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KBW's Cannon: Banks Will All Be Focusing on Expenses (Audio) · Bloomberg Intelligence

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  Speaker 1: as much as six point to percent amid gains in
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  Speaker 1: Over at JP Morgan Live from the First Big News Desk,
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  Speaker 1: I'm Bill Maloney, Charlie all right, hey, thank you very much,
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  Speaker 1: Bill Maloney, and they here live breaking news over your
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  Speaker 1: Bloomberg Time Squawk squ a w K on your terminal.
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  Speaker 1: I'm Charlie Peloton. That so Bloomberg Business Flash. This is
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  Speaker 1: taking stock with Kathleen Hayes and Pim Fox on Bloomberg Radio.
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  Speaker 1: JP Morgan. Shares of JP Morgan Chase are higher right
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  Speaker 1: now by more than two percent volume more than twenty
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  Speaker 1: three million shares. Here to tell us more about JP
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  Speaker 1: Morgan's stronger than expected a second quarter results is Fred Cannon.
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  Speaker 1: He is Global director of Research at KBW. Fred, thank
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  Speaker 1: you very much for being with us. Great to be
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  Speaker 1: on Tim, Thanks for having me. Okay, so uh, stronger
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  Speaker 1: than expected second quarter results, a surprise increase in revenue,
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  Speaker 1: a surge in the trading business. Let's start there. How
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  Speaker 1: did that happen? Well, one of the things that Brexit
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  Speaker 1: did was an increased volatility near the end of the quarter,
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  Speaker 1: and so we saw trading pick up and already been
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  Speaker 1: a bit better in the first quarter, quite a bit
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  Speaker 1: better actually the first quarter, and then we got a
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  Speaker 1: little surge there at the end that got us the nice,
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  Speaker 1: nice beat on trading. So will that continue? Probably not.
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  Speaker 1: As we entered the summer months, especially August, we always
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  Speaker 1: see a slowdown in trading in the back half of
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  Speaker 1: the year tends to be slow. Plus there's some big
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  Speaker 1: long term pressures on that business from regulation, the amount
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  Speaker 1: of capital that banks have to hold against it. Tell
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  Speaker 1: us about the lower expenses at JP Morgan Chase, so
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  Speaker 1: they can continue to cut I think the short answer
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  Speaker 1: is yes, they did get a special benefit in a
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  Speaker 1: reversal of some legal fees this quarter, and we know
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  Speaker 1: that's not going to continue. But overall, what you're going
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  Speaker 1: to see all the big banks do in this low
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  Speaker 1: interest rate environment is very much focused on expenses. So
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  Speaker 1: I think the trend at JP Morgan to control and
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  Speaker 1: contain expenses. You're going to see from all the big
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  Speaker 1: banks and loan growth that exceeded what ten How did
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  Speaker 1: that happen? Annualize credit cards? It looks like JP Morgan
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  Speaker 1: is gearing up on credit cards. We think there's probably
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  Speaker 1: a little bit of market share steel from American Express
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  Speaker 1: that's been struggling recently. But also it looks like all
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  Speaker 1: these credit card lenders are willing to take a little
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  Speaker 1: bit more risk, go down this credit spectrum and push
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  Speaker 1: growth now. Part of the conference call included comments from
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  Speaker 1: the chief financial Officer, Marianne Lake, saying that the June
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  Speaker 1: jobs report, wage growth and retail sales and housing are healthy,
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  Speaker 1: and that the US economy is set for continued moderate growth.
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  Speaker 1: Is that necessary for the results of JP Morgan and
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  Speaker 1: other banks to improve. Absolutely. Remember, we have a huge
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  Speaker 1: head wind from the interest rate environment. The market hitting
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  Speaker 1: record levels, but the ten year bond rate is one
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  Speaker 1: point five three. I think we just heard that's a
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  Speaker 1: very tough environment for banks. Uh, it means that spread
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  Speaker 1: on their business is low. Um, So what has to
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  Speaker 1: happen is we have to have other offsets and so
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  Speaker 1: as she was talking about today. We really need this
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  Speaker 1: loan growth economic growth to continue at a good pace
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  Speaker 1: in the US, because we're not seeing it overseas well.
