The Transcript 10.19.20

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Succinct Summary: Earnings season kicked off this week.  The nation’s big banks reported earnings and for the most part provided positive economic commentary.  We are seeing a return to a generally sound economy and confidence has improved a lot.  Credit performance has been much better than expected and if nothing changes banks probably have a lot of excess reserves.  The election creates the potential for near-term volatility but the end of the pandemic is hopefully in sight.

Macro Outlook:

We are seeing a return to a generally sound economy

“…what our data continues to suggest is that we are seeing a return to the fundamentals of generally sound underlying economy…In the third quarter, we’ve seen a full restoration of spending by Bank of America customers when compared to last year.” – Bank of America (BAC) CEO Brian Moynihan

Confidence has improved meaningfully

“I would say that CEO confidence has improved meaningfully in the quarter. It’s still not at the highly elevated levels that might have been at the beginning of the year, but CEO confidence and the dialog we’re having is certainly improved.” – Goldman Sachs (GS) CEO David Solomon

“…every month we move through this, we see more and more customers with more confidence booking both close in and further out and that’s what we continue to need to see that development and confidence.” – Delta Air Lines (DAL) CEO Ed Bastian

GDP may have rebounded by 30%

“…in the third quarter, Our own Bank of America economic experts predict a sharp rebound in third-quarter GDP of around 30%” – Bank of America (BAC) CEO Brian Moynihan

This has been an upside surprise

“The unprecedented joint monetary/fiscal policy response by many governments, including the US, is providing a bridge for disrupted income streams and has so far surprised on the upside.” – BlackRock (BLK) CEO Laurence Fink

“…we did see improvement throughout the quarter with procedure volume recovering faster than expected as well as positive trends in scripts and physician office visits.” – Johnson & Johnson (JNJ) IR VP Chris DelOrefice 

But we’re still below peak economic activity

“The powerful rebound in the third quarter still leaves the economy well below its pre-COVID peak, including restaurant sales 15% lower, real GDP 4% lower, and unemployment 7% below pre-COVID levels.” – Wells Fargo (WFC) CEO Charlie Scharf

“Commercial card spend remains significantly lower throughout the quarter and was still down approximately 30% in the last full week of September compared to the same week a year ago.” – Wells Fargo (WFC) CEO Charlie Scharf

There’s a long road ahead

“That said, the Covid-19 recession threw the economy into a very deep hole, and it will take some time, perhaps another year, for the level of GDP to fully recover to its previous 2019 peak..It will likely take even longer than that for the unemployment rate to return to a level consistent with our maximum-employment mandate.” –  Fed Vice Chair Clarida

“This did not start as a financial crisis but it is morphing into a major economic crisis, with very serious financial consequences…There’s a long road ahead.” – World Bank Chief Economist Carmen Reinhart

Permanent job losses have risen

“…improvements [in labor markets] were largely driven by reversals of temporary layoffs while permanent job losses have risen to nearly 4 million people, reflecting some of the deeper challenges in our economy.” – Goldman Sachs (GS) CEO David Solomon

The election and Covid dynamics could create near term volatility

“As I look forward to the fourth quarter, we can count on any number of issues to be the source of some volatility, whether that’s U.S. election, LIBOR transition, the trajectory of COVID, any one of those.” – Goldman Sachs (GS) CFO Stephen Scherr

“…the different speeds of economic restart across countries, a lag in stimulus, particularly in the US and the upcoming US election next month…could have significant implications on policy and on markets.” – BlackRock (BLK) CEO Laurence Fink

“Our way of looking at this is the risk of large-scale lockdowns has a lower probability, but it’s a larger number. And then the likely upside coming from vaccinations is medium to high probability, but it’s a lower number. And we’d see both of those factors being somewhat balanced…But I fully agree with your question is, if there’s going to be a tighter lockdown, it’s going to be in the U.K.” – Walgreens Boots Alliance (WBA) CEO Stefano Pessina

But the end of the pandemic is hopefully in sight

“…as you look forward, as you get into next year, there will be a vaccine, there will be therapeutics. The world will continue to open, and everyone is learning how to do it safely, even in today’s environment. And ultimately, that’s what’s going to drive business activity and demand, and that happens will be the beneficiary.” – Wells Fargo (WFC) CEO Charlie Scharf

Financials:

Credit performance has been much stronger than anticipated

“Credit performance across almost all loan products was stronger than we would have anticipated a quarter ago.” – Wells Fargo (WFC) CEO Charlie Scharf

“What you’ve seen with us and also the other banks this morning, I mean, provisions are a bit lower than they had been the early part of the year…You’re right, our losses have been very low.” – First Republic Bank (FRC) CEO Jim Herbert

