YouSaid · the spoken record

Mike Mayo

lines on the record

33

first

2017-12-14

most recent

2017-12-14

sittings or episodes

1

sources

podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

1. “That they cannot afford to lose. So as you start to see these technologies get adopted, if they do get adopted on a widespread basis, the banks have no option other than to making sure that they are fulfilling the needs that clients that are using cryptocurrencies need.”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

2. “Yes, it did. You can't ignore it, just the rapid appreciation in the value of Bitcoin coupled with the adoption that you're seeing amongst a broad range of different industries, not necessarily in terms of embracing it, but just in terms of recognizing it as a phenomena is something the banks cannot ignore. In some ways, the banks would love to see a world that moves toward virtual currencies. I think banks spend a lot of money doing things like refilling ATM machines and delivering cash and collecting cash, moving towards a cashless society would actually improve the overall efficiency of the banking system considerably. What the banks are paranoid about, quite rightly so, is losing control of the payment system. So if you think about one of the functions that banks really fulfill, they're really at the center of the payment system for any developed economy. And that puts them in a very, very valuable and unique position.”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

3. “Though, you are going to see convergence of both generation X and millennials in terms of how they approach complex financial transactions. One of the things I think a lot of banks will say is that millennials typically are people in their mid to late 20s, and your financial needs don't start to become particularly complex until you start getting into your 40s and 50s. What they're seeing is that as these millennials get older and as they start to look to consume things like retirement products, and as they start to think about mortgages, they're willing to do a lot of research online, but when it actually comes to pulling the trigger and buying the product, they still want to sit down with somebody and talk to them about the different offerings to make sure they fully understand what they're buying, what they're getting themselves in for, and how the product represents value for money. I do think as millennials quote-unquote grow up, they are still, I think, going to look for advice. But perhaps in”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

4. “I think most banks would tell you that millennials would rather deal with a machine than a person and they're responding to that. They're taking a lot of functionality that you historically would have gone to a branch for and they're replicating that in terms of what you can do with an online app. That's one thing, which is that they're changing the way in which they distribute to those clients and the way in which they serve those clients through making sure that a lot of functionality that historically was based on human interaction is replicated with some sort of online app. The second is that millennials want to understand value in a different way. So banks have moved towards simplifying pricing structures and really explaining the value of the advice that they offer in a bid to get millennials to understand what the overall value proposition is. Over time,”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

5. “Obviously the generation that's new to banking or reasonably new to banking, they're not looking at debt the same way maybe their predecessors do their use of credits down, they're where the stock market, their interest in cryptocurrencies. We could have a whole podcast on that topic, but how are financial institutions adapting or not adapting to the new generation of consumer”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

6. “Several things have changed. When I started looking at banks 20 years ago, it was a very regional market. It was a very fragmented market. And the single most important driver of bank performance was just how your local economy was doing. What we've seen over the last 20 years is that banks have become much more national, in some cases they've become much more global. So they're not as exposed.”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

7. “That will happen and to a degree I think that is happening. If you look at the top four banks in the United States today, they're all spending between 8 to 10 billion dollars a year on technology, of which between $2 to $3 billion of that is discretionary. So that's money that they're spending that they don't have to spend. And they're investing that either in innovation or improving the overall customer experience. If you look at the fifth largest bank, they're spending about a billion dollars on technology a year. So there's this very considerable gap that's opening up between the largest banks and everyone else. That innovation and that investment is going to lead to some of the larger banks taking market share in certain areas because they're going to be in a position where they're going to be able to offer a better product, frankly, to their clients than some of the smaller banks over a period of time.”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

8. “We tend to think of technology sometimes as a leveler that it democratizes information, democratizes certain functions in society, but it also can be a tale of haves and have-nots. You've pointed out that some banks just have a lot more resources devoted to innovation and R&D than others. And so could we see the same sorts of things we've seen in the technology sector where those who have a lot of money to put into new technology are going to really outpace the banks that are a little bit smaller and don't have that wherewithal.”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

9. “to ensure that they adopt those technologies themselves and then give those technologies away to their clients for free. The banks understand that the opportunity is theirs to lose. The banks currently control the client set. Most of the clients already are clients of banks. The banks realize that clients will leave them if somebody gives them a better offering at a better price. And what the banks have shown over the last few years is that they're willing to replicate some of the technologies that have been offered by technology companies and effectively give it away for free, which in some ways does negate your incentive to move outside of the banking system.”

