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Myles Udland, Brian Sozzi and Julie Hyman of Yahoo Finance break down big bank profits with Devin Ryan, senior research analyst at JMP Securities.
Video transcript
JULIE HYMAN: Let’s move on to some specific companies that reported numbers this morning – the banks. JPMorgan got the ball rolling, and the company is really enjoying an increase in business revenue. It was expected. But as it tends to happen, JPMorgan did even better than expected and saw its overall revenue increase by 3%, with much of that boost coming from commerce. Stocks, however, as you can see, are trading lower. And on the other hand, Citigroup has actually signaled more weakness, especially in its bond trading business, which I think is an interesting contrast.
Let’s call on Devin Ryan, senior research analyst at JMP Securities who covers the industry. Devin, I want to ask you about this trade piece because I know this is an area that you pay a lot of attention to. What do you think of this, that JPMorgan, on the one hand, has done well in this business activity, Citigroup not so much. Is it a question of execution on parts of both or is there something bigger to remember?
DEVIN RYAN: Hello Julie. I think looking at individual trading quarters and trying to compare too closely you get a bit of analysis paralysis. The reality is that the business environment has been very good for the industry throughout 2020. It was driven by a lot of volume. Just like you had market volatility, you had interest rate movement, repositioning. But you also had really high market prices which helped the market making companies.
So maybe JPMorgan Trading Inventory did a little better than Citigroup, but not something I would focus on too much. I think as we approach 2021, the big question is whether trading can stay as strong as it was in 2020? And I think that’s a pretty high bar. And so we’ll probably see a bit of moderation.
But we also believe that business and overall capital market activity – investment banking, stocks, financial markets, mergers and acquisitions – may remain a bit stronger than what we actually were even before the pandemic, as it there are so many stimulants in the economy. There is so much capital that we believe will continue to stimulate these businesses. And so we are still quite constructive on the outlook for financial markets until 2021.
MYLES ABROAD: You know, Devin, just look at the market reaction of some of these names this morning, just a few percentage points. I’m curious as we head to other banking results next week, is that kind of a surge response that we’ve seen in a lot of these names over the past couple of months? And is this kind of result expected, even when some of those results are better than expected? And I certainly think JP’s case points to a pretty strong franchise there. Is this kind of trading action to be expected when you saw the stock rise 20%, 30%, 40% before results?
DEVIN RYAN: Yeah, I think you hit the nail on the head. I mean, these stocks are up over 10% since the start of the year. The S&P is up about 1%. So financials have finally got their day and have outperformed the larger markets significantly over the past five or six months. So I think we need a little time to take a break and regroup.
I think the outlook for all banks as they report will always be positive. As I mentioned, you still have a very good trajectory in the financial markets here. The stock markets, the credit markets are at or nearing highs. And then the credit history, I think it’s also a little better than what 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 are going to start to see a bit of a rise as well. So it’s still a very good prospect. Stocks have returned to levels that we haven’t seen in some time.
Goldman Sachs, which will release a report next week, we are very bullish on their earnings next week. But the stock was just over 200 months ago at the time of profits. It’s over $ 300 today. And we had a hard time convincing people to buy it for $ 200. And here at $ 300, people got more excited about it.
So I think we just have to take into account that the market has been very strong. And maybe we have a bit of a breathing space here with the group as we recalibrate for 2021.
MYLES ABROAD: And Devin, I just want to do a quick follow up on the rate point, because we’ve seen the rates go up. And I think the very simple point of view that I have, as a person who is not an expert on banks, is higher rates, all other things being equal, probably good for bank stocks. How does that take into account some of the models, at least in the companies that you follow? And how could that play into actual results as we get closer to 2021?
DEVIN RYAN: Sure. Well, there are really two things. You have the front end of the curve. And that’s anchored in federal funds, which probably aren’t going to budge anytime soon, or at least that’s the consensus. And then you get further down the curve, where you start to see an upside, 10-year Treasuries have seen a great move since the start of the year. And that comes with a little bit of extra payoff, if you think about revising the price of the loan books and being able to put mortgage backed securities in the securities portfolios and get a little bit higher return.
So there is a bit of resumption of propagation. One thing we’ve talked about – if rates really start to move up here, and maybe even start to move away from the market, our personal opinion is that it could disrupt the overall rally in stocks. And so, perversely, it could turn negative for financials, simply because it could disrupt risk appetite.
So that’s something I think we need to pay attention to and maybe pay attention to what we wish for, because I think a little increase in yield would be a good thing. 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 is the tailwind in the first half of this year that the big banks will be back out there to buy back their shares? Wells Fargo lifted its stock repurchase program of approximately 500 million shares this morning. JPMorgan has announced that it will start repurchasing shares in the first quarter. How much will these stocks boost their stock price?
DEVIN RYAN: Yeah, I mean, I think that’s part of why these stocks have worked so well over the last month, even though we’ve had these announcements that banks might be back in the market, I think earlier than most people thought, by buying their stocks. . This is definitely a bright spot, I think it says a lot about the fact that they are incredibly well capitalized, even in some pretty severe economic scenarios. And they’ve all built up a lot of excess capital over the past nine months because they haven’t redeemed shares.
And so it’s definitely positive. I think you can also think of the potential of mergers and acquisitions in the space to deploy some of that capital in opportunistic deals. So I think there are a lot of interesting things to come in 2021.
On the flip side, one point that we think people don’t talk about a lot is simply the risks that exist around a potential legislative change that is punitive to finances. We do not think there are too many, because the Senate is always fairly balanced. But on the regulatory side, there is obviously room, I think, to move forward in certain areas. And this is something that we don’t hear a lot about from investors, but I would just say this is an area that we think could be a risk for what overall is quite a pretty backdrop. constructive for the group.
JULIE HYMAN: Alright, well, we look forward to receiving the numbers from the rest of the industry in the coming week. Devin Ryan, senior research analyst at JMP Securities. Devin, thank you very much. Appreciate it.
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