Expect banks to fight back on Fed's policy proposal: Analyst

Major bank stocks took a hit in Tuesday's trading session after Federal Reserve Vice Chair for Supervision Michael Barr announced updated capital requirement regulations. KBW managing director David Konrad joins Asking for a Trend to discuss the state of the sector and break down the Fed's latest move.

JPMorgan Chase & Co. (JPM) President and COO Daniel Pinto believes that analysts may have too rosy of expectations for the bank's net interest income expenses in 2025. Konrad notes that his estimate is below Wall Street's own guidance, and adds, "What happened this past year is their guidance kept being raised because they're asset sensitive, the forward curve didn't materialize, and the Fed really didn't cut rates yet obviously this year. So their estimates this year beat expectations."

As the Federal Reserve moves into an interest rate easing cycle, Konrad expects "asset-sensitive" names like JPMorgan to experience some pressure in its net interest income.

Meanwhile, Goldman Sachs (GS) announced that trading revenue could fall 10% in the third quarter, which Konrad calls "disappointing." He notes that trading will be a more volatile number as it faces seasonality and volume issues. He adds, "We think that's that's a little bit not necessarily a trend line, but a tough quarter there."

With the Fed unveiling new proposed capital requirements, Konrad argues that "reducing the capital requirements by 50% was kind of in the market a little bit. And that's really basically where it came into."

Fed Vice Chair of Supervision Barr expects capital to rise about 9%, which Konrad says "feels about right" and comes in "largely in-line" with expectations: "The Fed typically gold plates the international standards, and then they took it a step further with this proposal. So what ended up happening is you had the US banks holding a lot more capital than the global banks. And so I think this largely adjusts that."

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Melanie Riehl

Video transcript

The Federal Reserve unveiling changes to its original plan on capital requirements for banks, scaling them back fed Vice chair for supervision, Michael Barr saying the proposed changes would quote better balance the benefits and costs of capital in light of comments received.

However big banks we know came under pressure in today's trade as JP Morgan voices a cautious outlook for next year.

And joining me now is David Conrad managing director at KBW uh Steve for company David.

You are just the man I talked to today because your coverage universe David uh in focus making a lot of headlines, you know, different threads I actually did want to start with with JP Morgan.

So Jp Morgan's uh President David, he had a conference and he says, you know what I think analysts might be just a bit too rosy here, I guess in their projections of next year's uh uh net interest income expenses.

What, what did you make of those comments, David?

Yeah.

Well, we, we are actually below the street for, for 2025 in, in NI I but, but basically what's going on here is, first of all, JP Morgan is one of the top financials globally, um and getting really stronger almost every day.

But what happened this past year is their guidance, um kept being raised because they're asset sensitive.

The forward curve didn't materialize and the fed really didn't cut rates yet, obviously, this year.

So their estimates this year beat expectations.

But now as we're looking, you know, going forward, you know, we're expecting 3 to 4 cuts perhaps uh in this fourth quarter and then cuts next year as well.

So some of the asset sensitive names will feel some pressure as we go into next year on, on their NI I and, and let me get you to take out another name, Dan.

So I know JP Morgan, I believe you're on the sidelines.

But another name you cover also made news and Goldman, that's the name you like.

Uh Goldman's Chief also making comments um saying listen, maybe trading revenue uh could fall 10% in Q three.

Your reaction to those comments, David.

Yeah, there's a couple of things there.

Um that was, that was a little bit disappointing.

Obviously, trading is a little more of a volatile number and they were coming off of a really difficult comp in the prior year, but there's a lot of volatility in August and it's seasonally, you know, also a slow volume uh period as well.

And so, you know, we think that's, that's a little bit, not, not necessarily a trend line but, but a tough quarter there.

The other thing they announced was uh a $400 million chart contra revenue uh as they prepare to sell the, uh the GM credit card portfolio.

Um Although that was a, a negative headline, we actually think that's good news for the stock broader question, David, uh this morning, uh new proposed capital requirements.

Um When you saw those numbers, would that was that basically in line with your expectations, David?

Were you think it was gonna be lower?

What do you make of it?

No, I think they were largely in line.

I mean, it took away a AAA negative scenario but, you know, reducing the capital requirements by 50% were, was kind of in, in the market a little bit.

Um And that, that's really basically where it came into.

So, you know, I I think um you know, Vice chairman Barr said that, you know, he expects capital to go up around 9% for the G SI S. Uh we're currently 11% in our model.

Um And that feels about right because, you know, the bank's calculation has historically been a little bit higher than the fed's calculation.

So largely in line.

And then the other move there was the RW A inflation won't apply to the category four banks.

So that's the banks between 100 and 250 million.

Um That's really a non event, the RW inflation wasn't that high for them anyway, the big issue for them is the, the mark to market of the bonds which still does stay in the capital.

So kind of a non event for that?

And, and does it mean David, would you expect banks now accept that proposal?

Think this is as good as it's gonna get or would you expect them to fight?

Oh, there, there'll be a little bit of a fight, right?

But II, I think this is broadly, you know what they were looking for.

I mean, I think what happened is, you know, the the fed typically gold plates, the the international standards and then they took it a step further uh with this proposal.

So what ended up happening is you have the US banks holding a lot more capital than the global banks.

And so I think this largely adjust that David quick question in your last one, I looked through your coverage universe.

I only see one c one lonely underperform and that is PNC.

How come?

Well, it, it's one of the more expensive names out there.

It is a quality name.

Um They have their kind of outlook is for a very strong 2025 ni I um a record number, but we think that's largely embedded in the numbers.

And so it's training roughly at a two term premium to the group with relatively in line returns.

So we just think as, as numbers come in as its peers recover on capital, uh we think there'll just be a mean reversion of those ps closer to the peer levels.

David.

Appreciate you coming on the show and thank you for those stock picks.

You bet.

Thank you.