Myles Udland, Brian Sozzi and Julie Hyman of Yahoo Finance share the earnings of major banks with Devin Ryan, Senior Research Analyst at JMP Securities.
Video transcription
JULIE HYMAN: Let’s look at some specific companies that reported numbers this morning – the banks. JPMorgan kicked off and the company really benefited from an increase in its commercial revenue. This was expected. But, as it tends to happen, JPMorgan did even better than expected and saw its overall revenue increase by 3%, much of that momentum coming from the trading business. Stocks, however, as you can see, are trading low. And on the other hand, Citigroup did report more weakness, specifically in its bond trading business, which I find an interesting contrast.
Let’s bring in Devin Ryan, a senior research analyst at JMP Securities that covers the industry. Devin, I would like to ask you about this commercial piece, because I know it is an area that you pay close attention to. What do you think about this, that JPMorgan, on the one hand, did well in that trading business, Citigroup not so much. Is it a matter of execution on the part of the two or is there something bigger to take away?
DEVIN RYAN: Good morning, Julie. I think that looking at individual trading quarters and trying to compare very closely, you get a little bit of analysis paralysis. The reality is that the commercial scenario was very good for the industry throughout 2020. This was driven by a lot of volume. Just as you had market volatility, you had a movement in interest rates, repositioning. But there were also very high market prices, which helped market-making companies.
So, maybe JPMorgan’s trading stock did a little better than Citigroup, but not something I focused on too much. I think going to 2021, the big question is: can trade remain as strong as it was in 2020? And I think it’s a pretty high standard. And we’ll probably see a little bit of moderation.
But we also think that the commercial and general activity of the capital markets – investment banking, stocks, capital markets, mergers and acquisitions – may remain a little stronger than we were in the pre-pandemic, because there is a lot of stimulus in the economy. There is so much capital that we believe it will continue to drive these businesses. And, in fact, we are still quite constructive about the prospects for the capital markets in 2021.
MYLES UDLAND: You know, Devin, just look at the reaction of some of those names this morning, a few percentage points. I’m curious to see some more banking results next week. Is that a kind of response to the increase we’ve seen in many of these names in the past few months? And is this an expected result, even when some of these results are better than expected? And I think that is certainly the case with JP pointing to a very strong franchise there. Is this kind of commercial action expected when you see the stock rise 20%, 30%, 40% ahead of the results?
DEVIN RYAN: Yes, I think you got it right. That is, these shares are over 10% in the year. S&P rose about 1%. Therefore, the financial sector has finally had its day and has substantially outperformed the broader markets in the past five, six months. I think we need to take a break here and regroup.
I think the prospects for all banks, as they report, will still be constructive. You have, as I mentioned, a very good capital market trajectory here. Stock markets, credit markets are up or close. And then the credit history, I think it’s also a little bit better than people probably thought a few months ago.
And then you put it all together. And the last thing I didn’t mention, interest rates will also start to increase a bit. So it is still a very good prospect. Inventories recovered to levels that we haven’t seen in a while.
Goldman Sachs, which will report next week, is very optimistic about its earnings next week. But the stock was just over $ 200 months ago, at the time of earnings. Today it costs over $ 300. And we were having a hard time getting people to buy it for $ 200. And here at $ 300, people were more excited about it.
So, I think it is only necessary to take into account the fact that the market is very strong. And maybe we will have a little rest here with the group, just as we recalibrate for 2021.
MYLES UDLAND: And Devin, just to quickly catch up with the rates, because we saw the rates come back. And I think that the very simple view that I have, as someone who is not a specialist in banks, is of higher rates, everything else equal, probably good for bank stocks. How does this really influence some of the models, at least in the companies you’re following? And how could this be reflected in the actual results as we move forward in 2021?
DEVIN RYAN: Right. Well, there are really two things. You have the front end of the curve. And that is anchored in Fed funds, which are unlikely to be moved anytime soon, or at least that is the consensus. And then you have more out of the curve, where you start to see some increase, the 10-year treasury bills moved well in the year. And that generates a little incremental gains, if you think about repricing loan books and the ability to go out and put mortgage-backed securities in the securities portfolios and get a little higher yield.
So there is a little bit of increased spread. One thing we’ve been talking about – if rates really start to go up here, and maybe even start to distance themselves from the market, our personal view is that it can be detrimental to the overall stock recovery. And then, perversely, it could turn out to be negative for finance, just because it could hinder risk appetite.
So it’s something that I think we should pay attention to and maybe be careful about what we want, because I think a little increase in income would be good. A really abrupt jump can be something that creates friction in the market. Then you can cut both ways.
BRIAN SOZZI: Devin, how big is the wind in favor in the first half of this year, so that the big banks will buy their shares again? Wells Fargo raised its share buyback program by about 500 million shares this morning. JPMorgan has signaled that it will begin to buy back shares in the first quarter. How much will these shares increase in their share prices?
DEVIN RYAN: Yes, I mean, I think it’s part of the reason why these stocks performed so well last month, right, is that we received those announcements that banks could be back on the market, I think sooner than most of people thought, buying their shares. It is definitely positive, I think it speaks to the point that they are incredibly well capitalized, even in some very severe economic scenarios. And they have all accumulated a lot of surplus capital in the past nine months because they have not bought back shares.
And then it is definitely positive. I think you can also think about the potential of M&A in the space to invest part of that capital in opportunistic businesses. So I think there are a lot of interesting things to come in 2021.
On the other hand, a point on which we think people don’t talk much is the risks that exist around a possible legislative change that is punitive for the financial sector. We don’t think there is much there, because the Senate is still quite balanced. But on the regulatory side, obviously, there is room, I think, for advancing in certain areas. And this is something we don’t hear much from investors about, but we would just say that it is an area that we think may be a risk for what is, in general, a very constructive scenario for the group.
JULIE HYMAN: Okay, we hope to get the figures for the rest of the industry next week. Devin Ryan, senior research analyst at JMP Securities. Devin, thank you very much. Appreciate.