YouSaid · the spoken record

Alex Gray

lines on the record: 54
first: 2023-01-13
most recent: 2023-01-13
sittings or episodes: 1
sources: podcast

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“Thank you for having me. I know all of my friends and family appreciate my opportunity to have a platform to pontificate that's not them. So really appreciate the opportunity.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“In theory, a lot of them have taken, have sort of reversed that, but that doesn't necessarily one-to-one translate into all of that being given back to investors because that was also a different, you know, in the same way that they hold their portfolio companies accountable to making good strategic capital decisions in the midst of deterioration. You're going to look really silly if you do a huge share buyback in the middle of a time that is hard to predict what's going to happen next. And then you say, oh, shoot, Fed, I need help.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Exactly Exactly. So they said we need to re engineer this test and you need to go through this same sort of like off cycle test to say if this is 10 times worse than we think it's going to be for industries that are most affected, you know, right off your airlines, right off your restaurants, right off your hospitality, we need to know that you're still solvent. And so that was a conversation that was happening at the same time that this accounting guidance changed. And so when you put the two together, it looks like everyone ran a pandemic stress test and then upped their provision when really they were two sort of isolated incidents.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Which operationally is actually incredibly complex and has been a huge lift for banks, which they basically have to take this list of 30 variables and run it through their entire balance sheet and sort of spit out what their CET1 capital looks like at the end of it. And so for years, they've been running this test, this scenario of it's going to happen in the corporates bank. Everyone trash your corporate loan books as bad as you could possibly imagine. So take like the most doomsday economist and multiply him by 10 and we need to know that you are still solvent. When the pandemic happened, they went, oh crap, you know, we guessed wrong, as would anyone in the whole world. We need you to rerun that same process, but we want you to trash your hospitality book and your cruises. And they tailored it.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Yes. So to take a step back, CCAR is an annual stress test. It's banks with more than $50 billion in assets need to complete it. And basically what the Fed does is they come up with 30-ish economic variables under three scenarios that they think best reflects what is going to be the catalyst for the next recession. And so the really smart thing that they do that I appreciate is they don't just run 2009 over and over and over again. They've taken stock of what's going on and they say we, like most people, including myself, believe that the tightening that's going to be the catalyst for the next downturn is going to be in the corporate space. And so for the last few years, the scenarios that have guided the stress test.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“No, Jamie Diamond is not like it. None of the banks are big fans, and you can't blame them. And he is officially tired of being asked questions about it. But the When that got rolled out It changed the way that new loans for the quarter were reported on in terms of setting that provision, but they also had to do a full book redo and basically go back in time and pretend that this was the accounting methodology when those loans were made. And so a lot of the timing is purely coincidental that they were taking these large provisions at the same time they were having to run a new CCAR scenario that reflected more of a pandemic assumptions for the economic indicators.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, sure. So a couple of things I heard people say, you know, just on the street this morning is there's this idea that we're continuing to talk about the bank provision environment. As compared to 2020, which irks me a bit because it's not quite right. There was an accounting guidance change in late 2019 called Cecil, and it's something that they came up with, the Fed came up with, I don't probably 2014. I remember DSE when the, you know, the project.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“And I got the sense on the calls earlier that it was kind of like, yeah, the lagging indicator NCOs are up and the leading indicator delinquencies are up. But like, don't worry about that. Credit's fine. And it always reminds me of that, you know, they put together all of those flip wheels and 2000, you know, late 2007 of like every single bank CEO being like credit's never been better. And it's not to say I'm forecasting some catastrophic event, but I think we do need to be careful about the way that we talk about it and the way that we understand leading indicators of credit stress.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“The margins on a chart like that when you've got 2008 factored in just sort of it continues to double down on the, yeah, look, it's tiny. So like it's up a little bit, but it's normalizing. And then it's like, okay, well, what is normal though? And at what point do we say this is not normal? And at what point do we start paying attention to the leading indicators of net charge offs, which is delinquencies? So we have a good amount of visibility into people that are behind on their payments. It's basically like a, you know, it's a receiver AR aging schedule basically, but for their consumer and commercial loan books.