Gerard Cassidy, RBC Capital Markets managing director and head of U.S. bank equity strategy, joins Yahoo Finance Live to discuss his outlook for financials ahead of the big banks reporting earnings starting Friday, January 15.
- All right. Well let's stay on the finance-industry-adjacent conversation, and turn our attention to bank earnings, which are set to roll out later this week-- unofficially-- kicking off fourth-quarter earnings season. Joining us now to discuss is Gerard Cassidy. He's the head of US Bank equity strategy, and a large-cap bank analyst over at RBC.
Gerard, thanks so much for joining the show this morning. I want to begin with the dynamic for banks, as we head into earnings here. As you note in a recent report, we have seen banks-- bank stocks meaningfully outperform the markets over the last couple of weeks ahead of this run of reports. How does that change the thinking, for investors, into these numbers? And how does it challenge expectations here, given the strength we've seen in these shares for the last couple of months?
GERARD CASSIDY: No, thank you for having me on the show, and you really framed it out well that the banking sector-- ever since the announcement, by Pfizer, of the vaccine, shortly after the election-- the bank stocks have done extremely well and have easily outperformed the markets, in general, with the start of the year being incredibly strong because of the steepening of the yield curve. So we think 2021 is setting up very well for the banks. Even though the stocks have had this nice move, they still are not trading at levels that we would suggest would be fair value, when you compare where they've traded historically over the last five years. Now granted, we don't expect bank stocks to trade at valuations where they were trading prior to the financial crisis, because of the changes in the banking regulations due to Dodd-Frank. The amount of capital the industry carries today is considerably higher. So the profitability for the industry is less today, and is permanently less than what it was pre- financial crisis.
So as we move forward and look at the set up for '21, fourth quarter results-- as you point out-- will start this Friday with JPMorgan, Wells Fargo, Citigroup, PNC are the big banks that will report on Friday. We expect to see a continuation of the trends we saw in the third quarter, which means that the credit quality-- which was the number one issue in 2020, for the banks-- we expect this credit quality to be rather benign, relative to where we were in the first half of the year. And I think that's going to be the story for 2021, is that credit deterioration is not as severe as expected six to nine months ago. And second, with the recent move and the 10-year government bond yield, the pressure on net interest margins could be alleviated should that yield continue to rise as the economy recovers in 2021. Which all means that there's still, we think, upside potential in the bank stocks. Possibly another 20%, 25% from current levels.
- Now Gerard, it's Brian Cheung here. Great to speak with you. So if there is upside potential, is there any sort of downside risk in the fact that it's a Democratic-led administration? We heard Sherrod Brown saying he wants to have these banks pay more attention to things like climate change, things like racial injustice-- as opposed to just broad rollbacks of some of the Dodd-Frank rules, which were the Trump administration attitude. So do you think that could present some sort of headwind to the banking industry as we head into the later part of 2021, maybe the beginning part of 2022 when Congress might be able to affect some of those things?
GERARD CASSIDY: It is a really good point you're making on those topics, because you're right with the new administration coming in and the changeover in the Senate. The Democrats are going to approach it differently, under Sherrod Brown's leadership of the Senate Banking Committee, than what we saw under the Trump administration. When it comes to the climate change and racial injustices, that will be a focus point. It will be interesting to see how they approach that. Right now it's not against the law to lend to oil drillers, it's not against the law to lend to gun manufacturers. But these are areas that are a concern to a number of the politicians in the Democratic party. So as a result what they can do, from a regulatory standpoint, to kind of frame that out we'll have to see. We don't expect them to, obviously, ban lending in these sectors, but certainly taking a look at-- should the climate change environment become worse in the next 10 or 15 years, they certainly-- with the regulators, as you pointed out in your comments earlier with Jerome Powell-- they are taking a look at this. That was not necessarily the case two years ago, or four years ago.
When it comes to the rollbacks of Dodd-Frank, I just don't see that happening. And the reason I don't see that happening is when the bill that was passed-- it was called the Crapo bill, by Senator Crapo-- that rolled back some of those changes, 16 Democratic senators supported that bill. So I doubt you're going to find those senators now changing their positions, that were two or three years ago when the bill passed, so therefore I really don't see much change in the Dodd-Frank legis-- you know, the rollbacks being changed. The other thing we also have to remember, in 2008 and 2009 when the Dodd-Frank legislation came out following that period, the banks are at the center of the storm. We all know that. This cycle, that's not the case. And as a result, the banks are very well-capitalized. They've gotten through this incredibly volatile time period very effectively. So I think this is a testament to the success of what Dodd-Frank did, and there's really no need to change it.
- Gerard I want to lock in on JPMorgan here. Last year, JPMorgan CEO Jamie Dimon had a pretty big health scare. Do you think this is the year that Dimon finally signifies who his successor is, and if he does what does that mean to the stock? And what does it mean to a JPMorgan with a future that doesn't include Jamie Dimon atop the company?
GERARD CASSIDY: It's a really good question, because eventually he will need to step down. I don't see it happening any time soon. Today, when you think about-- look at incoming President Biden, in his late 70s, as president of the United States. Just because somebody is in their early 60s, does not mean they need to step down. And so Jamie Dimon is arguably the most influential banker in the United States, possibly the world. And he enjoys that role, he's still having fun. But to your point, he's had a couple of health scares. Last year's, in particular, was very severe. Fortunately he got through it, of course. And = I don't see him wanting to give it up. I don't see the board pressuring him to give it up.
But when he does-- and eventually he will at some point, whether it's in two, three, four years from now-- I think what you'll find is that he's got a very strong bench. A number of his former senior executives, that have left, are currently CEOs of other companies. Jes Stanley, over at Barclays, is a good example. Charlie Sharf is another one, at Wells Fargo. So he still has surrounded himself with some very high quality people. But he's got big shoes to fill. And I think when the news comes, and he does decide to kind of retire, that's going to weigh on the stock when that announcement comes out. No doubt about it, because he's got big shoes to fill. Eventually, however, whoever it is, I think, will be able to fill those shoes. But it will take some time.
- All right Gerard Cassidy, with RBC Capital Markets. Always great to get your thoughts. Thanks so much for joining the show, today. I know we'll be in touch.
GERARD CASSIDY: Thank you, always a pleasure. Thank you.