Bloomberg Audio Studios, podcasts, radio news joining us now. I'm so pleased to say, as Tamashad, CEO of a Kbwstfel company, Tom, a lot of people have been raising this issue about whether we're fighting the wrong war and whether maybe some of what the regulators are targeting with banks is counterproductive for the current cycle. Do you think that that's going to be in focus later this week?

Bloomberg Audio Studios, podcasts, radio news joining us now. I'm so pleased to say, as Tamashad, CEO of a Kbwstfel company, Tom, a lot of people have been raising this issue about whether we're fighting the wrong war and whether maybe some of what the regulators are targeting with banks is counterproductive for the current cycle. Do you think that that's going to be in focus later this week?

Well, I think first of all, with the stress test, the first thing you're going to see is that the banks are in very, very good shape. Remember, the stress tests were set up to look at an adverse scenario to show the marketplace that they have plenty of capital to withstand that. And we think that the conversation is going to move away from that to individual company analysis quickly, which is actually a really positive statement about how the industry has been continuing to build capital. The other thing is the industry has not only been building capital for the stress test, but the industry's been building capital get ready for Basel three endgame.

Well, I think first of all, with the stress test, the first thing you're going to see is that the banks are in very, very good shape. Remember, the stress tests were set up to look at an adverse scenario to show the marketplace that they have plenty of capital to withstand that. And we think that the conversation is going to move away from that to individual company analysis quickly, which is actually a really positive statement about how the industry has been continuing to build capital. The other thing is the industry has not only been building capital for the stress test, but the industry's been building capital get ready for Basel three endgame.

So that's been the big story.

So that's been the big story.

So I think the first box to check is that the industry is going to come out it's being very well capitalized. And then they're going to be individual companies that are pivoting in one direction or another.

So I think the first box to check is that the industry is going to come out it's being very well capitalized. And then they're going to be individual companies that are pivoting in one direction or another.

So there's a lot to unpack.

So there's a lot to unpack.

There's a question about which banks, let's start here, are really strong and resilient, right. I mean, it's one thing to say JP Morgan and Bank of American and City Group pre are going to fail. I don't think anyone is saying that they're at risk of any kind of real potential turmoil. It's really the regionals. At what point do we get to the confidence there?

There's a question about which banks, let's start here, are really strong and resilient, right. I mean, it's one thing to say JP Morgan and Bank of American and City Group pre are going to fail. I don't think anyone is saying that they're at risk of any kind of real potential turmoil. It's really the regionals. At what point do we get to the confidence there?

So there are twenty three banks in this test that's coming on Wednesday, so they start to go down into the super regional category. I think for all twenty three banks, the market's going to say they have plenty of capital. I think for the regional banks, the regional banks are still in pretty good shape, except for the ones where there might be more concern around real.

So there are twenty three banks in this test that's coming on Wednesday, so they start to go down into the super regional category. I think for all twenty three banks, the market's going to say they have plenty of capital. I think for the regional banks, the regional banks are still in pretty good shape, except for the ones where there might be more concern around real.

Estate exposure for example.

Estate exposure for example.

And you're seeing a downturn in some of their results, but by and large, and again I think it's.

And you're seeing a downturn in some of their results, but by and large, and again I think it's.

Very narrow as to where the concern is.

Very narrow as to where the concern is.

Just in preparation for coming today, I was interested about dividends. I went back and looked at that there are seventy four banks that are in the KEEF Bank Index or regional bank Index.

Just in preparation for coming today, I was interested about dividends. I went back and looked at that there are seventy four banks that are in the KEEF Bank Index or regional bank Index.

If you look at since the beginning.

If you look at since the beginning.

Of last year, five of them cut or eliminated their dividend. Meanwhile, fifty four of them raised their dividends over that period. The industry is actually in really, I think, pretty good shape for the challenges that we've had, and I think that the areas of concern are generally more narrow than you would think. And then remember last year's bank failure moment was really around a liquidity crisis, and what we realized is that some banks had gotten off sides in terms of their concentrations and their deposits. I don't think that that was a broad based trend even so.

Of last year, five of them cut or eliminated their dividend. Meanwhile, fifty four of them raised their dividends over that period. The industry is actually in really, I think, pretty good shape for the challenges that we've had, and I think that the areas of concern are generally more narrow than you would think. And then remember last year's bank failure moment was really around a liquidity crisis, and what we realized is that some banks had gotten off sides in terms of their concentrations and their deposits. I don't think that that was a broad based trend even so.

I mean, every now and again you hear of another bank that maybe isn't hedged to interest rates. The latest one was a large bank out of Japan, I think their largest agricultural bank, who was basically positioned for rates coming lower. Obviously that hasn't happened yet. When you hear these incidents of pockets of stress, do you think that these are still the rare bank that have been hedged against the current rate environment, or if it's higher for longer, do we hear more of this.

I mean, every now and again you hear of another bank that maybe isn't hedged to interest rates. The latest one was a large bank out of Japan, I think their largest agricultural bank, who was basically positioned for rates coming lower. Obviously that hasn't happened yet. When you hear these incidents of pockets of stress, do you think that these are still the rare bank that have been hedged against the current rate environment, or if it's higher for longer, do we hear more of this.