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, it's interesting. Something you heard repeated on the calls earlier this morning was, oh, NCOs are normalizing, which I think is their way to say, yeah, yeah, we see it, we see what you see, but it's off of nothing. It's that same like, don't take the 14 basis points and say JPMorgan doubled net charge offs, it's normalizing, but they're fairly vague on what their expectations for normal is. So Bank of America actually included some really neat charts if you're a chart nerd like I am in their presentation this morning. And I think that was probably getting ahead of some of these questions in terms of, you know, what they really wanted to do and they were smart to do it is they have a line graph and they included 2008 for charge offs were. And yeah, when you look at it like that over time and there was a blip in 2016, 2017, I think, and then it kind of like comes back down again close to zero. And, you know, those.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Level of default, pick your banks. I mean, maybe JP Morgan, a Bank of America, because we've been focusing on those. And then, yeah, how high do you think it has to go before the C-suite of those banks start to sweat a little bit?”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“It's all about the RWAs. And how do the current default rates compare to when you were in the business? I, one of my pet peeves, Alex, one of my few pet peeves, is when something is at like seven basis points, so 0.07%, and then it goes to 14 basis points and people say, it's doubled as if it's 0.14% is high. Current rates of delinquency, current rates of default charge off NCOs, acronym, however you want to define it, they are going up over the past year. And I expect, as bankers expect, they will continue to go up, but they are still below where they were in 2019, 2018, and they are a tiny, tiny fraction of where they were in 2008 or 2009. So yeah, how would you establish the correct?”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“To that, I thought you meant risk manager, so bad. Thank you. The most fun part of banking is the acronyms for sure. Again, with making everything as difficult to understand as possible.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“They can spot things earlier than you can when you're still getting to know someone. So, you know, I don't know that it's so much like a top-down strategy where they're saying like, whoa, whoa, whoa, RMs, be careful, but they're being RM being relationship manager, that quarterback of the deal. I'm glad that you.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Everyone in our corporate loan book is going to be a one or they're going to be a 13. And the one is going to be like a AAA rated public company and the 13 is going to be a company that makes $20 million a year and we don't have anything but their desk chairs. Or, you know, well, at a 13, they're probably already showing signs of deterioration. And they're going to say if you're a PD 8 to 13, you have to go through a pretty intense quarterly review process where the whole deal team needs to show up to a risk committee and continue to argue that we should still do business with that customer. So when I say like the devil you know, I mean it because the customers that they have their eye on, they know really well. And they know the quirks. They know, you know.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“I think there is definitely an element of the devil you know in all of this. And that's, you know, that's true. It's very, very true because when you think about, so the way that there's a scale in banks that help them negotiate creating a universal credit box that like, you know, thousands of banks in the company are underwriting loans. Maybe that's dramatic depending on the size of the bank. But like you're a bank of 60,000 people. You've got a bunch of people underwriting loans in different sectors and you need a way to create, you know, we call it a box. And here's our risk box. And if you go outside of the risk box, that's an escalation to risk in some form or fashion. And we need to see X, Y, and Z things. So part of the way that they box that in, so to speak, is they have a probability of default rating where they'll say every”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Right, so let's say my company is a company that it's a technology company that went public or something and there was a time when money for my company was very abundant, but now it's not the case. And I wanted to go to a bank and let's say, you know, you're the bank, easy to imagine. And you want to do more business with Apple, who you're going to give them a 10 basis points over Fed or something extremely sweetheart deal. It makes sense. Apple's, yeah, they'll be able to pay you back much more so than me. But you're going to, you know, you might pick up my calls. We might, you know, chat for a little bit, but you're more likely to, you want to do business with Apple and not with me or some other kind of random company that you don't know if they're creditworthy or not.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Correct. Yep. So in a term loan, banks cutting a check for a billion dollars and a line of credit the bank is providing access to up to a billion dollars with some of those collateral combinations leading that needing to say up to rather than just here's a billion dollars but for really good you know grade a companies triple a rated they're they're going to get huge lines of credit and full access to it and The gloan growth that I suspect we'll see in the next couple of quarters, it's going to be existing bank customers increasing their utilization of their existing lines under the terms that they negotiated when things were better and rates were lower. And so I think they had to.