And I'm just curious what the cycle investment playbook typically is for a rate hike cycle and what might or might not be different this time.

Thank you for having me on the program, Leslie.

And it's a really good question, obviously, because the Fed has made it very clear that they're moving to fight inflation.

And one of the tools they use, of course, is to raise short term interest rates.

And it's somewhat nuanced.

When you look back over the last five credit tightening cycles, we wrote about this about a week ago.

There's no perfect playbook.

What do you make of that? I know it was tough comps last year, but just in terms of just the key driver of trading, which has been such an upside boost to these earnings numbers we've seen in recent quarters.

Where do you think we are in the banking cycle? And kind of what's your outlook going into kind of the next earnings season and into 2027?

Sure.

It's really interesting.

Most bank stock investors, certainly myself in particular – As a bank investor recommending bank stock ideas to our clients, we always have a worry.

A worry about credit, worry about inverted yield curves.

But what's interesting today is we don't have any worries, and that's my worry.

Because you always have to have a worry, and there aren't any.

Is there any sort of interconnectivity to the larger banks or traditional banking models whereby perhaps that could be one of the things that you may worry about? I'm just curious if you've got any insight into what is kind of percolating there.

Why do you think the reversal happened? Was the concern about expenses? Was it the fact that they didn't raise the full year despite the net interest income beats?

Melissa, you put your thumb right on it.

It was primarily their commentary about expense growth.

They had a very strong first half when it came to their, what they call their efficiency ratio, measuring expenses to revenue.

Particularly in the second quarter it was very good.

But they didn't lower the, uh, ex- uh, efficiency ratio for the full year, which remains around 60%, suggesting expenses could grow faster in the second half of the year, and they pretty much verified that.

And that was the turning point in the stock during the earnings call.

Your thoughts on all of that.

What do you make of the reaction to the banks and probably more specifically to the flattening of the yield curve?

I think, Melissa, you put your thumb on it.

It's the flattening of the yield curve that may have investors a bit concerned.

Because coming into the year, a steepening curve was what many investors were anticipating.

Obviously, we had the conflict start in February and the consequences of the Middle East conflict with the higher oil prices and now maybe higher inflation.

You all have been discussing it just a moment ago.

So that changes the narrative a bit.

Is there more juice left in this squeeze, as they say? Guy, we're

How much is there left in the stock run?

run?It's a really good question, Melissa, because it was a really landmark quarter for, um, Citi.

They had record quarterly revenues.

Their markets business, I believe, you know, had over $7 billion in revenue.

It was the best quarter ever.

So there's been a l- a number of things that went right for them, deservedly so.

But to your point, you know, Jane Fraser has done a very good job in turning this company around, and there's still room to run.

Sorry, it's a long question, um, and I'm leading the witness.

Um, you know, how much weight would you put on all of those different elements that the banking system has related to private credit, as well as just what it says about credit quality in general and the health of the balance sheets across, uh, the system?

The health of the balance sheets are very strong.

The capital levels of the US banking industry and liquidity is the best we've seen in decades.

We're not as worried about the private credit exposure to the banks as we were going into 2007 with the subprime crisis or back yet in 1990 with the commercial real estate crisis.

Yes, banks do have some exposure, but it's quite low and it's very manageable.

Does that mean that they're not gonna have maybe some credit losses in lending to BDCs that are owned by the private equity and private credit firms? Possibly that will happen later this year or next year.

But again, we think it's very manageable.

Of course, there's the comment period and so forth, but I'm curious what you make of the potential strategic changes that banks may talk about now that we've seen some of these proposals out in the open, uh, on the quarterly conference calls, what it means for their own M&A, what it means for the types of lending they do and all of that.

The but is for, for now.

now.Right? And we're seeing that in the warehouse specifically, robots are getting great at picking items out of buckets, which is sort of the last frontier in these Amazon warehouses.

So we could end up seeing a pattern where employment spikes because these companies do better, but then they find a way to automate that extra employment, and then it goes down.

And that could ultimately lead to real crises in our economy if we end up automating some of the core jobs that make the economy work.

Um, if this is a buying opportunity, h- why do you feel like the recent sell-off is misplaced? What is the market not understanding about the current bank environment?

Thank you, Leslie, for having me on the program.

And I think, Leslie, this is very similar to what we saw last year.

