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Stephen Biggar, director of financial institutions research at Argus, joins Yahoo Finance to discuss the factors behind recent mixed bank earnings and what small banks can expect in the coming years in the future. their quest for growth.
Video transcript
BRIAN SOZZI: First, we’re starting with another set of blended banking profits released today from Bank of America, Citigroup, and Wells Fargo. Stephen Biggar is the Director of Financial Institutions Research at Argus Research and covers the industry. Stephen, good to see you here this morning.
Generally, the theme is that the banks have disappointed at all levels, especially with their net interest margins. Does a quarter sound pretty good and potentially a good bank stock to own?
STEPHEN BIGGAR: Well, thanks for inviting me. And I think it’s been a very mixed quarter so far. You know, we don’t have the full set, and we certainly have the reports of the heavy banks in the capital markets early in the cycle. And a lot of cross currents there, some of which would have been expected. We had very high investment banking income on the equities side, not good on the fixed income side.
You know, trading income is down as you might expect, because volatility has been brought under control here – and a lot of weaknesses still on the lending side, which you know will become awkward if it moves in the second. half of the year here. And this net squeeze in the interest margin, we would now expect to be past a year in quarter terms when the Fed first went to zero. So things should start to stabilize here.
And our expectation for the second half of the year is that we get some lending growth, that the rollout of government stimulus measures, number one, the increase in unemployment benefits, better job growth. , improved confidence, more adventurous people, vacations and travel, and there have been signs of life in credit cards and auto loans. And I think it needs to improve. I mean, even if the net interest margins go up, it doesn’t do much to the banks unless new loans are on the books at higher rates.
So I think each of them has had their moments of weakness and strength in the banks that have reported so far. They exploit their strengths in many of these versions.
MYLES ABROAD: You know, Stephen, you mentioned that loan growth is going to have to accelerate here. But you also notice that the charges continue to be about as low as we’ve seen them. Looking at Bank America’s results this morning on the business side, they had hardly any in the last quarter. I mean, what do these banks need to see from corporate consumers to try and extend more credit? Because it looks like their clientele right now could hardly be in a better financial position.
STEPHEN BIGGAR: I agree. The balance sheets for consumers and businesses are simply phenomenal. They are full of money. Much of that came from the fantastic savings last year on the consumer side. There was nowhere – we couldn’t go out to eat, we couldn’t travel a lot. So we saw it in the country’s savings rates.
And so the customers will run them out, I think, before they go to the bank for loans – the same with business customers. They took a lot of loans last year and put them in the bank as a deposit, just to get through the recession. So they have to capitalize on it, or spend it on investing – new factories, new people, new products before they have to come back for another round of funding.
So I think the economy just needs to grow until the end of this year. And I think the credit will come back. It’s hard to see the economy growing at the rate we’d expect here – that 6% range moving into the second half of the year – slowing, of course, down to maybe 3% next year, without having a certain leverage effect. And with rates so low, it’s probably going to be a push there, too, before the Fed moves away from that zero limit.
BRIAN SOZZI: Stephen, I was roaming the Wells Fargo neighborhood, and my takeaway is this bank might never turn around. Do you think this will change our life? And what does a turnaround look like at Wells Fargo?
STEPHEN BIGGAR: Well, Wells is an interesting story, obviously. They still have the Fed cap. So they have a cap on their ability to grow their assets here. So they had to do a lot of finagling below the surface to stay below that ceiling. So that’s one thing.
I think the cap needs to be removed, and that could be a major catalyst for stocks as well. They need to cut back on their spending. They mentioned it. Charlie Scharf, the relatively new CEO, has made a lot of progress on some of these initiatives. I think, however, that it will take a few more quarters to show up in earnings results here.
So you know, it’s a big bank. It is blowing in macroeconomic trends, especially for housing – the main mortgage lender out there. They’re a little smaller in the capital markets than, you know, a lot of them – whether it’s Bank of America, or Citi, Goldman, JP Morgan, Morgan Stanley, sure. And you know, so they’re more … it’s more of a problem when the loan company isn’t cooperating there.
So spending, remove the cap – the asset cap of the Fed. And you know, I think there’s a good underlying franchise story there. And that’s what motivated the purchase. And, of course, the stock has rebounded well here over the past year as well.
MYLES ABROAD: And, Stephen, well, before I let you go, I mean, we’re definitely focusing here at Yahoo Finance on bigger names, big tickers – so the big silver central banks are getting a lot of attention from us. as we move into earnings season – and that will be mostly big tech. But on that back half, we’re going to see a lot more smaller financial institutions pulling out their bottom line – companies that don’t have the kind of reserve release capacity that the big guys did to make the bottom line figure. , and businesses that are much more dependent on loan growth.
What is the outlook there when you think of small banks plus regional banks have domestic leverage? If we see some kind of NIM compression for the big ones, I mean, I think it’s probably only going to be worse for the small institutions.
STEPHEN BIGGAR: Well, I certainly think on the income line it’s going to be a lot more of a headwind for regional banks and smaller banks – so something on the order of a high to a low double digit to the double digit of the net interest income, hurt by lower loan balances and also by increased margin squeeze, but you will see that earnings are likely to improve significantly over the course of the year.
The second quarter of 20 was the peak of expenses and provisions for losses in the event of a pandemic. The charges never really materialized. The macroeconomic environment has therefore improved considerably since they took these steps. And that alone will lead, I think, to some pretty clear gains in the earnings picture.
Lucky for the banks that they have a period here where they can present solid profit figures before hopefully getting that improvement in loan growth and margin expansion rather than the downturn. approaching next year. So I think regional banks have a break here. I think investors should take a look at the loss reserves and basically say that earnings were excessively depressed last year, and we’ll get some of that back this year.
But the case of the banks, I think, is good here. It’s the interest rates going up a bit, I think the Fed is widely expected to break out of the zero bound by the end of next year. Credit quality, as you mentioned, we still have – we still have a few quarters, probably, of reverse loss provisioning. And we also have the returns on capital of the big banks, in particular the moratorium they had last year for the pandemic.
BRIAN SOZZI: Stephen Biggar, director of financial institutions research at Argus Research, nice to see you this morning. Thanks for stopping by.
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