00:00What bank is going to blow us all away and justify this massive run-up that we've had,
00:04not in all of them, but in many of them?
00:07Yeah, look, I think they're all going to, to varying degrees, have good results.
00:13I think those likely who have more capital markets exposure and investment banking exposure
00:19are probably going to post really good results.
00:23Goldman reports this morning.
00:25But I think we'd expect a really strong result there.
00:30But all in, I think this is a good quarter for the banks, generally speaking.
00:35We're expecting median EPS growth of 70% year-on-year.
00:38I've mentioned the capital markets results being strong.
00:41But I think you'll also see good loan growth, net interest income growing okay, credit quality doing well.
00:48The question, Bonnie, though, is durability.
00:50As you mentioned, many of them, not all, but many of them.
00:54And in general, they've performed really well.
00:57So can the good momentum, can the continued profitability improvements, can the continued upside to consensus EPS revisions, can that
01:07continue?
01:08I think the quarter, so the quarter is going to be more about sustainability, revenue sustainability.
01:15Can the exceptional capital markets results continue?
01:18Net interest income, can it continue to grow?
01:20And I think the bar is a bit higher.
01:22But all in, we think that the banks, broadly speaking, are going to have pretty good results.
01:28There's no danger that we're a little complacent or overconfident in these results.
01:32Is there anything that's going to surprise us all?
01:36Yeah, I think, you know, we highlight that in our preview.
01:39You know, I think right now investors look at the big picture and say, well, you know, there's nothing that
01:45is clearly going to derail the story that we can point to.
01:50But that, you know, that runs the risk of growing complacency.
01:56I would say two things that are, you know, risks that might show up in the results.
02:02I think the first one, which is perhaps more likely, it's not the base case, is net interest income being
02:07softer.
02:08You are, I mentioned loan growth is good.
02:12One of the underpinnings of the positive thesis for banks is that, you know, we have positive real rates across
02:19the curve.
02:19And that, you know, that's a good thing for net interest income.
02:23But the funding costs are, you know, maybe ticking up.
02:27And, you know, you talked to your last guest about monetary policy.
02:33Now we're pricing in two rate hikes over the next nine months.
02:37So there is a concern that maybe funding costs and deposit costs will start to bite.
02:42And if the banks suggest that net interest income growth in the back end of the year is going to
02:48be a little bit lighter than it has been, that could be a cause for concern.
02:52And then the second thing is capital market sustainability.
02:56We, you know, the markets results, trading especially, has been really, really strong.
03:01I think it will be strong again this quarter.
03:03But if there's any hint that the second half of the year, which does have tougher comps, will see slower
03:10growth, that might lead to some pullback and some concern about, you know, whether the capital market's results will continue
03:17to be a source of strength.
03:19Yeah, I mean, already just in the last few sessions, that 30-year yield is at 510, right?
03:24So you would imagine that, you know, banks will have to have a different answer to questions regarding, you know,
03:30longer-term yields and so on.
03:33What about private credit?
03:36There's no worries there, right?
03:37All across the banks, we've damped down all those worries, and we're not going to find out anything that surprises
03:43us.
03:45I don't think so.
03:47I mean, you know, I think when we had this discussion last quarter, private credit was very much front and
03:53center of the discussion.
03:54What the banks did do last quarter that was really positive was that they gave really good disclosures on their
04:01private credit exposures.
04:03And what it showed is that the overall levels of exposures are low, low single-digit percentage of portfolios, and
04:09that the risk profiles are good.
04:11They're collateralized by pools of loans, advance rates, which are basically the maximum amount of loans relative to the value
04:16of the collateral, are pretty low.
04:18So you have to see really big losses in the underlying portfolio for that to be impacting the bank.
04:25So I don't think, I think they'll update the disclosures perhaps, but I don't think it will, you know, you'd
04:31never say never when you talk about anything related to credit quality.
04:35But I don't think that will be a big theme this quarter as much as it was last quarter and
04:41maybe the previous couple of quarters.
04:43And now to get to the base question of stock prices and where they're at, you have upped your price
04:47targets by between 6% and 14% for the various banks.
04:50I am curious, though, why is J.P. Morgan only up 3.5% year-to-date?
04:56And as for Wells Fargo, which is your top pick at the moment, I mean, we're down year-to-date
05:01by more than 5%.
05:03Yeah.
05:05Yeah, I mean, there's, you know, in the case of J.P. Morgan, look, it entered the year at pretty
05:14elevated valuation to still trade at a premium.
05:16So the bar is higher at J.P. Morgan.
05:17I mean, they posted really good results, but the bar is higher.
05:22You know, the stock price has done well for an extended period of time, and it trades at 15, 16
05:26times P.E., which is a pretty big premium to other traditional banks.
05:30So the bar is higher.
05:31I think the other thing that on the margin, you know, maybe has impacted them is their net interest income.
05:36They didn't increase the guidance on the back of last quarter, and there was some hope that they would.
05:41And they are spending.
05:42That's not necessarily a bad thing.
05:44They are spending.
05:45They are investing.
05:45That positions them well for longer-term growth.
05:47But it does lead to a situation where they're the only bank that we cover that is expected to not
05:53have positive operating leverage.
05:54So I think it's a combination of all those things.
05:56Wells Fargo, we did upgrade them to our top pick, you know, into the quarter.
06:01So this is, you know, Citi had been our top pick for quite a long time.
06:05So this is a new, you know, change for us.
06:09And I think, you know, there are a couple things.
06:11But the big thing with Wells more recently was the net interest income dynamic.
06:16Again, similar to J.P. Morgan, but more extreme.
06:20They really underperformed in the first quarter.
06:22They had, you know, some pressure on funding costs and net interest income.
06:28You know, there had been some hope that they would increase guidance as well, and that didn't come to fruition.
06:32And right now there is some, you know, perhaps some concern about the trajectory there.
06:38We think it's going to improve in the coming quarters, that trajectory.
06:43I think we think that will be well-received.
06:44In the other parts of the story, excess capital, buybacks, loan growth good, investment banking is being built out.
06:51Capital markets businesses are being built out.
06:53The wealth, the investment management business is doing well.
06:56We think all those things and a discounted relative valuation underpin why we're more constructive here than we have been
07:03for a while.
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