00:00 Speaker A
Big banks are kicking off the first quarter earning season, and we want to talk about the ways that you can incorporate the financial sector into your portfolio. Here with more, we’ve got Syrian Sharma, who is the Morningstar senior equity analyst. Great to have you here with us. So let’s just start with the state of banks right now, as the market sees lots of volatility around President Trump’s tariff policies. How will that flow through to what we hear from the banks?
00:31 Suryaansh Sharma
For sure. Uh, thanks for having me. Uh, I think the tariffs when they were initially announced, they were substantially more aggressive than what the market anticipated. And I thought what surprised the market the most was just the breadth and the scope of tariffs. So every good was targeted, every country was targeted. And I think it’s widely expected that if these tariffs, I mean, uh we have a 90-day pause, but the uncertainty is not over. Uh so if some sort of, I mean, these sort of tariffs going to place, it’s not going to be good for the US economy. And banks are tied at the hip with uh US economy’s macroeconomic performance. So if the economy’s not doing well, the banks will definitely not do well.
01:53 Speaker A
What are the key areas for investors who are trying to track the banks and their metrics over the course of this earning season that you’re going to be watching for?
02:13 Suryaansh Sharma
For sure, I mean, I I mean the most important thing is what happens with tariffs. And I think if if tariffs go in place, uh the profitability of banks would be hit uh across the board. Uh so the first thing is uh if we see uh macroeconomic weakness, fed may cut rates faster than expected. If uh uh fed cut rates faster than expected, a lot of banks in our coverage are asset-sensitive and their net interest margins can contract, which means that uh their NII could uh uh head downwards. Also, I think, given the very high uncertainty that we see, uh loan growth can can take a backseat because I mean companies would really hesitate to do do deals or expand a lot. Uh I think after the election, there was an expectation that we are going to see an M&A boom or an investment banking boom. Uh it seems like we’re going to get an investment banking bust. So investment banking revenues are inherently cyclical. Uh they may take a hit. Uh we’ve seen uh capital uh capital markets correct. So if capital markets correct, not good for asset and wealth management revenues. And finally, I think uh one of the biggest areas to keep in mind is what happens with provisions. So if bank banking as a business is just banking cycles can be uh very large. So let’s say the banking cycle is 15 years uh on average, we can have 14 out of those 15 years where the provisions are uh less than average, and then during a recession, the provisions can just spike a lot. And I think uh that’s what the market is worried about, and I think that’s what uh I’m really looking forward to hear hearing from uh bank CEOs in the upcoming uh earning season.
05:17 Speaker A
Well, we’ve already heard from some of those bank CEOs right ahead of the earnings, of course, as the largest US Bank CEO and chair Jamie Diamond is coming out talking about his own concerns about a recession related to some of the tariff policy that’ve been rolled out. So which of the banks is best positioned in and which one do you think is the top pick that investors should be considering?
05:51 Suryaansh Sharma
For sure, I mean, just giving some context on valuation. So even before the tariff uncertainty, I think we were one of the lowest on the street with respect to our uh fair value estimates. For banks, we we thought that, I mean, the bank valuations were already strong. Uh the banks were out earning in certain parts of their business. I mean, JP Morgan was doing a 20% return on equity with very high capital levels. This is just, you know, extremely strong profitability, and the markets were just extrapolating it. So we were already sort of on the lower side. Uh we think that currently the sector is undervalued, but only slightly undervalued. So I think what we are recommending clients is to be very selective uh in in uh in in going within the bank sector. Uh the names that we like are Bank of America, uh in in large money center banks, which is around 20% undervalued to our fair value estimate. We also like uh US Bank Corp, which is a wide mode-rated uh name and around 30% undervalued. Has very strong fee franchise, and I think those are the two names that we uh like in the current environment.
07:43 Speaker A
Seransh, thanks so much for taking the time here with us today. We’re going to be checking back in over the course of earnings. Appreciate it.
07:51 Suryaansh Sharma
Thank you.
