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Would QE3 Hurt the Financial Sector?

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    Stifel Nicolaus Managing Director Chris Mutascio on the outlook for the banking sector.

  • Duration 4:18
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Today was the worst day of the year for the financial sector despite some positive earnings reports from JPMorgan and wells -- this morning and with a slew of banks on tap to report next week what should investors -- -- Christmas -- CEO is a bank stock analyst and managing director at Stiefel Nicholas and people were kind of scratching their heads Chris because.

You got -- good earnings reports from heavyweights in the sector at Wells Fargo JPMorgan but.

Why specifically did the financials -- such a hit today when they've been doing very well here to date.

-- -- -- part of part of the problem I think the banks are actually had a very good run -- -- first what two to three months of the year.

I was it was a by the rumor sell news type type story -- -- JPMorgan.

And Wells Fargo for all intents and purposes to put up some pretty good numbers there's always things you can pick at.

But given the fact you're probably over -- going into earnings if you were looking for each have a reason to take profits in the recent run shares you know -- Chris a lot of people take shots at the banks say all these low rates -- making out like bandits because they're able to get that get depends basically free money and trade like crazy -- that you say that's an unfair shot why.

-- -- -- -- The -- the banks margins right now are actually historical low levels because rates are too low they just can make a very good spread between earning assets.

Take a look at your investment securities you got a five year treasury earning less than 1%.

And your funding that with with cost of funds thirty basis points or maybe a seventy basis points -- spread on that one transaction.

So we human people talk about low interest rates benefiting -- banks are simply not true low interest rates right now are really hurting the banks from profitability perspective because -- net interest margins are all time lows.

-- here's why I'm confused about that Chris because every time the Fed indicates it might take away the punch bowl and stop adding.

Quantitative easing or any kind of propping up mechanism that Q -- as it's known.

These are the companies that start belly aching and they also don't do well in that type of atmosphere so.

Are they stock on a drug that both hurts the man help.

You know I think the traders are stuck on -- drug and ABS the bank's -- they're not telling you that they don't want they want QE3 the banks are telling you they want rotten short term rates.

Us through them later so I think you're talking computing two different things one what the banks would like to see -- -- with -- traders would like to state.

A right now -- any form of QE3 would actually very negative for the banks because the margin was -- lower for longer.

Again we'd like to see and typically speaking over the course of time the best earnings power for the -- -- rates -- rising at a gradual pick up -- But we know from the Fed that they're not gonna raise at least overnight lending rates -- for the next year or two so.

Now what what are the terror bets in banking what do you like -- their names out there that stand to do well no matter what the atmosphere.

One -- I don't know -- stated no matter what the atmosphere I think what you what you do what you try to invest and in the areas in which the markets giving you and for example say take a look at JPMorgan and Wells Fargo.

Miniatures margins are flat to down -- you're -- -- there was no growth.

But there was growth in certain fee income line items for example asset management trust fees that Wells Fargo pretty impressive you know almost 10% sequentially.

You also mortgage banking that was a quite substantially which will continue with the -- to program into the trading and investment banking for for JPMorgan.

There's a fee income line items that that can offset.

-- -- the margin pressures unfortunately the traditional banks generally speaking don't have those offsets so.

We think is gonna happen here -- some rotation back from the risk on trade.

Back into the risk off trade those banks can take share and -- niche businesses to grow earnings and otherwise lackluster environment -- Chris economies and on the thing as people were peace and through these reports both JPMorgan and and wells didn't show a lot of loan growth.

Is that bothers -- DO.

Is it bothersome no.

It -- -- -- concerning me is bothersome to keep them on that.

Loan growth typically seasonally weak in first quarter for example JPMorgan had two to 3% commercial loan growth in the quarter from fourth quarter that's not -- growth rate.

That was totally offset by contraction in the credit -- portfolio which is always -- we can first quarter after the paid out of your Christmas debt.

So it's somewhat -- it somewhat misleading to say -- gore there was no growth.

There was no net new loan growth we do expect it to improve going second quarter but I will tell you at this stage of -- of the of the at the economic recovery were still not seeing that type of growth you otherwise would see -- -- -- exactly and a lot of small and midsize business is still not getting the credit that they need to grow more hey Chris have a great weekend thanks a lot good to see.

-- you to pleasure being here.

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