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Sorry, Alex, can you explain a line of credit? That number doesn't mean that your bank had to hand over a billion dollars, right? It's agreement that they can draw upon, but that they and your bank has to set aside the reserve maybe, but it's not as if they give the billion dollars then, right?”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“There was a sentiment shared in the Bank of America call that I've heard before in other scenarios and it is intended to sound nice, but it's almost never a good thing. And that is, We're going to be cautious about the new clients we contract with, and we're going to take care of our customers. And that means a couple of things. And so they're saying that at the same time, they're suggesting that loan growth is still possible this year. And the way that both of those things can be true is there is a lot of untapped line of credit just out there in corporate America. And part of it is the bond issuances, as you said. And part of it is just things have been good, right? And so for the terms that exist right this second, large corporation, I was on a deal team for a $1 billion line of credit for a company.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Percent off by using code Guidance 10. Thanks, let's get back to the interview. Right. And Alex, in 2020 and 2021, there was a huge bonanza of like bond issuance. So banks are often involved in bond issuance and they may retain some of the bonds on their portfolio, but those are not bank loans. They're facilitated by a bank, a company issues it, and then the bond is owned by a bond fund and then it's owned by ETFs, investors and the like. So there was a huge bubble in bonds. As a result, companies didn't need that much money. So there actually wasn't that much corporate lending in 2020 and 2021 as opposed to 2022 where it did pick up markedly. What do you know about how bank activity, particularly your world of, I guess it's called middle market banking or commercial banking? I don't know if that middle market is the right term.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“It's literally like, we're going to go into your office after you shudder and like pilfer whatever we can for whatever we get. A lot of people, I think, would. More or less consider that uncollateralized. It's certainly on the farthest end of putting up any type of collateral. You don't really see a lot of truly uncollateralized commercial loans.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“So that sort of sits somewhere in the middle. So you've got your best tier fully cash backed, your middle tier receivables. And then you've got like on the far other end companies. And this is mostly for, I would say like businesses that make under $50 million a year where they just, they're too small to have either the reserves or, you know, because like some businesses, they don't realize their value in not reserves, sorry, receivables at any given time. It's just not their structure. And so they may not have the capital to cash back it and they may not have a reserve structure that you can tie to it. And so on the far end of the spectrum, you've got the companies that literally the collateral is like their desk chairs and their computer monitors and they're like. Mouses, that's dramatic, but”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“$10 million in AR, we're going to give you access to $8 million of your loan. Next month, we'll check back in. And then at any given point in that month, if they were to go bankrupt, they've only drawn as much on their line of credit as they have in receivables. And then the bank has to go get those receivables, but they have contractual rights to them.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“So it's that constant push and pull. So another structure that sits somewhere in the middle is we're going to give you the rights to all of our receivables. And normally what that means is like within some parameters, and that's obviously negotiable as is everything. If you can dream a loan structure, it exists out there somewhere, I assure you. But for this purpose, I think the common one is like at any given moment, like once a month you owe us an AR aging report and we will take, you know, anything from like, you know, that's current to like overdue 60 or, you know, however you want to set that, you don't necessarily want to accept receivables that appear to be uncollectible. So you manage that a little bit. And you say, okay, you've got $10 million in collectibles. And then you mark that down a bit and you say, yeah.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“You know, whatever you would, honestly, any marketable securities book that is. What's in the book does change the value so like So, your risk department goes, Hooray, we're fully protected. Nothing in the world could keep us from recouping these losses. And your sales department goes, crap, we have to give them a really good rate if they're going to do that.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“And they're going to take $10 million of treasury. They're going to dump it with me. And they're going to say, that's restricted to us. We're not going to touch it. That fully cash backs my loan. And you say.