Banks Have Seen ‘Twin Peaks’ of Pain, Says Mike Mayo

published on July 20, 2020

Michael mayo is with wells fargo he's been doing this more than a long time and has always done it with a certain vigor which upsets the executives and has required reading for everyone on the street mike mayo great

To get an update from you let me go to the money question they're lining up the accountant ducks of losses that will be taken down the road do you know what those losses will be

Taken down the road or do you like everybody else have to wait wait wait well these are some of the most uncertain times tom that i've seen in my three decades of covering banks

But we do have the results in for the eight largest banks and the conclusion is you've seen the twin peaks of pain the provisions for future loan losses relative to the actual losses

These past two quarters have been the highest in history and the second bit of pain is that the decline in the net interest margin these two past quarters has been the biggest in history so

There's a double barrel shotgun you know pointed at the banks in terms of credit losses and nim compression and that's huge pain but let me point out like this is not 2008

It's 20 20 banks are now part of the solution not part of the problem the war chest for future losses whatever they will be is the highest in history at this stage of a recession

In the past 50 years the reserves for the largest banks equal half the level of the actual losses during the global financial crisis even with this huge buildup of you know

Provisions or reserves for future problems banks still grew capital still grew book value for the most part and still for the most part cover their dividend sometimes by one two or

Three times so and banks are still open for business yeah the growth and deposits at bank america and jp morgan wow i mean over the past year they grew equal to the

Fifth or sixth largest bank so i give the banks for the second quarter earnings a a b plus but when it comes to the outlook tom nobody knows it's a very uncertain time

So you need to be ready for a variety of scenarios i love having you on mike as always twin peaks of pain you have a way with words pair the twin peaks of pain with the

Record revenues the record income from investment banking and trading volumes how much does this bring up political risk for the banks at a pretty unseemly time the idea of profiting

At a time of such economic pain well look banks are serving customers and sometimes like in march banks were serving customers with record lending

As revolvers were getting drawn down in the second quarter banks were serving customers by issuing debt to the capital markets record debt issuance uh year to date and it's natural that you have strong

Trading that follows that so whether you serve clients with lending or if you serve them with capital markets you're still serving clients so i'd say that criticism is more of a

20th century criticism in the 21st century you know financial world um it that you're serving the customer if you're a large bank looking forward given the uncertainty

Given the likely pain in the consumer that a lot of big bank executives are expecting which financial firm is best positioned to increase profitability going forward based on

These results well look you have the twin peaks of pain the good news is that the reserves for those future losses you know have been built more than ever

Before these are sobering times we expect loan losses to increase by about threefold over the next couple years but the other part of the pain the net interest margin should hurt the more plain vanilla banks

More than anyone else so we're going with the largest banks you know citigroup bank america and jp morgan because they are more diversified they have more levers to pull and digital banking digital banking is being

Dominated by the largest banks because they have better technology you're seeing the market share there and you're seeing an acceleration of their five or ten year plans into the next year because customers

Have been forced out of the banks mike mayo can you explain why goldman sachs wants to be a plain vanilla bank of all the ironies of all the ironies goldman sachs

Strategy has become more bank-like and then you see the second quarter results they knocked the cover off the ball with fantastic underwriting again serving clients trading

The traditional roots of goldman sachs really came out so this quarter showed you that goldman sachs is still goldman sachs like they've been for over the past 100 years and not what

They want to be in the future

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