Bank Earnings: AI Opportunity, Rate Risks & Resilient Credit

SPEAKER_1 (0:00)

But to help us break down what matters most for bank stocks and earnings, we're now joined by Cheryl Pate, Senior Portfolio Manager at Angel Oak Capital. So Cheryl, thank you so much for being with us today. Let's start off broadly here. We heard from some of the most major, largest banks this morning, and it was objectively really strong, but markets are somewhat mixed on it. So how do you assess the earnings we've heard so from this morning and also the rest of the week with several more banks expected to report?

Cheryl Pate (0:26)

Yeah, I think there's a couple things we take away from results thus far. We were expecting that we would see a little bit lighter capital markets activity relative to second quarter certainly. So I think a lot of that was already in the numbers, but we did see lower fixed income trading results basically across the board.

I think that plays into the headline miss we saw on JPMorgan, for example, Goldman also missed on fixed income. Other than that, though, I would say, broadly speaking, pleased with what we're seeing in terms of the net interest income, the net interest income forward guides. JPMorgan put out their preliminary 2027 guide of consensus. So that I think is what's driving the positive momentum in the stock today.

And also on the credit side, I think we were pleased we saw good credit trends, particularly in credit card at Citi. And that is now sort of tracking towards the lower end of the range. So I think, you know, lots to like here despite some volatility around the fixed income numbers.

SPEAKER_3 (1:37)

Cheryl, you can't have any conversation in financial markets now without talking about AI. It's become a major theme for financial services firms largely. Where do you see the biggest opportunities, but also the biggest risks for some of these banks as they start to accelerate some of their adoption?

Cheryl Pate (1:56)

Yeah, I mean, I think we characterize it into two buckets really and sort of, you know, the financing boom will be, I think, a long term tailwind for the sector for capital markets revenues as the banks fund some of this growth. And then on the flip side, I think where, you know, we're hearing concerns as on the consumer deposits in particular, and, you know, does some of this get competed away in the likes of Muse and other agentic AI.

I think that is a little bit of an overblown fear, in my opinion. I think, you know, when you look at the banks, there are certainly, you know, cash optimization that happened back in 2022, 2023 when rates were moving up. And a lot of that type of optimization behavior has already happened. And then secondly, you know, when you think about the value of bank deposits and the ease of going into a branch on the consumer side, but I think even more importantly on the commercial side, the value of things like treasury services and the related suite of products that is offered to business accounts. There will be, you know, some optimization that goes on, but I think when you look at the banks overall, you know, they're looking to maximize, they're all in return. So there will be some investment spend, but I think some of the risks are overblown in today's market.

SPEAKER_1 (3:19)

Okay, and credit quality has remained, I mean, relatively resilient, but say now, what are the key stress points that we should be looking out for watching for the remainder of this week and the remainder of this year?

Cheryl Pate (3:30)

Yeah, I think, you know, when we're in a higher for longer environment, certainly we expect that will benefit on the revenue side in that you will see some margin expansion.

The flip side is, you know, sort of caution around the pace of rate hikes from here. And do we get to a tipping point in an extended tightening cycle that could increase borrow or stress? So that's, you know, what we're working on. But I don't think we're in that type of environment with one hike likely to come by year end and maybe another one in 2027 I think that is manageable. All signs that we're seeing in the credit quality metrics out today, I think supports that. But that's something that we're always mindful of.

SPEAKER_3 (4:11)

Cheryl, you've mostly described a healthy economic backdrop. You're not going to get much pushback from us on that front. But that said, the bank stocks, the financial sector has kind of lagged recently. What do you think the market is missing about this story? Or is this more of an opportunity cost story where there are just other areas that seem more attractive right now?