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  Speaker 1: Jamie Diamond, the chief executive of JP Morgan Chase, said
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  Speaker 1: that he hopes that politicians are going to be sensible
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  Speaker 1: when they make decisions relating to the European Union in Britain,
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  Speaker 1: and that he hopes that businesses are going to get
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  Speaker 1: some time to adjust to this new reality. Do you
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  Speaker 1: think he's going to be listened to me, He's gonna
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  Speaker 1: be heard. I don't know about politicians being sensible is
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  Speaker 1: something that we can expect this year, to be honest him, Um, certainly. Uh,
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  Speaker 1: you know, we can be hopeful on that, but we'll
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  Speaker 1: just have to see. I mean, it was a big
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  Speaker 1: move for Britain to exit the Union. We've gotten what
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  Speaker 1: one of my clients called a brolly here at the
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  Speaker 1: end of the Braxton vote, right, but we will see
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  Speaker 1: if it continues. I mean, I think things seem a
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  Speaker 1: little bit softer here than We've a little bit better
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  Speaker 1: than perhaps people have thought initially, but we have a
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  Speaker 1: long ways to go to work through this. What is
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  Speaker 1: the best way to put a value on a bank. Uh,
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  Speaker 1: what we really have to do is look at the
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  Speaker 1: profitability to bank, and then we have to back into
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  Speaker 1: what the price to book value return should be. So
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  Speaker 1: JP Morgan makes around, you know, ten eleven return on equities.
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  Speaker 1: We think in this environment the cost of equity is
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  Speaker 1: probably nine percent. They should earn around where they are
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  Speaker 1: or maybe a little higher one point three one point
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  Speaker 1: four of times book value. So that's the best way
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  Speaker 1: to think about banks. Especially remember when you're thinking about
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  Speaker 1: these trading this uh, fixed income trading, you can't forecast that.
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  Speaker 1: That's just a crapshoot each each quarter. So a lot
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  Speaker 1: of these things can't be forecasted, so you really have
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  Speaker 1: to fall back on some of these price to book ratios.
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  Speaker 1: All right, So I'm gonna ask you to forecast or
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  Speaker 1: at least roll the dice a little bit, because we're
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  Speaker 1: going to get results tomorrow from City Group as well
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  Speaker 1: as Wells Fargo. What do you expect we expect some polls.
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  Speaker 1: Who remember, expectations have been reduced for all these big
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  Speaker 1: banks coming into earnings as a result of the interest
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  Speaker 1: rate environment. I think some of the things that we
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  Speaker 1: saw at JP Morgan should pull through for Wells Fargo.
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  Speaker 1: Mortgage business is a big part of their business. They
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  Speaker 1: won't recognize as much of that income as JP Morgan
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  Speaker 1: because of some obscure accounting issues, but yet that's a
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  Speaker 1: that's a big help for Wells Fargo, and we're quite
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  Speaker 1: positive on Wells Cities a little bit. You never know,
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  Speaker 1: they do tend to stumble on their quarters, so we'll
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  Speaker 1: just have to say. And next week we're going to
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  Speaker 1: get results from Bank of America, Goldman Sacks as well
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  Speaker 1: as Morgan Stanley. Is there a standout among those three
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  Speaker 1: for you? Well, I think one reason you saw more
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  Speaker 1: Goldman Sachs be the big winner today is is some
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  Speaker 1: of the read across from JP Morgan it would be
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  Speaker 1: quite positive, both on trading and on some of the
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  Speaker 1: capital markets activities and some of the investment banking. So
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  Speaker 1: that's the one to watch. The stock has been beat
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  Speaker 1: up pretty good here in the last last few months,
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  Speaker 1: so that's one to watch. The pop I want to
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  Speaker 1: thank you very much for spending time and giving us
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  Speaker 1: some detailed information about the banking sector. Fred Cannon is
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  Speaker 1: Global director of Research at k b W. Right now,
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  Speaker 1: the shares of JP Morgan chase. They're up two percent.
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  Speaker 1: Shares of City Group they are up nearly three percent,
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  Speaker 1: Bank of America shares up at two percent, Goldman Sachs
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  Speaker 1: shares a higher by three percent, and Morgan Stanley a
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  Speaker 1: gain of more than three percent. You're listening to taking Stock.
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