So I think with the focus for this conversation right now being in the US, I'll go to our Bank America upgrade, which we did recently. We have earnings models by quarter for net interest income. I think just about all of the two hundred and twenty banks we follow, nearly all are going to hit a bottom on a quarterly basis, either last quarter or this quarter. That's the reason why we upgraded Bank America is the second quarter is the inflection point, and it gets better from here. So it's all a question of timing. Let me there's another point. The five month, five year, three month, five year, you'll curve spread is the most important for banks. I know that that plenty tentions on two tens. That's not the key for the banks. It's been sixty two years since we've seen the length of time for the inversion that we've had. So all things really kind of need to do is get a little bit less bad for these banks to do a.

So I think with the focus for this conversation right now being in the US, I'll go to our Bank America upgrade, which we did recently. We have earnings models by quarter for net interest income. I think just about all of the two hundred and twenty banks we follow, nearly all are going to hit a bottom on a quarterly basis, either last quarter or this quarter. That's the reason why we upgraded Bank America is the second quarter is the inflection point, and it gets better from here. So it's all a question of timing. Let me there's another point. The five month, five year, three month, five year, you'll curve spread is the most important for banks. I know that that plenty tentions on two tens. That's not the key for the banks. It's been sixty two years since we've seen the length of time for the inversion that we've had. So all things really kind of need to do is get a little bit less bad for these banks to do a.

Little bit better.

Little bit better.

And I think that pivot is right here right now, and these banks have a lot of bad news in them. As long as we don't get a hard landing, I think you're going to see a continuing quarterly improvement.

And I think that pivot is right here right now, and these banks have a lot of bad news in them. As long as we don't get a hard landing, I think you're going to see a continuing quarterly improvement.

Over the next four or five quarters.

Over the next four or five quarters.

And also too, there are specific types of banks like more than others. But this is a great opportunity if you can look longer term.

And also too, there are specific types of banks like more than others. But this is a great opportunity if you can look longer term.

We think, I know you want to stay in the US, but I have to take you to Europe, especially given we're going to get one of the first rounds of French voting on the thirtieth. You've had the likes of JP Morgan really be courted by mccraul and saying come move to Paris in a post Brexit world, and you've seen other US banks do something similar, really building up operations and talent bases in Paris. If there is political volatility, what happens.

We think, I know you want to stay in the US, but I have to take you to Europe, especially given we're going to get one of the first rounds of French voting on the thirtieth. You've had the likes of JP Morgan really be courted by mccraul and saying come move to Paris in a post Brexit world, and you've seen other US banks do something similar, really building up operations and talent bases in Paris. If there is political volatility, what happens.

So I think it's really the big picture of what's happening with the economy. One thing I would note is over the last twelve months banks have been the.

So I think it's really the big picture of what's happening with the economy. One thing I would note is over the last twelve months banks have been the.

Leading group in Europe.

Leading group in Europe.

Again, there was so much bad news in these stocks, and really what you need in Europe is you needed some improvement in the rates. Negative interest rates were certainly adversely affecting the banks. Our sense, as it all comes down to what the economy is doing, we still think there's upside for the banks, because the banks have done a lot to stabilize themselves over the last several years, and many of those stocks still trade at sixty percent of book value. So we think that the bigger banks are stable in Europe, and it's a question now of what's happening in the economy.

Again, there was so much bad news in these stocks, and really what you need in Europe is you needed some improvement in the rates. Negative interest rates were certainly adversely affecting the banks. Our sense, as it all comes down to what the economy is doing, we still think there's upside for the banks, because the banks have done a lot to stabilize themselves over the last several years, and many of those stocks still trade at sixty percent of book value. So we think that the bigger banks are stable in Europe, and it's a question now of what's happening in the economy.

Does it consider we've heard last week from the FED in terms of living wills and some of the US biggest banks finding some shortcomings when it comes to likes of Bank of America City.

Does it consider we've heard last week from the FED in terms of living wills and some of the US biggest banks finding some shortcomings when it comes to likes of Bank of America City.

You know, you remember that teacher in college who was always a hard greater, who never really gave out the oh, this is perfect, You're all done, you don't have to do anymore. I will imagine for the rest of my career, every year there will be more work to do on a living will. Okay, And if you look at the living will, JP Morgan had work to do, City Group had work to do. Really, these living wills were evolving with the risks of the moment. And also, I would say, given last year's bank failures, the FDIC has probably sharpened their pencil on these living wills. But so I would view it as as a living, breathing thing. I didn't see our view on it is the banks are going to spend more money at preparing for them, but that there was nothing devastating or really significant in what we read in the results.

You know, you remember that teacher in college who was always a hard greater, who never really gave out the oh, this is perfect, You're all done, you don't have to do anymore. I will imagine for the rest of my career, every year there will be more work to do on a living will. Okay, And if you look at the living will, JP Morgan had work to do, City Group had work to do. Really, these living wills were evolving with the risks of the moment. And also, I would say, given last year's bank failures, the FDIC has probably sharpened their pencil on these living wills. But so I would view it as as a living, breathing thing. I didn't see our view on it is the banks are going to spend more money at preparing for them, but that there was nothing devastating or really significant in what we read in the results.

