Next Treasury Sec. 'should have the heart of Main Street and the head of Wall Street': Mike Mayo
Mike Mayo, Wells Fargo Senior Analyst, joins Yahoo Finance’s Zack Guzman and Brian Cheung join to talk about what could happen to big banks after the election.
Video Transcript
ZACK GUZMAN: Obviously, with the election coming up, there are a lot of questions to ask about how it’s going to influence different sectors versus different sectors. And right now, I want to spotlight financials, since that sector is the second worst performer here on the year, trailing only energy, still up by about 20% year to date. It raises questions about how those big banks might fare depending on who wins the election.
Here to break that down for us is Mike Mayo, Wells Fargo senior analyst, along with Yahoo Finance’s Brian Cheung. And Mike, it’s good to be chatting with you again, man. I want to start here with kind of the question that really exists for all these companies, not just banks, but really, all businesses out there waiting to see how this pandemic develops from here.
What we’ve seen with the big banks is, obviously, loan loss provisions stacking up here. So how are you assessing the bull, bear case around the election for those companies right now?
MIKE MAYO: Well, with Halloween coming tomorrow, we say, don’t be too spooked by the elections. You can be a little spooked, but don’t be too spooked. You know what’s interesting is that bank stocks relative to the market have outperformed over the last several Democratic presidents. And they’ve underperformed under Republican presidents. And that’s kind of counterintuitive.
Now, correlation is not causation, but it does highlight that the economy trumps the presidency. And three specific things– number one is that regardless of who is elected, you’re likely to see big additional government stimulus, an increase in the 10-year Treasury yield. And that would be good for banks.
Number two would be that good politics equals good economics. So regardless of the tail risk ideas that are out there, I think in the end, you do what’s right for the economy. And number three, what’s often forgotten is the current regulations are based on Dodd-Frank, which was mostly a Democratic bill that became law. So, you know, good job. Over a decade ago, it made banks much more resilient.
So we don’t see banks being in the bull’s eye for major changes going ahead. So that just takes us back to the fundamentals, and that’s where banks we see we’re living an income statement recession, but not a balance sheet recession. And that’s a huge difference versus the global financial crisis.
BRIAN CHEUNG: Mike, it’s Brian Cheung. Now how spooked, though, should be banks in a Biden administration if there is to be an Elizabeth Warren as Treasury Secretary?
Because you mentioned that, yes, Dodd-Frank is the name of the game, which was installed by the Obama administration 10 years ago. Even members of the progressive wing inside the Federal Reserve like Lael Brainard have said that capital levels look OK right now. But is there a regulatory risk of clamping down further on the banks under a Biden administration?
MIKE MAYO: Well, there is certainly some potential for a rollback for some of the easing of the regulations. I’d put that more in the category of tweaks as opposed to major overhaul. I mean, there’s always been mention of a modern day Glass-Steagall and all these other things. I think those are really tail risks.
When it comes to the next Treasury Secretary, I think whoever is selected should have the heart of Main Street and the head of Wall Street. So it needs to be somebody who, if we’re in a time of turmoil or crisis, and we are living through the pandemic– these are sobering times– and you have the Dow down, you know, 2,000 or 3,000 points for a day because you have concerns with the plumbing, you need somebody with the standing to be able to talk to the markets and reassure the markets under that type of situation.
BRIAN CHEUNG: Now, Mike, you did bring up Main Street. And just kind of as a news peg for today, the Federal Reserve announced that it was going to lower the minimum loan size under the Main Street funding program from 250,000 to 100,000, hoping to incentivize increased uptake.
But one problem has been, A, that businesses on Main Street don’t want to lever themselves up with more debt, but then, secondly, whether or not it’s actually profitable or worth it from an effort standpoint for the banks to be doing these types of loans.
What’s the view from the big bank angle of their participation in the Fed Main Street program, and do you think that the changes today will change the calculus for them, wanting to get more aggressive in that program?
MIKE MAYO: Well, Brian, I’ll repeat what I said. I mean, these are sobering times for our economy and the people impacted. And to some degree, there’s been a hole in the donut. The largest companies have had access to the capital markets. You’re seeing them borrow freely. And they’re recovering OK.
The smallest firms benefit from the PPP program, many small business loans made. It’s those companies in between that have potential issues. They don’t have access to the capital markets. They haven’t been part of the PPP program.
You know, hopefully, this change on the margin should help, will help enough. That waits to be seen. That’s one reason why we have commercial loan laws increasing over the next few years, along with the rest of the industry. So I guess I’d say it waits to be seen. But every little bit helps.
ZACK GUZMAN: And Mike, in regards to how the yield curve might change here depending on whether or not we get a Trump presidency for four more years or Biden wins, it does sound like you’re taking a look at which banks will fare best as that curve steepens here. You seem to like Bank of America on that front. Talk to me about how it changes across, bank by bank.
MIKE MAYO: Well, these low interest rates are one of the biggest taxes on banks that you’ve seen. I mean, it’s really, you’ve had the biggest decline in the net interest margin in 100 years. I mean, it’s been crushing for bank profitability. So any reversal– and you have seen the 10-year yield go up a little bit this week– helps banks get to more normal profitability.
And regardless of who wins the presidency, we see additional government spending, higher deficits, and we think that leads to a 10-year Treasury yield that’s 50 basis points higher by the end of next year.
BRIAN CHEUNG: Mike, I do want to ask in terms of the earnings season that we just got past, I guess, two weeks ago it was– time doesn’t matter anymore. But what was the big takeaway from a bank operating standpoint? Because it does seem like in this low rate environment, as you just laid out, the real key here to getting bottom line numbers that can beat the Street’s estimates are expense management.
So do you feel like the banks have done it well? I know you have strong feelings on Citi, but broadly speaking, do you feel that they’ve done that OK and will do that OK in the coming quarters?
MIKE MAYO: Well, you’re absolutely right. I mean, talk about revenue headwinds. I talked about the worst decline in the net interest margin in 100 years. You also had the biggest decline in 100 years in net interest income, total revenues, and the biggest buildup of credit reserves in history. That’s this year.
So what can you do in the face of that? You need to become more efficient. Banks will become more efficient. You know, this is a tricky time because banks have extra costs related to the COVID situation. You paid frontline employees bonuses. You paid more money to– there’s plastic partitions in branches. You’ve waived all sorts of fees.
Having said that, if you strip all that out, I think banks are on the cusp of becoming much more efficient. On the retail side from digital banking, you’re seeing an acceleration of digital banking, like, 5 to 10 years faster than what you otherwise would have expected. And that’s because customer behavior has changed.
And even on the wholesale side, I mean, talk about closing big deals over Zoom. So I think Wall Street and the banking industry is learning how to deal with doing more, using technology. So unfortunately, that will mean less people working in the industry. That will mean more streamlining. But that should also mean more efficiency and better customer service.
ZACK GUZMAN: Yeah, tricky times to dig through all of this on the eve of trick or treating with Mike Mayo. I appreciate you coming on. Don’t be too “spooked,” the word there from Wells Fargo senior analyst. Appreciate you coming on, as well as Yahoo Finance’s Brian Cheung there.
