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Goldman Sachs, Citigroup, and Bank of America report earnings

In this article:
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Vining Sparks Director of Bank & Equity Strategies Marty Mosby joins Yahoo Finance’s Seana Smith to discuss the latest quarterly earnings results for Goldman Sachs, Citigroup and Bank of America.

Video Transcript

SEANA SMITH: Welcome back to Yahoo Finance Live. We are focusing on financials today. It's one of the worst performing sectors in the markets this afternoon, and this comes on the heels of some of the big banks reporting earnings before the bell. Let's go through some of those numbers for you.

First we had Citi. Its first quarter profit tumbling 46% as it sets aside more money for loan losses. And we're seeing that really echo throughout some of the big bank reports that we are getting. Bank of America posting a 45% decline in its first quarter profit.

And Goldman Sachs, their profit falling just around 49% in the first quarter. So for more on this, I want to bring in Marty Mosby, a Director of Bank & Equity Strategies at Vining Sparks. And Marty, let me just start with a big picture, your reaction to the bank earnings that we've got in so far. What do you think of the numbers?

MARTY MOSBY: Well first, we knew this was going to be a rough quarter, because of what happened in the economic disruption and how that creates this need to increase your credit provisionings. So credit costs go up in the anticipation of what's about to happen over the next couple of quarters.

So the first thing to realize is the earnings are showing a significant drop, like you've been reporting, but most of that's on the expectation in funding what losses that they imagine are going to happen. Those losses hadn't happened yet. The charge-alls haven't gone up, so we didn't see anything like.

That so it's not the actual realizational losses, it's just putting into loan-loss provisioning as they're anticipating those losses coming through.

SEANA SMITH: Marty, why do you think Bank of-- or sorry, Goldman Sachs is the reaction to their earnings have been much better as compared to Bank of America and Citi? Because Bank of America stock is off just around 5% right now, Citi down over 3 and 1/2%, but Goldman is actually holding on to gains this afternoon.

MARTY MOSBY: So Goldman actually has a business model and profile that benefited from all the activity in the capital markets areas. So as you saw equity trading volumes and fixed income trading volumes spike with the volatility in the marketplace, Goldman benefited from that. So the revenues were strong. And they don't have as much of a lending profile like the universal banks, like JP Morgan or Wells Fargo or Citigroup.

So they didn't have as much to offset the benefit that they got in capital markets with what they experienced in the losses on the lending side. So the balance worked out in their favor. And this is one of those periods of time when they do outperform.

SEANA SMITH: Marty, the big question when it comes to a lot of these big banks as to whether or not buybacks are going to continue through the end of the year, how likely do you think that is?

MARTY MOSBY: So two things. One, buybacks. The big banks have already pulled those back, right? So they've already stopped the buybacks. The dividends is really where everybody is most focused now. So will we go through like we did in 2008 where dividend yields go back down to zero?

What people are misinterpreting-- and that's where you really have to pivot on these earnings-- it's not about how much earnings you have, it is are you exceeding your dividend. In every one of these banks, except Wells Fargo, has been able to exceed their dividend with the earnings that they produce in this particular quarter with the massive increases in the provisioning for future losses.

So we still see the sustainability of dividends for the meanwhile. As long as this shutdown in the economy doesn't last longer than going into the summer.

SEANA SMITH: And Marty, from your perspective, when we're trying to figure out what banks are best positioned at this point-- I know you were saying some of the strength there that we're seeing from Goldman-- but what banks do you think are best positioned to weather the deteriorating economic outlook that we are getting at this point?

MARTY MOSBY: So first off, you look at these banks, they trade in a macro sense when you go through these types of pressures. So it's really the idea of, right now, let's focus on in total, is it the right time yet to be in banks, or do we need to wait longer? What we've basically seen is, as we've gone through these types of compressions, the banks really react much later when the recovery starts to happen in the rest of the market.

The 2008, 2010-- as a bias towards the anxiousness of banks and what happens to their earnings in capital. Because of what happened in the Great Recession, they changed their balance sheets over the last decade. Like we just said, they're still paying for their dividends and should sustain dividends this time.

But what you're looking for is really when do you want to think about getting back into banks? And what we've said is that there's still some patience to be had here, even though we're at levels where the spring is ready to move back once we come out from under this economic disruption, but the timing is still not right. We still have to go through some quarters here, and in the second quarter being released in July, so it usually takes about a year for the banks to recover.

So at this point it's time to be patient. And if you really want to just get in there because you want to get early, you really want to look at the very high quality banks that typically investors go to first.

SEANA SMITH: And Marty, I know in addition to the big banks, you also take a look at the regional banks too. What are you going to be looking for specifically in some of the reports that we have not gotten yet?

MARTY MOSBY: So there's really three things that banks need to accomplish in this period of time. The first is they have to make sure that their employees are taken care of and that they stay healthy as best as possible. So what we're watching and listening for is how are each of these management teams working with their employees?

The second thing is that these banks are much stronger than they were a decade ago. So instead of being the sector of the economy that's sitting there needing help from the government, this is a sector that needs to lean in-- to basically change the perception-- and show what the last 10 years of building liquidity and capital helps the banks be able to do. Actually help the economy bridge this pressure versus creating additional pressure.

And then lastly what we are looking at is what we talked about earlier, you've got to defend your capital. So are your tangible book valued levels continuing to stay stable, which we've seen so far? And then are you being able to earn through your dividend? So those two things are really how you defend your capital right now.

It's much more about capital levels than it is about the raw number of earnings that you have got.

SEANA SMITH: All right, Marty Mosby of Vining Capital-- or Vining Sparks, excuse me. Thank you so much for joining me this afternoon.

MARTY MOSBY: Thanks for having me.