To say, the reason why I started by asking you, are we looking at the wrong risks is because in the past couple of years, first of all the risks that I hear about what profitability opportunities do some of these smaller banks have when they're facing off with the rush of money into private capital. That's a big question at this point.

To say, the reason why I started by asking you, are we looking at the wrong risks is because in the past couple of years, first of all the risks that I hear about what profitability opportunities do some of these smaller banks have when they're facing off with the rush of money into private capital. That's a big question at this point.

Oh, there are some tectonic plates that are moving that if you want, you got to, if you want, take a step back and not look at the snapshot and look at the movie. Yes, and really what it comes down to was funding and liquidity and deposits. Banks don't fail because of capital. Banks fail because there's a bank run, and there have been very few of them in the United States. So the capital's fine, but really, what's happening in the deposit base. I think the greatest missed opportunity from last year is there's not been FDIC deposit insurance reform because it puts too much pressure on the small banks and it's encouraging market share to move up gap to the.

Oh, there are some tectonic plates that are moving that if you want, you got to, if you want, take a step back and not look at the snapshot and look at the movie. Yes, and really what it comes down to was funding and liquidity and deposits. Banks don't fail because of capital. Banks fail because there's a bank run, and there have been very few of them in the United States. So the capital's fine, but really, what's happening in the deposit base. I think the greatest missed opportunity from last year is there's not been FDIC deposit insurance reform because it puts too much pressure on the small banks and it's encouraging market share to move up gap to the.

Banks that have proven that they're too.

Banks that have proven that they're too.

Big to fail, and it also yeah, so that's the biggest And then number two is when it comes to stock selection. The way that regional banks, smaller community banks earn money in the biggest banks is very different. The smaller banks have more real estate and more spread income. They are going to be slower to rebound the bigger banks have. Bank America, amongst the biggest banks, has some of the least amount of commercial real estate exposure. These bigger banks have already made the shift away from that, and that's why we are leaning in heavier on these bigger banks for the stock ideas. We think it's going to take a little bit more time for the regional banks to turn.

Big to fail, and it also yeah, so that's the biggest And then number two is when it comes to stock selection. The way that regional banks, smaller community banks earn money in the biggest banks is very different. The smaller banks have more real estate and more spread income. They are going to be slower to rebound the bigger banks have. Bank America, amongst the biggest banks, has some of the least amount of commercial real estate exposure. These bigger banks have already made the shift away from that, and that's why we are leaning in heavier on these bigger banks for the stock ideas. We think it's going to take a little bit more time for the regional banks to turn.

There might be safety and even profitability in some of the bigger banks. There isn't so much of the classic market making. And this is the other risk that people talk about liquidity risk on another level, that they're not going to be able to shepherd this amount of bond auctions into the market and allow the trading to commence with the same kind of stability that has in the past.

There might be safety and even profitability in some of the bigger banks. There isn't so much of the classic market making. And this is the other risk that people talk about liquidity risk on another level, that they're not going to be able to shepherd this amount of bond auctions into the market and allow the trading to commence with the same kind of stability that has in the past.

Does that keep you.

Does that keep you.

Up at night?

Up at night?

No, you're talking about the treasury market.

No, you're talking about the treasury market.

And the treasury of particular, given the fact that the market has swollen to such a huge part.

And the treasury of particular, given the fact that the market has swollen to such a huge part.

But it's also the credit market.

But it's also the credit market.

I hear about this with public credit as well well.

I hear about this with public credit as well well.

What I take out of that is passive investing is at the highest degree of our lifetime and growing more and in many ways, it's changing the investment business. So there are so many of these indices and index driven funds that so much of that, and it's impacted the liquidity of a lot of the smaller companies. So if you look at a typical mid cap stock, it may have thirty five forty percent of their shares owned by passive investors. And it's happening in the credit markets as well, so when you get to individual credits. So that's pushing more of the trading into private markets away from some of the public markets, and so I think that is going to have an impact.

What I take out of that is passive investing is at the highest degree of our lifetime and growing more and in many ways, it's changing the investment business. So there are so many of these indices and index driven funds that so much of that, and it's impacted the liquidity of a lot of the smaller companies. So if you look at a typical mid cap stock, it may have thirty five forty percent of their shares owned by passive investors. And it's happening in the credit markets as well, so when you get to individual credits. So that's pushing more of the trading into private markets away from some of the public markets, and so I think that is going to have an impact.

So the way in which companies raise capital is all still evolving.

So the way in which companies raise capital is all still evolving.

Because there's this big private market that's grown a lot in the last four or five years.

Because there's this big private market that's grown a lot in the last four or five years.

Tamashad, awesome to hear from you. Thank you so much for being with us. Yes, thank Tavi Shouda of KBW

Tamashad, awesome to hear from you. Thank you so much for being with us. Yes, thank Tavi Shouda of KBW