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“So that's a really great question, and it calls out sort of the other part of that equation when we think about structure. So what I was hitting on was really like covenants in terms of what you can and cannot do strategically. Collateral is the other really big piece of that. And it varies wildly in terms of the types of structures you see in the industry. And your ability to post more collateral obviously is going to put you in a lower risk tier of client and it's going to get you a better rate. So there's a spectrum that we think about and we think about collateral. So think your best case scenario in terms of, so best case scenario used with nuance because your best case scenario is a bank from a and my interests are protected standpoint would be my client has a $10 million loan.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“So it's because the commercial bank loans are floating rate, the interest rate is going up all the time, right? Because so if it's sofer plus 200 basis points, when sofar goes from 20 basis points to 520 basis points, then you have to pay 720 basis points. So it doesn't, there's that rollover risk, it happens every single second, right? Or every single day, but then you're saying once people from the company sit down with the bank, the bank on top of that is going to say, oh, by the way, you can't do this, you can't do this, you can't do this. What are those sorts of things? And then what is the sort of collateral if the company defaults, what assets can the bank seize as their own property and sell off? Like a mortgage is collateralized by the house typically, credit card loans are not collateralized by anything.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“In good times, I only use 2 million of that to operate my business, but I'm seeing some deterioration in my business. Now I'm using 10 million of it. My bank's not comfortable with me, so they're not increasing that. They're actually making it more expensive. And they're going to stop me from going down the street and getting another loan from a different bank to fill the difference. And so you're going to get hit twice when you think about growing as a company in a high rate environment because it's going to be more expensive and the banks are going to be more restrictive on what you can do other avenues you can pursue to grow.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Banks have a surprising amount of control over the strategic decision making of companies and the way that they capitalize. So, you know, an example of that is it all comes back to we want to make sure our interests are protected if you deteriorate and go out of business. And so every dollar that goes out the door is a bank's business and that also comes down to like mergers and acquisitions, dividend, you know, any kind of distribution to shareholders is going to be heavily controlled if they see you start to deteriorate in any kind of meaningful manner, your new loan structure is not only going to be more expensive, but it's going to keep you from providing that type of value to shareholders, but also They may keep you from going to get a loan somewhere else. Like, okay, I have a $10 million line of credit.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“It will be people eventually. And the thing that I keep thinking about is like, we always talk about rising rates and connection with inflation for consumers, but it's not going to matter if bread is 10 cents if no one has a job. And so in addition to debt just getting progressively more and more expensive, for basically the same capital needs they needed before, the structures are also going to tighten. And so what that means is”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Trying to understand where their business is today versus where it was and ensuring that the bank continues to be protected. And I think something that doesn't get talked about enough is that it's not just rates that are going to go up for companies. And that's a huge deal. It's a huge deal that every single day a loan is coming up for renewal with a company and it's going to be refinanced at a significantly higher rate. And it is going to be a huge impediment to business, which as it's designed to do, right? We're doing all of this on purpose. So it's really going to stymie growth. And worse than that, you say like, okay, these public companies, they're not just going to say, oh, our cost of debt went up. I guess our earnings went down because that's not how they're incentivized to function. And they will find those expenses somewhere.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“It's really the process of understanding the best way to help your clients capitalize from a debt perspective through fitting them with the right product. So is it a line of credit? Is it a term loan? You know, if we identify that a bond deal is the right deal, we throw that over to capital markets because it's sort of an entirely different game as far as that structure is concerned. And it's been, it's added a really interesting and helpful perspective to just kind of understanding what's going on in the world today and where I personally see the biggest risks and challenges for the industry going forward, which is to say I'm intimately aware of the process of seeing a loan come up for renewal with an existing client.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Alone person, we have an FX person, so basically, you know, put all of the capital markets activity in one tranche. And, you know, you're just, you're partnering with clients to make sure that they have the capital and the banking support that they need to grow their business. So my role was on the lending piece and what that really entailed was, you know, so the existing book of clients, but also supporting prospecting and basically saying, here is your need. Let's help fit you with the best product and let's protect the bank's interest with the best structure. And then when you put those two together, you land on what the right interest rate probably is. And then you go to market and you compete with other banks and you take that down a little bit more. And so.