a larger presence outside of the
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  Speaker 1: United States. You think about Banks America, which has a
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  Speaker 1: very large financial advisory business, and then even a company
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  Speaker 1: like JP Morgan that has asset management, investment banking, consumer
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  Speaker 1: and commercial loans, a trust bank in there. So they
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  Speaker 1: are very diverse. They're competing against each other. Um. So
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  Speaker 1: you know, a bank isn't just a bank. It could
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  Speaker 1: be a number of different things sometimes as well. All right,
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  Speaker 1: so let's talk about the City Group for just a moment.
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  Speaker 1: Just following up on Wells Fargo shares are down about
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  Speaker 1: two and three quarters of a percent, the shares of
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  Speaker 1: City Group down about three tents of a percent. City
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  Speaker 1: Group lower their forecast for margin growth they did, um,
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  Speaker 1: but we have that baked into our numbers. So when
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  Speaker 1: you're looking at City Group earning is one of the
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  Speaker 1: important things you want to watch for is the consumption
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  Speaker 1: of their deferred tax asset. It gets a bit complicated
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  Speaker 1: in terms of the accounting issues, but basically it helps
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  Speaker 1: them because there's less taxes that they have to pay
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  Speaker 1: against that as they earn money, their tangible book values growing.
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  Speaker 1: It's almost that sixty three allar and fifty cents today,
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  Speaker 1: So that means you can buy the stock today for
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  Speaker 1: that tangible book value when you're looking at capital levels
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  Speaker 1: are already well above minimums where they don't even have
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  Speaker 1: to meet them until two thousand nineteen. So we like
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  Speaker 1: the value here quite a bit. You say that it
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  Speaker 1: is a tremendous value for investors. City Group shares right
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  Speaker 1: now trading at forty four dollars and thirty five cents
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  Speaker 1: are down ten cents. Also with City Group, they said
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  Speaker 1: that they have put a lot of resources to deal
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  Speaker 1: with the inquiries and complaints from costco host sale customers
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  Speaker 1: because you know, they took over as the retailer's exclusive
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  Speaker 1: credit card issue or last month. Are they going to
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  Speaker 1: be able to resolve these issues? Yeah? I think they will.
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  Speaker 1: You know, it's basic level blocking tackling of running the
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  Speaker 1: call center for a card type business. So they'll put
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  Speaker 1: the money in resources where to get things right. Um,
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  Speaker 1: so I'm not really seeing an issue there all right.
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  Speaker 1: Think they described a five percent jump in company wide
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  Speaker 1: operating expenses cost cuts. Is that going to mean we
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  Speaker 1: know that JP Morgan has certainly been focused on cutting costs.
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  Speaker 1: Is that something that all banks are just going to
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  Speaker 1: do from now on on a regular basis. You know,
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  Speaker 1: JP Morgan, I think thinks about it the right way.
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  Speaker 1: When you go to or listen to their analyst day
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  Speaker 1: or investor day. They talked about continuing to invest through
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  Speaker 1: the cycle of not just blindly cutting costs, but investments
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  Speaker 1: that they make, say five six years ago, or paying
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  Speaker 1: off today, and that never would have translated to revenue
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  Speaker 1: if they didn't make those investments. So I'm fine if
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  Speaker 1: they're not going to continually cut costs. Where it would
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  Speaker 1: actually help UM is if you actually get some interest
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  Speaker 1: rate rises and they could um slow a lot of
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  Speaker 1: that interest revenue down to the bottom line. Now, another
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  Speaker 1: bank that reported results was US Bank Corps. Tell me
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  Speaker 1: about them. The shares are higher right now by one
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  Speaker 1: and a half percent. Uh stock has had a great week,
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  Speaker 1: wondering if you could tell us what makes US Bank
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  Speaker 1: Corps so good. Yeah, they're really known as one of
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  Speaker 1: the Christine banks, them and Wells Fargo. Just when you
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  Speaker 1: look at their return on equity or return on tangible equity,
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  Speaker 1: and that's just their net income over the equities that
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  Speaker 1: they're deploying into the business. They're always head and shoulders
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  Speaker 1: above seemed to be the rest of the banking factor.
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  Speaker 1: Part of it is a payment processing business that they
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  Speaker 1: have in there, which is extremely capital light and it
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  Speaker 1: always tends to help them. And then they have tremendous underwriting.
