KBW Managing Director Brian Kleinhanzl joined Yahoo Finance to break down the effects of fiscal and monetary on U.S. banks.
- Just about 17 minutes to the closing bell. Let's keep talking about some of the bank earnings, and to help us put them into perspective and what it means for our investments, we invite into the stream, Brian Kleinhanzl. He is the Managing Director at KBW, a Stiefel Company. And Brian, it's good to have you here.
I want to talk about Citi, first, and in particular, we've talked about net interest margins at all the banks, and what's happening there. But you pointed out in your note on Citi that they're exiting some of their consumer businesses in 13 different countries, and that's a good thing. Why?
BRIAN KLEINHANZL: Yeah, thanks. I mean, for Citigroup, I mean, one of the big concerns with the company has always been the complexity, and how widespread their branched network is. It's not just a US company. It's a global branch network that they manage, too, and there's always been some concerns that global branch network leads to higher risks relative to the other US banks.
So by exiting these countries in both Europe, and the Middle East, as well as Asia, that's intended to reduce the complexity of the company. I think investors were looking for that, as well as these individual countries in the consumer business weren't really generating much profit for the company overall. So there really is a much loss from an earnings perspective, and there's some reduced risk as well. So I think it's a positive for the company.
- Brian, when you take a look at the stock reactions, today, Bank of America in the red, Citi's in the red. A similar reaction to what we saw from JP Morgan, yesterday, after they posted better than expected results. What do you attribute this to?
BRIAN KLEINHANZL: Yes, I mean, the challenge for the US banks-- and it applies to Citi, Bank of America, JP Morgan. --is that they really can't get away from the effects of both fiscal and monetary policy within the US. And those effects are readily apparent in the first quarter results for the US bank, so you have the Federal Reserve kind of flooding the system with liquidity, which is increasing deposits at the banks. But that also means interest rates are low.
In addition, the fiscal policy that you're seeing, which is stimulus, that's going to corporations, as well as stimulus is going direct to consumer is the positive. So what you've seen in the quarter is that spending's been up amongst consumers, and that generally means that there's less losses, as well, in the consumer portfolios for the banks. But it also means that there's not really a reason to borrow, both from consumers and from commercial companies. So loan growth has been weak, and that's what's kind of weighing on shares today is the weaker loan growth relative to expectations. And there's still some concern as to when the US banks will see better loan growth from here.
- You know, we don't think of Goldman Sachs as a traditional bank, and yet, they've got Marcus. But in your note, you talked about them as a "self-help" stock, and you also anticipate that revenue growth is going to be muted for Goldman. I mean, when they throw their weight around, someone gets a black eye, and they come out on top. Why do you think growth will be muted?
BRIAN KLEINHANZL: Yeah, when you look from here, I mean, what you're coming into is, generally, the peak or getting closer to a peak of a cycle. So what we saw this quarter from a capital markets perspective is that, really, equity capital markets activity, so that the issuance of IPOs and follow on offerings by companies has been just tremendously strong year over year. You're looking at something up 300% plus for Goldman relative to the prior year, so I think what you're seeing is this is a company that just posted $17 billion of revenues in the quarter.
It's hard to duplicate that quarter after quarter. So as you look forward, there will be some positive elements still. But by and large, a lot of this impacts from the capital markets. Activity is expected to wane on a go forward period. We do expect the economy to grow, but we do expect kind of activity to soften here on a go forward basis.
- Brian, we are going to get Morgan Stanley tomorrow. We've seen them restructure their business just a bit and really focus on their asset management business. How would you compare Morgan Stanley to the big banks that we've already seen report?
BRIAN KLEINHANZL: You know, the unique-- I mean, the immediate comparison is strictly with Goldman Sachs. I mean, they're still considered two of the premier investment banks globally, but what you're seeing is really a transition from Morgan Stanley more into wealth management, asset management, more stable revenue type businesses relative to where Goldman Sachs is. And I think investors have really appreciated that transition, and you've seen it, both in the share price there or stock price performance over the last year and a half, as well as some of the valuations that these trade at. Goldman certainly trades that a little bit of a discount evaluation to Morgan, so I think that's what kind of investors are looking for, more stable businesses.
Because then you can see Goldman Sachs as a result. I mean, they can be volatile and very volatile quarter to quarter. But you have less volatility in Morgan Stanley's results. Both expected to be strong, but both looking at a little bit different avenues for growth from here.
- Hey, Brian. Is Morgan will be able to dodge questions about [? Archegos ?] tomorrow?
BRIAN KLEINHANZL: No, I mean, they will have to address that. But thus far, what it looks-- I haven't said anything publicly on that. But we're not expecting losses. It looks like the US banks are fairly good about risk management from that perspective, so they will have to address those questions. But we aren't expecting anything material from a actual loss perspective there.