Myles Udland, Brian Sozzi and Julie Hyman of Yahoo Finance break out big bank earnings with Devin Ryan, senior research analyst at JMP Securities.
Video transcription
JULIE HYMAN: Let’s go to specific businesses that reported the numbers this morning – the banks. JPMorgan is starting it, and the company is really benefiting from a boost in its trading revenue. It was expected. While this is likely to happen, JPMorgan has performed even better than expected, boosting its overall revenue by 3%. Much of the boost comes in the trading industry. However, the stocks are trading lower, as you can see. On the other hand, Citigroup actually reported more weakness, especially in its bond trading, which I think is an interesting contrast.
Let’s bring 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 make of the fact that JPMorgan, on the one hand, did not fare so well in the trading company, Citigroup? Is it a matter of execution of the two or is there something greater to take away?
DEVIN RYAN: Good morning, Julie. I think I’m looking at individual trading quarters and trying to compare too closely, you get a bit of analytical paralysis. The reality is that the trade background during 2020 was very good for the industry. It is powered by a lot of volume. Just as you were volatile in the market, your interest rates moved and repositioned. But then you also had very strong market prices which helped the marketing ventures.
Maybe the trading stock JPMorgan did a little better than Citigroup, but not something I would focus too much on. I think the big demand goes after 2021, can trade remain as strong as in 2020? And I think it’s a very high bar. And so we’ll probably see a bit of moderation.
But we also think that the operating activity and the total capital market – investment banking, equities, capital markets, M&A – can stay quite a bit stronger than we actually were with even a pre-pandemic, because there is just as much stimulus in the economy is. There is so much capital that we think these businesses will drive. And that is why we are still quite constructive about the prospects for capital markets in 2021.
MYLES ABROAD: You know, Devin, you’re looking at the stock reaction of some of these names this morning, by a few percentage points. I’m curious if we’re going to hit some more bank results next week, is that a response to the run – up we’ve seen in many of these names over the last few months? And is this kind of an expected outcome, even if some of these results come out better than expected? And I definitely think the case of JP pointing to a pretty strong concession there. Is this kind of trading action to be expected when you have seen the stock 20%, 30%, 40% higher than the results?
DEVIN RYAN: Yes, I think you hit the nail on the head. I mean, these stocks are more than 10% higher than the previous year. The S&P is about 1% higher. So finances have finally got their day and have outperformed the broader markets over the past five, six months. So I think there is a bit we need to take here and regroup.
I think the prospects of all the banks as reported are still going to be constructive. You still have, as I mentioned, a very good capital market job from here. Stock markets, credit markets are at a peak or close. And then the credit story, I think it’s also a little better than people probably thought a few months ago.
And so you put it all together. And then, the last thing I did not mention, interest rates will also start to see a slight rise. So it’s still a very good prospect. The stock has recovered to levels we have not seen in a certain period of time.
Goldman Sachs, which will report next week, is very positive about their earnings next week. However, the earnings were a little over $ 200 months ago. It’s more than $ 300 today. And we struggled to buy people for $ 200. And here at $ 300, people got more excited about it.
So I think there is a bit to just assume that the market was very strong. And maybe we have a little break here with the group just as we recalibrate for 2021.
MYLES ABROAD: And Devin, I just have to quickly follow up on the tariff point because we saw the tariffs back up. And I think the very simple view I have, as someone who is not an expert in banking, is higher rates, everything else being equal, probably good for bank shares. How does this fit into some models, at least in the businesses you follow? And how could that play into the actual results as we become so until 2021?
DEVIN RYAN: Certainly. Well, there really are two things. You have the front of the curve. And it’s anchored on Fed funds, which are unlikely to move any time soon, or at least that’s the consensus. And then you are further outside the curve, where you start to see a bit of uplift, 10-year treasury has had a good move year after year. And that leads to a bit of an incremental income when you think about the recalculation of the loan books and the ability to apply mortgage-backed securities to the security portfolios and get a slightly higher return.
So there is a bit of a spread. One thing we’ve been talking about – if the rates really start to return here and maybe even start to get away from the market, our personal opinion is that it could disrupt the overall rise in equities. It can therefore, perversely, have a negative effect on finances, simply because it can have a disruptive risk to appetite.
So this is something I think we should pay attention to and maybe be careful about what we want, because I think a little increase in yield would be good. A real sharp jump could actually be friction in the market. So you can cut both ways.
BRIAN SOZZI: Devin, how big is the wind in the first half of this year that the big banks will be there again to buy back their shares? Wells Fargo lifted its stock repo program by about 500 million shares this morning. JPMorgan has indicated that it will repurchase shares in the first quarter. How much will these actions boost their stock prices?
DEVIN RYAN: Yes, I mean, I think that’s part of why these stocks have performed so well over the last month, though, we have the announcements that the banks may be back in the market, I think earlier than most people thought by buying their shares. This is definitely positive, I think it speaks to the point that they are incredibly well capitalized, even in a very serious economic situation. And they have all built up a lot of excess capital over the last nine months because they are not buying back shares.
And so it’s definitely positive. I think you can also think about the potential for M&A in space to use some of that capital in opportunistic transactions. So I think there will be a lot of interesting things coming in 2021.
On the other hand, one point that we do not think people talk about much is just the risks that exist around potential legislative changes that punish financially. We do not think there is too much, because the Senate is still fairly balanced. But on the regulatory side, there is apparently room to move in certain areas. And this is something we do not hear much about from investors, but would say that this is one area that we feel could be a risk for a fairly constructive background for the group.
JULIE HYMAN: Okay, we’m looking forward to getting the numbers from the rest of the industry next week. Devin Ryan, senior research analyst at JMP Securities. Devin, thank you very much. Appreciate it.