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‘Banks just don’t take the risks they used to take,’ portfolio manager says

Hennessy Large Cap Financial Fund David Ellison joins Yahoo Finance Live to discuss big bank earnings, investor sentiment, and credit issues.

Video Transcript

- All right. As we continue to digest these bank earnings, let's get a sense of how you should play your portfolio when it comes to the financial sector. We've got David Ellison, Hennessy Large Cap Financial Fund portfolio manager here. David, just want to get your high-level takeaway from what we're seeing so far as the banks report.

DAVID ELLISON: Well, you guys have done a pretty good job of-- I've listened to your commentary-- a pretty good job of laying out the issues, I think. So far, I think the bigger banks are telling us that the conditions are OK, not great, in the economy.

And that's good enough for them. I think they're managing through, you know, a massive change in rates and the yield curve. They're dealing with, you know, changes in credit conditions. And so I think they're managing through it pretty well.

It doesn't necessarily mean the stocks are gonna double or triple. But I think if you look at the big banks, which is the bulk of the lending activity in the economy, they're strong. They're ready to continue to participate in the economy. And I think they'll be fine.

I think you're gonna hear less sort of enthusiastic numbers as we talk about the smaller banks because they've been more impacted by, obviously, what's happened the last month or so and been more impacted by the rate activity of the last two years. So we'll see what happens. But so far, at least we have a few stocks that are up. As you know, it's been a very difficult two or three weeks here.

- David, what happened with these results. I think just because of how chaotic March was for the financial services industry, you have a JPMorgan out here smashing estimates, Wells Fargo doing pretty well-- in the case of JPMorgan, calling out the potential for higher net interest income as the year goes along. What did investors miss? Were the first two months of the quarter just that darn good?

DAVID ELLISON: Well, I think the issue is that rates have moved up. And, obviously, the big impact in the rise in rates really wasn't felt till the last month of the quarter. But I do think, you know, the Street is underestimating the bank's ability to raise the yield on assets and offset the cost of-- the rise in the cost of funds.

And I think if rates were to stay here, you know, I think you're gonna see continued expansion of the margins because those loan yields are gonna continue to move up. So I think they were too bearish on margins.

Credit's about what it's expected to be. You know, it's not going to be, you know, great. It'll be OK. But it's not gonna be like it was the last two years.

So I think that the banks actually are going to work and doing their jobs. You know, as I say, you know, that you want to own companies where they're working harder than you are. And I think that's where the banks are now. They're working very hard to manage through the yield curve, the credit expense issues, fintech, you know, risk, competition, regulatory stuff that's coming down the pike, you know, whatever. So they're working really hard. And so far, it appears to be working.

- David, perhaps you can help us kind of compare and contrast some of the economic data that we're seeing come through with what bank CEOs are telling us, which is that the consumer spending is remaining healthy. However, you do have credit card sales that are up. You also have card loans that are up. You have retail sales data on the economic side that came in below expectations there.

And so with that in mind, I'm not saying somebody is lying. But it's possible for a person to be healthy but still have a cold that they can navigate through or have severe allergies or some type of sinus infection. I mean, at the end of the day, it's kind of how the banks are classifying this, no? And if so, is it possible that consumers-- yeah, they might have a cold right now?

DAVID ELLISON: Well, I think the-- and that's a great question. And I'm gonna answer it, and I'll probably be wrong with my answer. But I think the-- when you were saying it, I was saying, look, the issue is unemployment. Unemployment is very low. And if I lose my job, there's somebody that's gonna get a job and take over my car loan or my house loan or-- so I think, you know, that's one of it, too.

I think because of what's happened, let's say, even since 2008, the banks just don't take the risks they used to take. And so you're not gonna see, in my opinion, big credit problems at the banks. You're gonna see it at private equity and private, you know, debt funds and, you know, nonbank banks.

And the shadow banking system is where the credit issues are gonna be. The banks just do not take the risks they used to take. And it's showing up in the credit metrics that we're seeing today.

- David, real quick-- before we let you go, is Citi here an undervalued turnaround story?

DAVID ELLISON: Well, it's been that way for 10 years. I own a little bit of it because the day I finish selling it, it's gonna double because I'll make the bottom in it. So it's-- I just don't think we know what Citicorp is. And, you know, management's making good money not doing much of anything. The directors don't hold them accountable.

It is a European-style bank that really is not doing much of anything, has no identity, doesn't really have any leadership. And they should. And you see that with the other three, four big banks-- you know, the other three of the four big banks that are protected out there.

They just need to, you know, get somebody who will actually tell the story. And they don't have that now. And until they have that, I think it's dead money.

- All right. We'll leave it there. David Elson, Hennessy Large Cap Financial Fund, always good to see you. Have a good weekend.