   2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

10. “Companies have thought very carefully about how far they want to encroach into what banks historically have done because of concerns about what it would mean for them from a regulatory standpoint. Despite that, we have started to see disruption in several areas over the last few years. The most notable has been disruption on the payment side. We've seen a number of technology companies launch functionality that will allow me to transfer money to you using a mobile app, which is in some ways independent of the banking system. That has caused the banks to go back and rethink how they're investing in technology and to think about the importance of being a very rapid second mover. Banks have learned from what's happened in other industries as a result of that, as they start to see these disruptive technologies, what they've been willing to do is move very quickly.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

11. “If the banking industry is definitely not immune to disruption, and I think history is littered with companies and industries that think they're immune to disruption to discover a few years later that things have moved on a lot faster than they had anticipated, what the banking industry is benefiting from is the fact that as an industry they have been relatively late in terms of being attacked by some of the technology companies encroaching on their space. The reason I think a lot of technology companies have historically hesitated is just because of the extreme amount of regulation that comes with moving into the financial services arena. So as you start to offer payment services, you have to think about things like money laundering. As you start to take on deposits, you start becoming subject to things like the FDIC guarantee. So I think a lot of technology”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

12. “What are the jobs you have as an analyst is figuring out which companies seem best situated for sustainable growth? What are particular areas that you have your eye on? And is there a sense that the financial industry is kind of immune to disruptions we've seen in other businesses?”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

13. “Buyers of securities themselves, so when a bank takes on a deposit, they can either go out and lend it out, which is what most banks want to do. But if there isn't enough loan demand, they typically go out and buy a security. Now what happened is that the banks found themselves competing with the Federal Reserve to buy securities, and as a result of that, really the yield the banks were earning on those securities was compressed, it was reduced. Now, if you think about QT or quantitative tightening, which is the reverse of QE, quantitative easing, what we're expecting is the process is now going to work in reverse. So you had a lot of cash creation as a result of the Fed buying securities. We think you will now see some destruction of deposits within the banking system. So we are expecting to see some deposits flow out of the banking system and back into financial markets. Against that, because the banks aren't competing with the Fed to buy securities, there should be better investment.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

14. “The fed effectively embarked on this whole process of what was called QE or quantitative easing a long time ago now. And really the way that worked is that the Fed went out and indirectly bought treasuries and mortgage securities from investors. The reason they did that is the economy was growing at a very slow rate at that point in time and they were looking to bring down interest rates even further as a way of getting people to invest effectively in risk assets and just invest in the economy more broadly. That process is now starting to reverse. Now the impact of quantitative easing on the banking system I think was twofold. The first is as the Fed went out and bought those securities the people they bought them from ended up with cash and a lot of that cash found its way back into the banking system. The second thing is that the banks are very large”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

15. “If you look at credit quality in the US, it is the best that it has been in thirty years. Credit quality is effectively measured by looking at the number of people that are defaulting on their loans. So either consumers or corporates that are filing for bankruptcy, and it is the lowest it's been in a very long period of time. Most of the banks feel very comfortable about the credit profile over the next one to two years. And the reason is that usually credit quality just mirrors what's happening in the underlying economy. So if you start to see unemployment pick up, or if you start to see an increase in corporate bankruptcies, that typically translates into an increase in bad debts over time.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

16. “Bigger impact. So you are likely to see corporates look to accelerate some of their investment decisions as a result of a lower tax rate. We do think that you are likely to see an increase in terms of large cap M&A transactions. And thirdly, there is likely to be an impact in terms of what banks ultimately will pay on interest-bearing balances as a result of higher interest rates. If you go back and look at what's happened over the last year, interest rates have gone up by basically 75 basis points. The banks on average have passed along about 20 to 25 percent of that benefit. We think over the next three to four rate hikes, that's going to increase quite considerably. So we're estimating that over the next three to four rate hikes, the banks are going to pass on between 30 to 45 percent of that benefit to consumers.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

