Investors eye bank earnings amid pandemic

Yahoo Finance’s Alexis Christoforous and Octavio Marenzi, Opimas CEO, discuss bank earnings as the coronavirus pandemic drags on.

Video transcript

ALEXIS CHRISTOFOROUS: All right, most banks that reported their fourth quarter results this week managed to beat estimates during this pandemic. But investors didn't necessarily reward those companies by pushing their stocks higher. Joining me now for a closer look at the banks and the overall market is Octavio Marenzi. He is CEO of Opimas. Octavio, always good to see you. Just first off, an overview here. What did you make of the bank earnings we saw this past week? And what does it tell you or what themes did you see throughout those earnings reports?

OCTAVIO MARENZI: Well, I think it's two or three things that really stood out. First of all, there was this big divergence between how investment banking did and how your sort of bread and butter Main Street retail and commercial banking did. The investment bankers blew it out of the water. They had record quarters and years in terms of equities trading, fixed income trading. IPOs went through the roof. That side of the business did extremely well.

And then, you had a more sort of a subdued side on the retail banking, where revenues actually came down a bit. Things didn't look as good there. The positive news on sort of the more traditional retail and corporate banking side was a lot of the loss reserves that these banks had built up during the first lockdown turned to be out to be over reserved. So they were, back then, afraid of having huge credit losses with consumers and companies going bankrupt. That didn't come into fruition so they were able to avoid that.

So one of the reserves they put aside, they were able to now book back as revenues or book back as profits. So, investment banking did incredibly well. Retail banking, not so strong. Reserves were overestimated. And I think finally what we've seen is that there's just been a huge amount of cash that has flowed into banks. So the deposit bases have grown by 30%, 40% over the course of the past few months. But their loan levels have come down.

So the banks on the lending side are in a bit of a conundrum. They're awash with cash, and they've got no one to lend the money to. So everyone that would like to lend to us already got all the loans they'd like to have. And they're going to have to go down to a greater credit risk, less creditworthy borrowers, to try and lend that money out.

ALEXIS CHRISTOFOROUS: And, you know, interesting that you bring up a lot-- the banks having a lot of cash on hand and who is it that they're going to lend to. You know, when I see what's happening in the housing market, I would imagine that those banks who heavily rely on mortgage lending, would actually be doing well because of that boon. Is that one area where lending is actually a bright spot?

OCTAVIO MARENZI: Well, certainly, as you saw interest rates coming down, that's always a bright spot because people refinance their mortgages, and the banks make a lot of money out of that. So those banks who are heavily into mortgages, when that happens, do very well. So someone like a Wells Fargo does very well at that. As soon as interest rates have bottomed out, we'll start to inch up a bit.

Of course, that stops. You don't refinance your mortgage, take on a higher interest rate. You only do it when it's going down. So that sort of uplift has gone away. But they're still lending out heavily sort of for new mortgages and things of that sort. So that's going to continue for some time. But that is the side of the business that's done OK.

But things like credit card loans have gone down, consumer loans have gone down. A whole bunch of other lending has come down. Commercial mortgages have come down quite substantially. So those lines of the lending business have come down. So that hasn't been great. But also the interest margin that the banks are able to earn on those loans have come down as well. So we're living in sort of a very low interest rate environment.

I was about to say an ultra low interest rate environment, but that's not true. In the US, we're not quite there yet. It can still come down lower if you look at Japan or Europe. But it's tougher for the banks to make money when interest rates are that low.

ALEXIS CHRISTOFOROUS: Right, and I was just going to ask, there is no reason to believe that interest rates are going to move up in a substantial way any time soon. So given that environment for the foreseeable future, which bank stocks do you think, or banks in general, are best positioned as we move into the new year?

OCTAVIO MARENZI: Well, I think those banks that are still focused more on the investment banking trading side of things, so people like Goldman Sachs and Morgan Stanley, are better positioned. As you pointed out, those banks beat analysts' earnings forecasts. They did very, very well. Morgan Stanley had its best year ever in 2020. Goldman Sachs had a fantastic Q4. And the market turned around to sort of punish them. It seems like no good deed goes unpunished.

So, Goldman Sachs' stock prices down 5% from where it was just a couple of months ago. And Morgan Stanley's stock price, despite the fact it beat all the records, is sort of moving sideways. It's enough to make you feel kind of bad for these investment bankers that their stock prices haven't gone up. But I think those two banks will continue to do quite well into the next quarter of next year.

ALEXIS CHRISTOFOROUS: All right, Octavio Marenzi, CEO of Opimas, always good to see you. Thanks for your time today.