One on One with Fred Cannon of Keefe, Bruyette & Woods
Thursday, October 15, 2009
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SUSIE GHARIB: Now in the financial sector, a mixed earnings picture today from two of the nation's biggest banking firms. Citigroup posted earnings of $101 million. But after adding in preferred dividends, Citi actually reported a third quarter loss of $0.27 a share. It was still much less than analyst estimates. Meanwhile, another spectacular quarter for Goldman Sachs with profits tripling. The giant investment firm earned $3.2 billion or $5.25 a share in the third quarter. That was $1 higher than estimates. Big gains in its trading operations contributed to the strong showing.
Joining us now with more analysis on the outlook for the financial sector, Fred Cannon, co-director of research and chief equity strategist at KBW. Hi, Fred.
FREDERICK CANNON, CO-DIR. OF RESEARCH, KEEFE BRUYETTE & WOODS: Hi, Susie.
GHARIB: Give us your overall analysis of the banking sector. Are these financial firms in better financial shape or are they still at risk?
CANNON: Well, they're in better financial shape, certainly than we were in March. We've seen a couple things happen that have been very good. Number one, we've seen the liquidity come back in the sector. There's no crisis in terms of a loss of liquidity. Secondly, these banks have been able to go out and raise capital, strengthen their balance sheet. And third, let's look at the markets. The markets are up. And those banks that are tied closely to these markets are doing pretty well.
GHARIB: But it seems like the financial firms that have some connection with investment banking or trading are doing well, like JPMorgan and Goldman Sachs, but if you have a lot of consumer lending, like Citi or credit cards, they are struggling. Is that a fair analysis?
CANNON: That is a fair analysis. JPMorgan and Goldman Sachs are great examples of companies with a lot of revenue tied to these markets. However, even if you look underneath it, JPMorgan and the other banks who are tied to the consumer, tied to real estate are still struggling.
GHARIB: What's your sense of Citi? How is it doing?
CANNON: Well, Citi is in what we would have to call the mother of all workouts. They've got a third of the bank that they are trying to work through. They're trying to get a business model. They still have something that's quite strong and that's their global payments platform. So they are starting to try and push that good bank stronger, but they still have a lot of bad bank there.
GHARIB: And what about Bank of America? It reports its quarterly numbers tomorrow. It has a big consumer lending business. What do you expect to see in their results?
CANNON: We don't expect to see the kind of numbers that we saw in JPMorgan and Goldman really because what are you talking about, if you look at the mix of their business it is much more the kind of banks on the Street that still have those big consumer portfolios tied to real estate, tied to an over levered consumer. So we think they will be OK, but still tough. The other thing you have to see, is the banks that are still tied closely to the government, Citibank, Bank of America aren't performing as well as those who have been able to pay the government back such as JPMorgan and Goldman Sachs.
GHARIB: Here is another issue that's going on at Bank of America. Late today the bank confirmed that the Obama administration's pay czar, Kenneth Feinberg has asked Kenneth Lewis who is stepping down as CEO of Bank of America, to forego any salary and bonuses for 2009 and he has accepted that voluntarily. So is this something that we will be seeing at other financial firms, maybe like at Citi? What is your sense of the implications of this kind of move?
CANNON: A couple things. Number one is I think it's going to make a lot of banks want to repay the government very quickly to avoid that. Certainly their CEOs are going to encourage that. But also it shows you that the government wants something back for what they've given. And they don't want to see excessive pay especially for the companies where they were critical to the success of those companies getting through this financial crisis. They want something back for the taxpayers, not too much to the managements before they let the shareholders really benefit.
GHARIB: What is this going to mean for the banking industry in terms of competition, attracting talent, you know, what do you see of wider implications if any?
CANNON: What we are seeing right now in the banking industry is winners and losers. We're still seeing as you know we're up to close to 100 banks who are failing. We think that number is going to top 500. There are a lot of banks who aren't going to make it through the next year and a half. On the other hand, we're starting to emerge, see a number of companies emerge, even some smaller banks. A small bank out in California, West America produced a great quarter. They stayed out of the problems. They are rolling out some of these failed institutions so you are starting to see a real shift between winners and losers.
GHARIB: Let's talk about what your sense of who are the winners and losers. Goldman Sachs, JPMorgan, Bank of America, Citi and Morgan Stanley, all of their stocks were down today. Are any of these, are you recommending any of these stocks for investors to buy at this time?
CANNON: We are recommending a number of stocks. Number one is we think that in this rally in the bank stocks that we've seen this quarter, we saw kind of all bank stocks rally. So we're trying to recommend right now really focusing on those banks that are going to be the winners because we think they're pretty reasonable. Goldman Sachs and JPMorgan are two of those. We think they are going to be winners. We still think there is some value in Bank of America and are recommending it. A couple others where we don't see value are Wells Fargo and TNC, banks where we think the capital is still thin, probably have to raise some capital to get through this and in the case of Wells Fargo, still have that government TARP on their balance sheets.
GHARIB: What about Morgan Stanley? It reports earnings next week. What is your view on that company?
CANNON: We like Morgan Stanley. We think two things. Number one is they are going to benefit the same way Goldman Sachs is from a lot of what occurred during this quarter in terms of the capital markets. Secondly Morgan Stanley is taking a little bit less risky approach to the future. They are focusing their business on asset management. We think that's a good thing on a go-forward basis and something they can really make some money on.
GHARIB: Any disclosures to make about all of these stocks that we've just discussed?
CANNON: I don't own any of them.
GHARIB: OK, Fred, thanks a lot, appreciate you coming on the program, really good information.
CANNON: Thanks, Susie, it was a pleasure.
GHARIB: My guest tonight, Fred Cannon, director of research and banking analyst at KBW.