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Yes, sure, so I am for a period of time I did corporate banking underwriting, essentially. And what that means is you have a portfolio of clients that you are on the deal team for. So most of the way it's set up, I think this is fairly standard through the industry is you've got a relationship manager that kind of like runs, you know, we call him the quarterback or her. They are kind of a generalist. They understand how to identify opportunities for the bank and for their clients, and they'll bring in different sort of subject matter experts as they see opportunities. So on a deal team for any given client, you'll have the relationship manager, you'll have a treasury manager specialist that's going to be”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so there's also like Main Street banking and then Wall Street banking, Wall Street banking is sales and trading, investment banking, which Goldman Sachs, who I think we'll hear from next week is very similar. And sales and trading is somehow, to my astoundment, they continue to make tons of money just because things are so volatile, interest rates, commodities. But investment banking of, oh, we're going to help you raise debt, we're going to help you issue equity. You're a spac. We'll help you do a SPAC. That business is down something like 50% year over year. But the Main Street lending is actually a pretty good business so far because people are using the credit cards, companies are borrowing money. There's a lot of consumer debt. Yeah. So tell us about your expertise. Do you work in commercial banking or middle market banking?”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so you see net chargeoffs in the consumer space on consumer loan products. And you also see it in the commercial space. In terms of level of visibility, different banks provide different views in terms of like getting into that granularity. But it's essentially We have decided that we are not going to collect that loan. So we are going to charge it off and take a loss. It's going to leave the balance sheet and we're going to take an expense on the income statement”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“So, can you explain the difference between what is a net charge off versus the building reserve? So reserves are, as you say, banks say, oh, we're just going to lose money. So we're going to book a loss now rather than forward. But it's a net charge off when they actually realize how does a net charge off actually happen? Do they realize, hey, no one's paying us?”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“It's not the same strategy because it's their own economic forecast and it's their own calculation. And so the way to think about the forward looking of that dynamic is you get that net interest income, but you also should be expecting higher provisions and higher charge offs as we meet the time that that is. I think charge-offs are really a lagging indicator. I think it's really interesting on the call this morning, Jamie Diamond said, you know, stop asking me for guidance on the credit stuff. Look at charge offs because that's what's already happened. Or it's like he's talking to a bunch of equity analysts who are like, what already happened doesn't matter to me. Tell me what's going to happen.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“The equation for arriving. The equation for arriving at those volumes, the provision and the allowance actually aren't apples to apples at each bank. They don't have to do it the same. The way the Fed works, most, much like the way that we have to calculate our own taxes and then say, is this right? It's a very similar premise where they said, hey, banks, we need you to put this in place so that, you know, from a provision standpoint, what we want is we want you to take it as an expense over a period of time so that we don't wake up one day and you take all your expenses at one time and now you're insolvent. But they don't actually prescribe the way. They say you have to go do that. We'll check you and we'll make sure we're okay with how you're doing it. But it's not prescriptive. And so even when we think about what banks are provisioning for,”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“There's a couple of different things that play into that because it's not just loans might default and we'll have to write those off and that's an expense for banks. It's more complicated than that because they take their own economic forecast and they use that as the baseline to create the calculations for like provision and the allowance for expected expense. And so the worse they see the forward-looking environment, the more expensive their own capital gets. And they have to do it that way because, I mean, so, and, you know, a one-off tangent on that just to make sure everything is exceedingly complicated all the time. Yeah, we love it that way.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Well, you always have to bring in the risk adjusted component, right? So The spreads are expanding, but they're expanding to compensate for increased risk and they're expanding to compensate for fewer funds being available. So, you know, in the short term, yes, because rates went up so fast that they're being able to appreciate those rates off of the same base book that in theory, based on the economic indicators that we look at shouldn't be troubled yet. And so when we think about loans and the money that we banks make on loans, you always have to think about it from the risk adjusted perspective because at the same time you hear a lot of sentiment about NIM improving. The other really big topic of this morning was credit quality.