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Big banks Q4 earnings beat: can trading remain this strong in 2021?

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Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman break down big bank earnings with Devin Ryan, JMP Securities Senior Research Analyst.

Video Transcript

JULIE HYMAN: Let's turn to some specific businesses that reported numbers this morning-- the banks. JPMorgan kicking it off, and the company really benefiting from a boost in its trading revenue. That was expected. But as tends to happen, JPMorgan did even better than expected and saw its overall revenue up 3%, a lot of that boost coming in the trading business. The shares, though, as you can see, are trading lower. And on the flip side, Citigroup actually reported more weakness, in specifically its bond-trading business, which I think is an interesting contrast.

Let's bring in Devin Ryan, JMP Securities senior research analyst who covers the industry. Devin, I want to ask you about this trading piece, because I know it's an area that you pay a lot of attention to. What do you make of this, that JPMorgan, on the one hand, did well in that trading business, Citigroup not as much. Is it a question of execution on the parts of the two or is there something bigger to take away?

DEVIN RYAN: Good morning, Julie. I think looking at individual trading quarters and trying to compare too closely, you kind of get a little bit of analysis paralysis. The reality is the trading backdrop was very good for the industry throughout 2020. That was driven by a lot of volume. Just as you had market volatility, you had a move in interest rates, repositioning. But then you also had very strong market prices, which helped the market-making businesses.

So perhaps the trading inventory JPMorgan did a bit better than Citigroup, but not something I would focus on too much. I think heading into 2021, the big question is can trading remain as strong as it was in 2020? And I think it's a pretty high bar. And so we'll probably see a bit of moderation.

But we also think the trading and overall capital markets activity-- investment banking, equity, capital markets, M&A-- can remain quite a bit stronger than we were actually at even pre-pandemic, because there's just so much stimulus in the economy. There's so much capital that we think will continue to drive these businesses. And so we're actually still pretty constructive on the outlook for capital markets into 2021.

MYLES UDLAND: You know, Devin, you just look at the stock reaction from some of these names this morning, off a couple of percentage points. I'm curious as we head into some more bank results next week, is this kind of a response to the run up we've seen in a lot of these names over the last couple of months? And is this kind of an expected outcome, even when some of these results come in better than expected? And I think certainly the case of JP pointing to a pretty strong franchise there. Is this kind of trading action to be expected when you've seen the stock up 20%, 30%, 40% ahead of results?

DEVIN RYAN: Yeah, I think you hit the nail on the head. I mean, these stocks are up over 10% year-to-date. The S&P is up roughly 1%. So financials finally have kind of gotten their day and substantially outperformed the broader markets over the last five, six months. So I think there's a little bit of we need to take a pause here and regroup.

I think the outlooks from all the banks as they report are still going to be constructive. You have, as I mentioned, still very good capital markets trajectory from here. Equity markets, credit markets are at highs or close to it. And then the credit story, I think it's also a bit better than people probably thought a few months ago.

And so you put it all together. And then the last thing I didn't mention, interest rates as well will start to see a little bit of uplift. So it's still a very good outlook. The stocks have recovered to levels that we haven't seen in some period of time.

Goldman Sachs, which is going to report next week, we're very bullish on their earnings next week. But the stock was a little bit over $200 months ago at earnings time. It's over $300 today. And we were having a hard time getting people to buy it at $200. And here at $300, people have gotten more excited about it.

So I think there's a little bit of just taking in the fact that the market has been very strong. And maybe we have a little bit of a breather here with the group just as we recalibrate for 2021.

MYLES UDLAND: And Devin, I just to follow up quickly on the rates point, because we've seen rates back up. And I think the very simple view that I have, as someone who is not an expert in banks, is higher rates, all else equal, probably good for bank stocks. How does that actually factor into some of the models, at least in the companies that you are following? And how could that play out in the actual results as we get kind of through 2021?

DEVIN RYAN: Sure. Well, there's really two things. You have the front end of the curve. And that is anchored to Fed funds, which probably aren't going to be moving any time soon, or at least that's the consensus. And then you have further out the curve, where you're starting to see some uplift, 10-year treasuries had a nice move by year-to-date. And so that does drive a little bit of incremental earnings, if you think about the loan books repricing and the ability to go out and put on mortgage-backed securities into the securities portfolios and get a little bit higher yield.

So there is a little bit of spread pick up. One thing we've been talking about-- if rates really start to back up here, and perhaps even start to get away from the market, our personal view is that that may be disruptive to the overall rally in equities. And so, perversely, that could become a negative for financials, just because it could be disruptive to risk appetite.

So it's something that I think we have to pay attention to and maybe be careful what we wish for, because I think a little bit of uplift in yield would be good. A really sharp jump could actually be something that creates friction in the market. So you can kind of cut both ways.

BRIAN SOZZI: Devin, how big a tailwind is it in the first half of this year that the big banks will be back in there buying back their stock? Wells Fargo lifted its share repo program by about 500 million shares this morning. JPMorgan signaled it will start buying back stock in the first quarter. How much a boost will those actions be to their stock prices?

DEVIN RYAN: Yeah, I mean, I think that's part of why these stocks have done so well over the past month even, right, is we got those announcements that the banks could be back in the market I think earlier than most people thought, buying their stocks. It's definitely a positive, I think speaks to the point that they're incredibly well capitalized, even in some pretty severe economic scenarios. And they've all built a lot of excess capital over the last nine months because they haven't been buying back stock.

And so it's definitely positive. I think you can also think about the potential for M&A in the space to deploy some of that capital into opportunistic deals. So I think there's a lot of interesting things to come in 2021.

On the flip side, one point that we don't think people are talking about much is just the risks that are out there around potential legislative change that is punitive to financials. We're not thinking there's too much there, because the Senate still is pretty balanced. But on the regulatory side, there's, obviously, room, I think, to move on certain areas. And that's something that we're not hearing a lot about from investors, but just would say that's one area that we feel like could be a risk to what's overall a pretty constructive backdrop for the group.

JULIE HYMAN: All right, well, we look forward to getting the numbers from the rest of the industry in the coming week. Devin Ryan, JMP Securities senior research analyst. Devin, thank you so much. Appreciate it.