17. “Higher interest rates impact consumers in two ways. The first is what's called a negative substitution channel. So what that means is as interest rates increase, consumers or households have got a greater incentive to save because you're getting a better return on those savings. Against that, there's what's called a positive income channel, which is that as interest rates go higher, consumers also earn, in theory, more interest on those higher deposit balances. Now, those two things to a large degree we think will net themselves out. So on one hand, there will be some consumers who will opt to save more because they're paid to do so. On the other side, you will obviously have consumers who will actually look to spend more because they're earning more on the pool of savings that they currently have. I don't think it's going to have a significant overall impact, at least in year one, on consumers, but on corporate activity, we do think there is likely to be a”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

18. “So, again, I think most banks view it as having a positive impact that are likely to be several impacts from this. I mean, the first is most of the banks are expecting that you are going to see higher economic growth as a result of this corporate tax bill. So a number of banks talked about 50 basis points higher GDP growth in 2018 as a result of tax reform, and that grows into 2019. In addition, given the repatriation and given the fact that the US should look more competitive on a global stage in terms of attracting investment, it should be good for job creation as well. Given the fact that we're close to full employment, that should also lead to some wage inflation. So I think the banks are viewing this as being overall positive for the health of the consumer and growth in wages and growth in employment in the US.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

19. “Lot of inflows from investors into high yield funds and as those funds have looked to redeploy that capital it's put a lot of pressure on spreads which frankly has made it easier for corporates to obtain credit at a better price from debt markets what we're expecting as we head into next year is that as you get clarification or certainty on corporate tax reform you see a pickup in CapEx that CapEx needs to be funded and that will partly be funded by loan growth so we do think that you will see loan growth activity pick up secondly I do think you will see a pickup in M&A activity so mergers and acquisitions you will see a considerable repatriation of cash from overseas into the US what you'll see as a result of that is corporations looking to redeploy some of that cash in the form of acquiring other firms to accelerate their growth profile”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

20. “That's been one of the biggest surprises of this year is that I think a lot of banks at this point last year were expecting to see loan growth pick up. In actual fact, loan growth has slowed this year. So if you look at loan growth across the United States, it's running at around 2% and it's down from about 4% last year. The reason that it's fallen is mainly because of a slowdown in corporate loan demand. So at this point last year, corporate loan demand was 6% to 8%, it's now dropped to closer to 2%. And I think there's several reasons for that. The first is, I think uncertainty around healthcare reform and corporate tax reform has led to a number of corporations postponing investment decisions. And secondly, the banks are actually seeing a lot of competition from the high yield market when it actually comes to providing credit. The high yield market has seen spreads compress considerably over the last 12 months.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

21. “So, one of the problems banks have had, they've been getting deposits a little faster than they've been able to make loans. Are they anticipating a pickup in client activity or demand from the tax bill?”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

22. “Growing faster than expenses today, and that's taking place at a time that credit losses are very benign. In addition, banks are actually returning considerable amounts of capital to shareholders in the form of buybacks. So over the next two to three years, we are expecting to see bank earnings outstrip growth in S&P earnings, and we are also expecting to see bank dividend yields grow faster than the overall market as well. So I do think those are the reasons why banks are trading at a premium is because at least based on what we know now, bank earnings growth could actually look quite attractive over the next two to three years.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

23. “Banks, at the moment, are trading at around 14.5 times earnings. That represents about 80% of the S&P multiple. If you compare that to history, it is slightly higher. Banks have historically traded around 75% of the S&P multiple. I think, though, that there's a lot of good reasons as to why bank valuations today are higher than they were a year ago. The first is that it does seem as if economic growth is going to accelerate. That should lead to a pickup in terms of top line growth within the banking industry. Second, we are seeing banks use technology in different ways to the past in that they are starting to use the very rapid adoption of consumer technologies to reduce things like expensive fixed cost distribution networks like branch networks. And in turn, that's led to a pickup in operating leverage. So revenues are actually”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

24. “I think that's right. I mean, what you've seen, and you mentioned this at the beginning, is that bank share prices have increased quite considerably over the last year. If you look at the bank index, it's up 50% over the last 12 months. Valuations have become more demanding, and as a result, banks are looking at buybacks as being less attractive as they were at this point last year, i.e. the return that they are generating from buying back their own stock is less attractive today than it was a year ago.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

