JPMorgan and Citi reported third quarter earnings that surpassed expectations. Vining Sparks Director of Bank Advisory & Strategic Services Marty Mosby joins the On the Move panel to discuss.
JULIE HYMAN: And now we got to move on to the banks, because we heard from JP Morgan and Citigroup this morning. JP Morgan's third quarter profit up 4%, Citigroup's profit down 34%. But both of them did beat estimates on the top and bottom lines. Let's talk more about this with Marty Mosby. He is Vining Sparks Director of Bank Advisory and Strategic Services. Both of these stocks were also trading down, Marty, even though we had what looked like a beat compared to what the street was expecting. What's sort of your big takeaway if you're looking at the 10,000 foot level from these two first reports that we've gotten?
MARTY MOSBY: Well, really what we have to focus on, is that bank investors, because of the 2008 Great Recession and the impact it had on our banks across the country, are still worried about survivability. However, capital liquidity are better positioned, much better than what we were back at that point. We've built these positions over the last decade. So this downturn is not going to be about survivability once we come out the other side. It's really going to be about profitability.
So when you look at the profitability, you're seeing net interest income and net interest margins, because the low interest rates get hit. And that's really what you're trading on right now. Early on, they were trading on survivability and you got that little pop, especially going into earnings, because provisions were going to be lower. Once they got past that headline, they look at net interest income, and it's down significantly. And it's going to continue to go down as you go into next year. So we got two different pieces. Survivability, we're passing. Profitability, we got a little pressure.
ADAM SHAPIRO: So, Marty, given what you just said, how will the Fed interpret this? Will they extend the cap on share buyback restrictions past the end of the year do you think?
MARTY MOSBY: So as we go through this year, what we're going to be able to see is one, banks need to sustain their dividends first. Remember, they put the new rule out there. You got to earn your dividend. Both of these banks, and we'll see that is consistent going through this earnings season, that the banks will be earning their dividend. So that's the first step. Share repurchase really isn't a major component of this investment thesis until we really get into the middle of next year.
So as we get into that process, the actual realization of losses will start to be more clear. And then the Fed and the bank managements can begin to move forward on share repurchase and getting that back going. But right now, it's sustaining dividends, and we're seeing the earnings be able to support that.
BRIAN CHEUNG: Hey, Marty, it's Brian Cheung here. And what's been interesting, is that there's quite a lot of noise when you talk about those provisions. It is indeed the case that they provisioned less for the last quarter. But when you look at the total allowance for loan lease losses that they've accumulated over this period of time, it's still very large.
So when you think about the capital positions of these banks and the ability to at some point down the line when the Fed loosens the restrictions, pay out dividends or do sort of stock buybacks, what do you expect in terms of the bleed down from reductions in those provisions and actually being able to pay it out to shareholders?
MARTY MOSBY: So now you're getting into the preservation of capital. So sustaining dividends is about earning enough. The preservation of capital is what gives you that acceleration like you're talking about, once you get on the backside of this. If we look at the capital that's been built up in the lower risk profile, you're freeing up the ability to do just exactly what you're talking about.
As soon as you begin to get a clarity on the losses in the first half of next year, in the second half of next year, you can see significant share repurchases as these banks begin to come back out and use some of that capacity that they put on pause. They'll have the excess capital. They're preserving it, and they'll want to deploy it rather quickly once we get some clarity on the loss content that's in these loans portfolios.
JARED BLIKRE: Jared Blikre here. Wan tot ask you about net interest margin and how that could be affected by the Fed, a potential headwind in fact, as we've seen some increased calls over the last week from Evans and Rosengren, basically calling for potentially yield curve control, maybe more asset purchases. How does that and the effect on the yield curve fit into your analysis?
MARTY MOSBY: So again, that's the profitability side. Survivability is about capital, about losses. That is tilted in the favor of the banks. What's not tilted in the favor of the banks is they're literally competing against the Fed for assets and the ability to have asset yields. So as the Fed has pushed down the back end this curve significantly more than what happened in the last downturn when we had QE, QE is much more effective this time because the liquidity is not being kind of soaked up in the financial system to get past the distress.
The QE liquidity has actually made it into the economy. Look at deposits. Deposit growths are 20% and 30% over last year. That's because QE has made it into the economy, is pushing down those back into the curve, and that's going to hurt asset yields. So the profitability, what we call the exit velocity on the back end of this, will be hindered or hampered because of the fact that we're going to have lower interest rates for a much longer period of time.
JULIE HYMAN: Marty, thank you so much for your perspective. Marty Mosby, Vining Spark Director of Bank Advisory and Strategic Services. Thanks, Marty.