Wells Fargo research analyst gives 6 reasons why he's bullish on bank stocks
Mike Mayo, Wells Fargo Senior Analyst joins the Yahoo Finance Live panel to discuss what to expect from big banks to kick off earnings season.
Video transcript
AKIKO FUJITA: It has been a big reversal for financial stocks. The sector among the worst performing on the S&P 500 last year. This year, it's up nearly 20%, and we could see more gains this week as JP Morgan, Goldman Sachs, and Wells Fargo kick off the earnings season. Let's bring in Mike Mayo, Wells Fargo senior analyst. Mike, it feels like the bar is set really high going into this earnings season. A year ago we were talking about the demise of the banks. As we look ahead to tomorrow, what are you going to be looking for? And what do you think is going to be the biggest catalyst?
MIKE MAYO: Well, look, I think there's more to go with the catch-up trade for bank stocks. It's all framing. They have well outperformed the broader market this year, and especially since Pfizer Monday in November. But since the start of last year, bank stocks have still underperformed by more than 15 percentage points. And so, we don't think that the bank group's getting full credit for the resiliency that they've demonstrated. So we are cyclical bulls and structural bulls.
So, you know, I can summarize it as the six C's, if you will. The first C is credit quality. And banks build up reserves last year, and now they're releasing these reserves. Jamie Dimon put out a 66-page CEO letter last week. And he's super bullish for the next three years. And these reserves for problem loans are really based on your forecast and how you feel. So credit quality should be much better.
The second C would be capital markets, which have been much stronger for longer. So Goldman Sachs, we think they'll have results that far exceed the consensus expectations. The third C would be the curve or the yield curve. You've seen the 10-year Treasury bond increase. That should be good for traditional banking revenues later in the year.
The fourth C would be capital return buybacks. As you recall, the Federal Reserve allowed banks to start buying back their stock. The fifth C would be cost control. We think the industry is on its way toward record efficiency over several years. And the sixth C is brand new for me, and that is climate. And climate has moved more toward the front burner for the banking industry, which is expected to help general industry transition to a new green world.
ZACK GUZMAN: Oh, I mean, the last time I've heard anyone walk through six C's was at my sixth grade report card meeting with my parents. But Mike, when we talk about which one of those C's might be most important, it seems like investors have been talking about the way that they've been walking back reserves for the last couple of quarters. Talk to me about which one of those you think might have the highest opportunity to maybe make one of these banks a winner relative to the other ones reporting.
MIKE MAYO: Well, I think the-- look, to some degree, you've baked in some of those reserves in the first quarter. And you've baked in some of the strong capital markets. I think when you look at Goldman Sachs results tomorrow, I mean, it will just be mind boggling how much they're in their sweet spot. I mean, this is really Goldman's moment. But a lot of that is baked in so people have to look toward the future. I think the one C that's probably underappreciated is the curve, the yield curve, and the increase in the 10-year interest rates and the possible increase for rates sooner than expected.
So for example, Bank of America, we think this is the low point for their traditional banking revenues. And then those should inflect higher over the next several years. So, talk about a big change there. So I think the impact of higher interest rates and what that means not for this quarter, but for the future. And the other part of that, the yield curve, is the loan growth that may come along with that. And we think this is probably a bad quarter for loan growth, but the question is, when will that pick up? And so, I think the comments on the earnings calls will be actually more important than the results themselves.
AKIKO FUJITA: Mike, let's talk about that sixth C that you mentioned, climate risks. It feels like every company, really, not just banks, are sort of trying to get ahead of regulation they know is coming, forced disclosures, as well as potential stress tests around climate risks. Who do you think is the most vulnerable when you look at the big banks?
MIKE MAYO: Well, you know, it's hard. We published a report with the help of Oliver [? Wyman. ?] We looked at ISS data. And we talked to other climate experts. And banks are pretty much in the same band. So what stood out to us, though, would be some of the efforts taken by Bank of America and JP Morgan on a go forward basis.
And, like, for example, JP Morgan is looking to go more solar in branches and offices and their campus in Ohio. So I think when you look at who's walked the walk, it's tough to tell. When you see who's talking the talk, certainly Bank of America and JP Morgan have stood out from a qualitative basis. These are early days. There's a lack of data and full transparency when we're analyzing the banks based on climate.
But we do know this. I got my first question ever in 30 years as a bank analyst as it relates to climate and banks. On day one as CEO, Jane Fraser at Citigroup announced that Citigroup is going to be net zero emissions by 2050. The regulators are now incorporating climate risk as part of their analysis of financial risk and overall governance. And even the Bank of England has a climate stress test for banks in June of this year. So we do know this is a topic we need to stay in front of more than any other time in my career.
ZACK GUZMAN: Yeah, one of the other C's, I'm not entirely sure if it made your list of six, but one that's top of mind for me after reading Jamie Dimon's letter was competition. And he really called out fintech as being kind of one of those spaces that's increasingly encroached on their space and maybe gotten away with not having to deal with the same regulations. But it sounded like he was looking at maybe acquiring some of these companies, if you read the letter. I'm curious to get your take on maybe what we might hear about that and maybe the way that some of these banks are looking to hit back against fintech coming for their lunch.
MIKE MAYO: Well, thanks for adding a seventh C there for competition. And, you know, I sensed a little undercurrent of anger in those 66 pages by Jamie Dimon as relates to fintech and technology. And the way I would summarize it-- these are my words, not the CEO letter-- is that you have 20th century regulation of the financial markets in the 21st century. And in the 21st century, banks provide less than one-third of overall financing. And there was some good data in that CEO letter by JP Morgan.
I mean, the market value of the capital market's debt and equities overall have grown 14 times faster than the market value of the largest banks. The shadow banking system over the last 20 years-- by the way, it was over the last 20 years-- the shadow banking system has grown more than the growth in loans from traditional banks. So while I think it's good what the regulators have done with the banks, the question is, why doesn't that apply to the rest of the financial industry, which sometimes doesn't have the same requirements? So, that was kind of an undercurrent.
As far as who's going to win in the long term, Jamie Dimon said, like, six or seven years ago, Silicon Valley is coming. And now he's saying Silicon Valley's in the room, and they're real competitors. And I think any large bank is going to look at the possibility of buying a smaller fintech, which they could link and leverage. So the idea is get the skill set and leverage that over-- for the largest banks, 20, 30, 40 million customers. As far as making a big acquisition, the math doesn't work because the valuations on these fintech firms are just so high.
ZACK GUZMAN: Well, we could sit here all day, and I'd be pressed to add more C's to your list, but I wouldn't want to do that to you. Wells Fargo senior analyst Mike Mayo, appreciate you coming on. We'll see what happens when we get that first report tomorrow morning. Thanks again.