25. “The first is that if you look at things like dividend payout ratios, they're much lower than what they were historically. And secondly, over the last 10 years, the banking industry has actually generated a relatively low return on equity, at least compared to the past. I mean, most banks are generating between a 10 to 11% return on equity. It used to be 20%, and there are shareholders who frankly would like to see some of the capital return to them so that they can invest in other areas that are growing quicker. I do think what you will see as a first order is that banks will look to increase their dividend payout ratios. Again, if you look at the largest banks, their dividend payout ratios are between 30 to 35 percent. If you look historically, banks paid out closer to 45% of their earnings in the form of a dividend. And I do think over the next few years, banks are looking for opportunities to grow their dividends as a way of providing a better yield to shareholders.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

26. “If banks become more profitable, they will obviously generate a higher return on their capital, which means that they will accumulate capital at a faster rate. That's good news for the overall financial stability of the system. If you've got banks that are better capitalized, it means that you've got banks that are in a better position to withstand a downturn in the economy when it happens. That said, most of the banks currently have excess capital today. So we estimate that if you look at the largest banks in the United States, they're currently sitting on about $100 billion of capital that they don't need for regulatory purposes. So a lot of this capital, as I mentioned, isn't really needed by the banking industry to support growth. So a lot of it will either be, as I said, invested in the business or return to shareholders or competed away over time. Most banks are under a lot of pressure by their shareholders to return more capital to them. And I think they're under pressure for two reasons.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

27. “Let's talk about the regulation as it relates to the tax bill. If banks retain more of their earnings because of the lower taxes, what impact will that have on their capital ratios and their overall financial health?”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

28. “Yeah, that was a fairly extensive discussion point at the conference, and different banks will do different things depending on where they are in the investment process and what their earning power looks like. But broadly, I would say a third of the benefit is going to drop through to the bottom line. A third of it is going to be competed away due to just greater competition. And I think a third of it will be reinvested in the business. Banks will probably use this as an opportunity to go back and accelerate some of their investment spend projects that they were planning over the next three to five years and accelerate those into the next one to two years, just given the fact that they think the return on those investments looks very attractive right now.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

29. “So the repatriation really only applies to banks that have got meaningful overseas operations, so those are the largest banks. And the way that the proposal works is that foreign earnings or foreign capital is going to be deemed to be repatriated, it will be taxed effectively on day one. So banks will incur a one-off charge as a result of that if the legislation was passed as proposed.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

30. “Yes, at least initially. Over time, the banking system is very competitive. Banking is a very commoditized industry, so you would expect to see some of that benefit eroded through increased competition over time. But in the short run, it would have a material earnings uplift for the banks that we cover at least.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

31. “There's still a lot of question marks around how exactly the tax rate will change. There's obviously a lot of details that still need to be ironed out. But it would have a fairly significant impact on overall bank earnings, at least in the short run. As you point out, the tax rate would drop from 35% down to 20%. Most banks earn 90% of their earnings within the US, and most banks actually have relatively high tax rates, at least compared to other sectors in the S&P. On our estimates, you probably see a 15% uplift, at least in the short run, in terms of the overall earnings power of the sector.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

32. “So there was a very healthy debate around what is the impact of corporate tax reform going to be, not just on the banks themselves, but on the broader economy. The third theme was regulation. Regulation is always a very, very important theme at this conference, but there are obviously a number of things that are changing post the election a year ago, and investors were really interested to try and understand both how rules are going to change, but also how bank behavior is going to change around things like buybacks and dividends. And then the last theme was really just about the economic environment. Because we host this conference in December, banks do talk a little bit about their expectations for 2018, so there was a lot of discussion around what will change as we head into 2018 in terms of the economic backdrop.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT

33. “So I'd say there were four themes that came out of the conference. The first is technology and just how rapidly technology is reshaping the financial services sector. We're seeing a very rapid adoption of new technologies, not just by millennials, but by people in their 50s and 60s. And that's really getting banks to go back and rethink what the value of things like branch-based distribution is. So in many ways, what we're seeing in the banking sector is very similar to what we're seeing in other sectors like retail, where consumer preferences in terms of how they're interacting with the providers is just evolving at a very rapid rate. The second theme was corporate tax reform. This is obviously a very important theme, not just for banks, but for the market more broadly. Banks, though, do benefit disproportionately in some ways in that 90% of bank earnings are domestic, and banks actually do have relatively high tax.”

    2017-12-14 · Goldman Sachs Exchanges · Tax Reform, Bitcoin and the Year Ahead for Financials · IDENTIFIED FROM THE TRANSCRIPT