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- [00:00]
Indiana University Announcer
Indiana University is shaping the future of healthcare, advancing discoveries that become treatments for Alzheimer's, obesity and cancer and training the providers trusted to deliver them. See how IU solves what's next iu Edu Impact.
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Bloomberg Audio Studios Announcer
Bloomberg Audio Studios Podcasts Radio.
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John
News let's stick with earnings Zions reporting a beat on earnings with a net income of $222 million despite a $50 million loss from an ALLE 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.
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Bob Diamond
Good morning, John.
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John
It's good to see you, sir. 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.
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Bob Diamond
In regional banks is. 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 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 four and a half thousand. It has the support of Secretary of the Treasury Besson that consolidation is necessary makes the banks more competitive. It increases the ROEs, it makes them just better, better investments. And I think four and a half thousand banks, the United States of America, it's just, it's the wrong number. And so we see this going over the next two to three years to closer to a thousand or fifteen hundred. And we think also John, I think this is really important. The thesis here is one of consolidation and taking costs out. So many of these smaller community banks are just too small to succeed. They're very good banks. But to get a positive ROE with technology costs, with regulatory relation costs, virtually all of these banks have the same technology platform. So you eliminate one technology platform, many of them or all of them have regulatory relations staffs, you can eliminate one of those. 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 pnl. 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 four and a half thousand 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.
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John
It's happening. Your forecast is happening. We've seen it with 5th, 3rd and Co America. 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?
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Bob Diamond
I think, I think what we have seen is where the synergies are most clear is in state and close to state. 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, not in terms of where in the US it's more that in state and close to state is, is the preference.
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Bloomberg Audio Studios Announcer
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 meet mid tier banks are stuck with everybody else and that that's where the credit problems have really come. Has there been, you've seen that proves that to be true?
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Bob Diamond
No, we've seen idiosyncratic issues. We've seen certain banks that, you know, may have a specific name issue. But the truth is that, you know, 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.
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Bloomberg Audio Studios Announcer
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?
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Bob Diamond
I think the cutting rates, I mean if you think of the, 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, the, the treasury, the Fed, the SEC are encouraging consolidation. They're talking about simplifying capital rules. They're, they're, they're talking about, you know, endorsing these mergers and this, this consolidation. And then you have rates at funding four to four and a quarter percent 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, stays stable and strong, it's a great environment for banks.
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Anne Marie
But you're forecasting at least that 4,500 number to be cut in half in the next three years, right? More than, more than that. How is that possible?
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Bob Diamond
I think one of the situations we faced prior to this administration is there wasn't quite the same support for approving mergers, was it? Elizabeth Warren and Bernie Sanders, a little bit on the edge. Like, I'm very, very surprised, Anne 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 JPMorgan 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 going to 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 their, expand what they do.
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John
But we got 30 seconds left with you, which is not enough. I know.
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Bob Diamond
Oh, come on, give me more.
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John
The mayoral race in New York City.
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Bob Diamond
Yes.
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John
The beating heart of capitalism and the socialist is ahead. What's your brief take on what's happening in this city?
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Bob Diamond
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 months. The city was really hit by Covid. 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.
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John
You managed to answer that question without answering. He's running top time and everyone Indiana.
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Indiana University Announcer
University is shaping the future of healthcare, advancing discoveries that become treatments for Alzheimer's, obesity, cancer and other rare and complex diseases. And training the next generation of providers, doctors and nurses trusted to address health challenges with skill, compassion and purpose. From the lab to the clinic, from research teams to patient care, IU talent is driving medical innovation, improving health outcomes and strengthening communities. See how IU solves what's next iu. Edu Impact Bloomberg Daybreak is your best.
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Karen Moscow
Way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.
- [08:52]
Nathan Hager
And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.
- [09:05]
Karen Moscow
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- [09:12]
Nathan Hager
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