Chapter 1: What is the main topic discussed in this episode?
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Let's stick with earnings. Zion's reporting a beat on earnings with a net income of $222 million despite a $50 million loss from an alleged fraud. The former Barclays CEO, Bob Diamond, writes the following, the dislocation in regional banks stems from a few single bank-specific issues but doesn't change our view on the opportunity. We remain very bullish on regional bank consolidation.
Bob joins us now for more. Bob, good morning. Good morning, John. It's good to see you, sir. Look, a few years ago, we had some problems managing interest rate risk. Can we avoid it with credit risk in this segment now? I think broadly in regional banks, as you just quoted me, we're very bullish.
I think both the interest rate dislocation that started with SVB or was recognized with SVB, and we're really a function of rates going from 0% to 5.5% is in the market. I think the... You know, the regional bank area has some really strong banks and some that are not as well managed. So of course, some have more exposure, for example, to commercial real estate than others have.
And if the commercial real estate is in Iowa, it might be different than if it's in LA. So we look at all of those things. But as a sector, This is a really, really strong sector, the banks. There's 4,500. It has the support of Secretary of the Treasury Besant. That consolidation is necessary. Makes the banks more competitive. It increases the ROEs. It makes them just better, better investments.
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Chapter 2: What insights does Bob Diamond provide on regional banks?
You don't really need two. So if you add the cost synergies, which we've proven in back testing really come out and are real, and you add the increase in ROE, because when a bank buys another bank, There's purchasing, accounting, and you have to mark to market fully through the P&L, the bank that you're acquiring. You're putting capital in.
Automatically, the ROE goes up because the asset prices are different. So when we look at the cost savings, we look at the increase in ROE. We look at 4,500 banks. We look at too many or too small to succeed. This is probably the best investment we've seen where the downside is really, really protected, and there's good upside. It's happening. Your forecast is happening.
We've seen it with Fifth Third and Comerica. You're suggesting there's more to come. You talked about how region-specific some of these issues can be. Is there a common thread in the consolidation so far? I think what we have seen is where the synergies are most clear is in-state and close to state.
Chapter 3: How does interest rate risk affect regional banks?
So when you have a really good front office, meaning you have a good business around deposits and loans, And a similarity in terms of region where you're really adding clients and customers and taking out costs, those are the best opportunities. But not in terms of where in the U.S. It's more that in in-state and close to state is the preference.
There's been this fear that some of the biggest banks have really taken the wealthiest and the highest credit ratings in terms of customer base, and that mid-tier banks are stuck with everybody else, and that that's where the credit problems have really come. Has there been anything that you've seen that proves that to be true?
No. We've seen idiosyncratic issues. We've seen certain banks that may have a specific name issue. But the truth is that 40% to 50% of lending to small businesses in the U.S. come from the regional and community banks. They don't come from the big banks. Many of the big four, many of the larger regionals just don't have the cost structure or the attention to service smaller businesses.
So we think the credit quality on balance and lending is very, very good across regional and community banks.
If there's no real weakness that they're seeing with respect to consumers or smaller businesses, does it make sense? And does it really help the case to have the Fed cutting rates at the same time that inflation is still a concern?
I think the cutting rates, I mean, if you think of the go-forward environment, so let's say a regional bank buys a community bank, you get the synergies, you have an ROE, and now you're focused on additional acquisitions and what's the go-forward? The go-forward is terrific. I mean, the Treasury, the Fed, The SEC are encouraging consolidation. They're talking about simplifying capital rules.
They're talking about endorsing these mergers and this consolidation. And then you have rates at 4% to 4.25%, likely coming down this month, potentially again in December. You have 100 basis points between twos and tens. You can't make a better environment for banks going forward than this.
So if you strengthen through consolidation, and then you look at the go forward, obviously, assuming that the economy stays stable and strong, it's a great environment for banks.
But you're forecasting at least that 4,500 number to be cut in half in the next three years.
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Chapter 4: What role do commercial real estate exposures play in bank stability?
Was it Elizabeth Warren and Bernie Sanders a little bit on the edge? Like, I'm very, very surprised, Ann Marie, that Elizabeth Warren would come out and say we shouldn't approve consolidation in banks. And we're talking about putting additional capital in banks, making them stronger, making them better competitors with JP Morgan and Citi, and yet she's against it.
And that's the politics of being a liberal and saying no, no, no to anything that looks like it's positive for business and positive for profits. This administration has been very clear. It's gonna make the banks stronger. It's going to make them better competitors to the big banks. It's going to provide more lending. In a way, it's getting more. It's kind of monetary easing, right?
It's getting more money into the market for businesses that need to raise money, small businesses to expand what they do. Bob, we've got 30 seconds left with you, which is not enough, I know. Oh, come on. Give me more. The mayoral race in New York City. Yes. The beating heart of capitalism and the socialists as a head. What's your brief take on what's happening in this city?
You know, I think the city is at the strongest it's been since pre-COVID. You know, I live in Midtown. We have our office in Midtown. I walk to work in the morning for 11 blocks, and I have never seen so many people on the streets every morning as we've seen in the last couple of months. The city was really hit by COVID.
Chapter 5: What is the outlook for bank consolidation in the U.S.?
It was really, really tough. I think we all kind of, you know, struggled through, not quite able to admit this is really bad. And it's really good. The city's back, new restaurants, new clubs, people excited, down in the village. My son and his family who live in London are moving to Brooklyn. They're really excited. I think the city has a lot of buzz.
You managed to answer that question without answering that question.
He's running.
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