Big Banks Weather Interest Rates, AI Spending Tests Tech Trade

SPEAKER_1 (0:01)

Welcome back to Opening Bell. Getting you ready for the trading day. Joining me right now, David Ellison, Portfolio Manager, Hennessy Large and Small Cap Financial Funds. And a great person to have here on this morning as we kick off these bank stocks here. David, how are you feeling? What is your takeaway thus far? We've heard from JPMorgan City, also Goldman Sachs and Wells Fargo. Any takeaways yet?

David Ellison (0:24)

I think it's pretty much what people expected.

When they say they missed my number, well, maybe the street number was wrong and not the company number. But I think the credit is better or the same, so that's good. Margins are what they expected. They're not as good, but obviously rates have gone up. And I think loan demand, loan growth is better. Deposit growth is okay. The Wall Street income is a little all over the place because of what's happening. It's a very good environment, so you can't grow that 20 percent forever. And so I think they're in good shape, so that's good. I mean, that means that they're underpinning a strong economy and they'll be able to continue to do that.

SPEAKER_1 (1:07)

So as we think about, you mentioned a few of the things, the credit situation, margins, loan growth, deposits. So is this subject to, for example, Citi talked about the macro outlook, the market conditions. What does this tell you about the current economy, current market conditions?

David Ellison (1:26)

It tells you the economy is good. It has been good for a number of years now. It sounds like given the outlook that they're giving, the Wall Street income and some of the loan demand metrics that they're giving for outlook, it's going to continue. So I think the banks are telling you the economy is fine. So that probably tells you that the earnings that are coming up for all the other non-banks are going to be fine and the outlooks are going to be okay.

SPEAKER_1 (1:51)

I saw that JPMorgan missed, they had lower than expected fixed income revenue. When you think about currencies and commodities and things like that, that part of the story, though, I was also reading how it's undeniable short-term treasuries are the way to go right now. What do you think about the situation with the higher rate environment and maybe the trade on fixed income?

David Ellison (2:13)

Well, I think you don't look at a three-month period in trading and say that's a trend, good or bad. I think at the end of the day, the investment banking stuff is episodic and it always has been and it will continue to be that way. But I think the rise in rates has put pressure on their book values because they've had mark to market issues and they've talked about that a little bit in the earnings call. But at the end of the day, the higher rates are, where they are now is good for the banks. It gives them a nice spread.

You don't want rates at zero because there's no spread when rates are at zero. And if they go up too fast, you're going to create some problems with demand for credit and potential credit issues. But I think we're in a good place right now. I think that the banks are strong enough to handle higher rates, and they're strong enough to handle some credit conditions. And they really are, they're doing what they're supposed to do. They're supporting a strong economy.

SPEAKER_1 (3:03)

I know you handle and look at all these names with the funds that you handle. Do you lean towards a couple more than others, top holdings, when you look at maybe the leadership or the size of the bank or what they do?

David Ellison (3:19)

I think, in a sense, you own JPMorgan because they've got, I think they've got the best management right now. It hasn't always been that way, but right now they do. You own Citi because they're an okay to good to better story in terms of the metrics, in terms of returns on assets and equity. Wells Fargo is a little bit like that. They're still trying to get better from some of the regulatory issues that they've had.

Then you go down the market cap spectrum, and they're all reasonably in good shape. The question now is, you play valuation against one or another. But again, I think I can't emphasize more of the fact that the banking industry is telling you that the economy is in decent shape. They're providing the liquidity and the stability for these other companies to raise capital and grow and generate the jobs.

SPEAKER_1 (4:07)