You might recall, um, last year we had the tariff stories that were going to lead to possibly a recession in 2025, which meant you didn't wanna own bank stocks.

In that context, it's difficult to make the bull case for banks, isn't it? I mean, if you're, if you're o- of the belief that AI is going to displace all these jobs, it's hard to say, "You know, I'm gonna be bullish in banks."

Well, w- time will tell.

Um, it's certainly not something that we're too concerned about over the near term, because I- we haven't seen real evidence of that happening.

Uh-...

And what I'd like to share with investors when we talk to our clients is to look at what the microcomputer did, and Excel spreadsheets, and word processing, and it really advanced the technology in banks and all of the internet applications, digital banking, and there, and thousands of new jobs were created.

Now, certainly, the traditional jobs were lost, no doubt about it.

That will happen with AI.

Is there a reason you see that happening, and what would you do with those?

Here, uh, with Gerard Cassidy on the old days of eighteen thousand banks.

Back then, we had eighteen thousand banks and thrifts when you and I were young men, and today we're down to about forty-three hundred.

So the consolidation that was brought on by national interstate banking under the Clinton administration, when they signed that law, has really led to the consolidation.

As a result, what has happened is that the banks have become more efficient, which has led to much better profitability, while at the same time, their capital levels are meaningfully higher than they were twenty, thirty years ago and, of course, since the financial crisis.

And then I want to hear which names are the winners.

You're right.

The segment this year that has done extremely well are the large money center universal banks and the investment banks.

When you look at the likes of Citigroup or Goldman Sachs, Morgan Stanley, Bank America, all of these companies have done very well.

And this has been driven by the strength in the capital markets.

The regional banks have lagged.

But if the outlook proves to be correct, where we have the Fed cutting another 25 to 50 basis points, you get a steeper yield curve, Long growth accelerates next year.

You know, why do you want lower rates right now?

What have we learned this morning, and how does that inform your view of what we can expect tomorrow?

John, I think what we should expect tomorrow is the fact that, um, the trading results from Morgan Stanley and BankAmerica will likely mirror what you saw today from the big banks, which were very good.

You know, the FICC numbers in particular year over year were strong, and we anticipate that we'll see that for the others.

Also, the investment banking results, uh, as you pointed out already earlier in the show, were also strong, and we should expect that as well for BankofAmerica and Morgan Stanley.

And finally, on BankAmerica, since they've got a real deep dive into the consumer, the consumer numbers we've seen today, whether it was JP Morgan, Citi, or, uh, Wells Fargo, all were resilient, and we would expect BankAmerica's numbers to be resilient in that area as well.

How much do you expect this success to be mirrored in smaller and mid-sized banks that are going to report that might be more leveraged to those middle market clients?

clients?It's going to be interesting, Lisa, because certainly, uh, Wells has got a good read on the middle market of the US.

It's predominantly a US bank, and the regional banks, though, could also benefit from the fact that the capital expenditures that we're anticipating, due to the- the big, uh, beautiful bill that was passed in July, with the depreciation of 100% of those capital (laughs) expenditures in year one, could drive commercial and industrial loan demand.

Is JP Morgan unique and superior or are the others lagging? Which is it?

Um, I think it's that JP Morgan is unique and superior, partly due to the fact, you might recall during the pandemic, there was a surge of deposits in the US banking industry due to the actions taken by the Federal Reserve and the US government.

JP Morgan, along with the other big banks, saw a big increase in their deposits and JP Morgan invested them in a very short duration portfolio, cash up at the Fed and overnight funds, whereas other banks took duration risks like Bank America.

As a result, their profitability at JP Morgan is far superior than their peers.

The other important part, Tom, is that their efficiency ratio, expenses divided by revenues, is around-

positive.So, uh, Gerard, here, uh, is there, is it by the group here? Is it try to be selective? How are your clients thinking about some of these big banks? 'Cause boy the earnings were with the, today and yesterday, look pretty solid across the board.

They really do, and it's a good question, and you can certainly buy the group through one of the ETFs that we're all familiar with.

But I think if you are in the camp that the Federal Reserve could be lowering short-term interest rates between now and the end of the year, 25 to 50 basis points, maybe a year from now, the short end of the curve is down 75 or even 100 basis points, a, a positive slope to the curve, assuming the tenure stays anchored at four and a half percent, a three and a half, three and three-quarters Fed funds, four and a half tenure is very positive for the banks.