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Interest rate spread. So basically NIM was 1.58% in the fourth quarter of 2021. Now it's 1.99%. So that is really improving the profitability and that interest rate spread is the spread, the differential between the rate that JV Morgan earned on its assets, which has gone up a lot and the rate that JPMorgan pays for its deposits or its assets, which has also gone up a lot, but not as much. I think right now they're paying 1.37% for deposits in the fourth quarter of 2022 up from zero a year ago. And that rate, so the people who are JPMorgan and anyone who has a checking account, or I guess, yeah, Linux savings account, checking account is free. But they're getting 1.37%. Meanwhile, the Fed funds rate is 4.5%. So banks kind of just get to they make money for freebase.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so when interest rates are at zero, risk free interest rates, I'm just going to make this up the loan spread is 250 basis points. So you're getting 2.5%. That's very little. And when you take into account offices, labor cost and just risk in general, it's not a super profitable thing to make loans when interest rates are so low. So you try and make it on other things, those fees, those sort of weird businesses.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“You know, from that standpoint, the economy was strong. Typically, Goldman Sachs is a little bit of a different business model. In that sort of healthy economy, you're not going to see a bunch of layoffs. It's not, you know, they're not going to be driven to cutting expenses by cutting people necessarily. And a lot of the push and pull at that time was banks want to be technology companies. And that requires reinvesting capital into the business that they would otherwise send out to the investors. And because that capital is so transparent, investors say, oh my gosh, J.P. Morgan, your technology expense went up twenty-five percent quarter quarter. And what are you getting out of it? And you just kind of have to trust them. We're doing stuff that's going to make us a better business, a better technology company down the road. So I guess just to wrap all of that up.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“And that is an interesting opportunity when you think about how the size of businesses that all need those types of services. So it's remote check deposit and I want to put Fed funds overnight sweep on top of my business bank account, which is a lot less popular when interest rates were zero. But there's a lot of different sort of services and value adds that banks can provide when they're not focused as much on growing that loan book. And so as the rate changes, you just see a shift in the conversation and you hold banks to a different standard in terms of what you look for as the highest priority things. And so one other thing. So that was all income side of the house, but another thing everyone was looking for at that time is like, what are you doing about expenses?”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Lot of focus on deal flow, the asset managers, net inflows in that same period of time. And it was really, it was just shifting focus, you know, because the banks kind of, they fly together in the interest rate environments in terms of like doing well, not doing well. There's certainly winners and losers, as I talked about with Wells Fargo and Bank of America. So they're not all made equal. But in that environment on the call, as you will hear, back to back to back, no one's really talking about the interest side of income because it's just, you know, it's very clear the environment that everyone's operating in. You're still looking for loan growth and you spend a lot of time talking about fee income, which is basically, you know, investment banks charging large amounts of money to execute deals. And even, you know, in the regional banks, you've got treasury management income.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“There's a couple of different dynamics. Over that period of time of low interest rates, you still want to see banks building their book, you know, particularly in that variable interest space because those are the same books that are going to be able, like the existing books are the ones that are going to be able to appreciate how fast rates have increased in the last few months. So you're still looking for that loan growth. And then everyone just kind of acknowledges that we'll talk about NIM so that NIM is the net interest margin. And that is basically it's the relationship between the income that you make on loans versus the price that you pay to bring in the capital to then lend out. And so it was really, there was a lot of focus on, so for the investment banks, there was a lot of”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT
“Right. So if you own bonds as interest rates go up, the value of that bond actually goes down because it's a fixed rate thing. Most bonds are fixed rate, whereas the vast majority of loans, as you said, are variable rate. And that's why people say when interest rates go up, you got to buy the banks and banks do well because they make more money. To what degree is that true? I know you spent a lot of the 2010s working inside a bank when interest rates were basically zero. What was it like? What was the attitude towards profitability like specifically were loans being made that just weren't profitable, but say, hey, it's my job to make loans, so I'll make loans.”
2023-01-13 · Forward Guidance · The Big Bank Deep Dive | Alex Gray · IDENTIFIED FROM THE TRANSCRIPT