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  Speaker 1: So when you look at the excess spread that they're
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  Speaker 1: earning minus their net charge offs or the loans that
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  Speaker 1: they have to charge off that go bad, they tend
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  Speaker 1: to rank up up there pretty high. And then management
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  Speaker 1: is I mean, management has been been running the bank
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  Speaker 1: for quite some time. Anytime they do a deal, it's
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  Speaker 1: usually creative shareholders, so you can kind of think about
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  Speaker 1: that as a first mean bank. The thing is, though,
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  Speaker 1: when you look at comp them to the other ones
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  Speaker 1: in terms of price the tangible book value, they also
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  Speaker 1: seem to be UM at a premium. At a premium,
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  Speaker 1: they pay a two point four percent dividend. That's the
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  Speaker 1: US Bank Corps shares are five cents right now. Ups
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  Speaker 1: p n C Financial Services a group they're based in Pittsburgh,
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  Speaker 1: a dividend of over two and a half percent. What's
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  Speaker 1: your take on PNC Financial? You know, a bit more
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  Speaker 1: tilted towards the commercial side of the business. Um when
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  Speaker 1: we were talking before about you know, not all banks
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  Speaker 1: are just a bank. PNC tends to be you know,
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  Speaker 1: your typical consumer uh, and commercial bank tilted more to
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  Speaker 1: the commercial side, you know, good bank trying to think
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  Speaker 1: of it as a super regional again, usually treads more
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  Speaker 1: at a premium than say the Ultramega caps would. The
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  Speaker 1: Bank America is the city groups of the world, um,
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  Speaker 1: just because they won't don't have to hold as much
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  Speaker 1: capital as some of the bigger guys. Pack West Bank
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  Speaker 1: Corps also reported second quarter results that they said that
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  Speaker 1: they earn sixty eight cents to share. The estimate was
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  Speaker 1: for sixty nine cents to share. The stock is lower
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  Speaker 1: net earnings decreasing, they say, do mostly to lower accreation
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  Speaker 1: on acquired loans and leases, as well as lower gain
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  Speaker 1: on sales of securities. Tell me about pack West Bank
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  Speaker 1: Corps and they've got a dividend of nearly five Yeah,
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  Speaker 1: that's right, they do. So. One of the nice things
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  Speaker 1: about not being absolutely gigantic bank compared to say some
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  Speaker 1: of the c card banks is you could pay out
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  Speaker 1: more of your earnings um in form of dividends, so
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  Speaker 1: you could, you know, theoretically have a higher dividend yield
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  Speaker 1: in that. The thing that worried me about some of
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  Speaker 1: the regional banks compared to the bigger banks is the
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  Speaker 1: amount of cost that they're going to have to eventually
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  Speaker 1: scale through in terms of regulatory environment, So the amount
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  Speaker 1: of people that you have to hire, the amount of
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  Speaker 1: systems that you have to put in place, consultants, things
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  Speaker 1: like that. It could be a dragon earning. So we're
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  Speaker 1: looking at the regional bank index, comparing it to the
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  Speaker 1: large cat bank index and seeing the premium in multiple
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  Speaker 1: points that you have to pay above that. It probably
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  Speaker 1: doesn't make sense in our viue here, And you say
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  Speaker 1: that city group is really in the compelling value correct, Yeah,
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  Speaker 1: we think so. I mean in our base case, and
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  Speaker 1: the way we do everything is look at a range
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  Speaker 1: of values. So our base case estimate is we think
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  Speaker 1: city groups worth seventy five per share. Now, in a
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  Speaker 1: worst case scenario where the net interest margin doesn't rise
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  Speaker 1: at all for the next five years, so very pessimistic scenario,
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  Speaker 1: we get the share is worth intrinsically of only about
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  Speaker 1: forty dollars per share. Now, there's not much downside, there's
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  Speaker 1: quite a bit of upside. That's what we call in
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  Speaker 1: the service reward um. So when you're buying a stock
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  Speaker 1: like that at quote unquote value type prices, it's you know,
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  Speaker 1: that's investing. That's that's what we think, that's what we're
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  Speaker 1: trying to do here. Well, thank you very much for
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  Speaker 1: sharing that information. Mike Mattioli is a portfolio manager at
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  Speaker 1: Manu Life Asset Management. Talking about the City Group, you said,
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  Speaker 1: is it is a real value shares a City Group
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  Speaker 1: for thirty six cents down eight cents a share. This
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  Speaker 1: is taking Stock. We take you through to the clothes next,
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  Speaker 1: and this is Bloomberg.