“Overall, the balance of nonperforming loans remains at a modest 48 basis points to loans.” – Bank of America (BAC) CEO Brian Moynihan

“Charge-offs across our portfolios remained relatively low and, in fact, we’re down slightly year on year and quarter on quarter.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“Despite the somewhat lumpy increase in NPAs and charge-offs during the quarter, we’re seeing broad signs of progress in commercial credit quality as the economy recovers” – Citizens Financial Group (CFG) CFO John Woods

“…if you look at consumer as well, we’ve had really, really healthy trends even surprising to the point of being surprising but very solid in terms of delinquency.” – Citizens Financial Group (CFG) CEO Bruce Van Saun

90-95% of customers who received forbearance are remaining current

“…in terms of what we’re seeing with our customers that have exited relief, approximately 90% of accounts remain current.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“…our modifications were largely done in April and May. And so they’re now coming off modification and back to regular payments status. And thus far it looks like we’re at about 90%, have already come back onto their regular payment status.” – First Republic Bank (FRC) CEO Jim Herbert

“The performance of customers that have exited forbearance is trending well with approximately 95% in current status. Also, for customers that have not taken any forbearance, the delinquency status is trending favorably.” – Citizens Financial Group (CFG) CFO John Woods

Any increase in charge-offs would happen in 2021

“…any losses that may come out of that, it’s likely going to be in the 2021 calendar period versus something that pops here in the fourth quarter.” – First Republic Bank (FRC) CEO Jim Herbert

“While we could see an uptick in charge-offs over the next few quarters, given payment relief and government stimulus already provided we don’t expect any meaningful increases in charge-offs until the second half of 2021.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

Unless something changes, banks probably have a lot of excess reserves

“I’ve already said that the base case — if the Fed base case happens, there’s probably something like $10 billion of [excess] reserve.” – JPMorgan Chase (JPM) CEO Jamie Dimon

“We believe charge-offs should be stable in Q4 and barring a deterioration in economic outlook, we should start to see reserve releases beginning in the fourth quarter…I think we’re probably nearing the peak charge-offs, but they’ll stay elevated for a while before they move back down I think in the second half of the year.” – Citizens Financial Group (CFG) CFO John Woods

Consumer:

Walgreens says there is evidence that consumers will return to retail

“…there is clear evidence that as and when the restrictions lift, customers do come back to us, both physical in store and through omnichannel.” – Walgreens Boots Alliance (WBA) CEO Stefano Pessina

Technology:

Many companies want people to return to the office

“I’d like to spend a moment on our approach to return to office. We have employed a number of new protocols to operate as safely as possible around the world..We are focused on helping our people come back safely as being together enables greater collaboration, which is key to our culture.” – Goldman Sachs (GS) CEO David Solomon

“I think, over time, I think the culture of BlackRock is still an office type of culture where innovation has always been driven by having people working together. And I think longer term, we’re going to hope that we get back there as quickly as we can.” – BlackRock (BLK) CEO Laurence Fink

But it’s unlikely that we’ll go back to 100% of our work time in offices

“…let’s be clear, I don’t believe we will have 100% back in office even when we have 100% solutions related to the virus. I believe this will become a blessing. I believe this is going to be considered a benefit if we could have –30%, 40% of our workforce that they can work remotely at periods of time during the year.” – BlackRock (BLK) CEO Laurence Fink

Sales cycles may move faster in a virtual world

“…our customers are willing to take that call even if it’s a virtual call. It doesn’t have to be in person. It’s nice if it is, but it doesn’t have to be. In some ways, we might move faster in a virtual world because we’re not waiting for a resource to be there. Maybe somebody at the plant can’t make a meeting, but they can if it’s done virtually. And so in some ways, it might shorten the sales cycle.” – Fastenal (FAST) CEO Dan Florness

Technology favors companies with scale

“…one of the things that’s going on in the crisis is people are seeing that there continues to be efficiency in scale. As the world continues to digitize, it requires greater investment, and that obviously advantages companies with scale.” – Goldman Sachs (GS) CEO David Solomon

Silicon content in 5G phones is higher

“…on the average, the 5G phone have about 30% to 40% more silicon content as compared with 4G” – Taiwan Semiconductor Manufacturing (TSM) CEO C. C. Wei

Netflix has huge animation ambitions

“Our animation ambition right now is not just to step up and be as big as someone who’s doing it today — we’re on a path to be releasing six animated features a year, which no major studio has ever done, on top of the very healthy slate of animated series” – Netflix (NFLX) Co-CEO Ted Sarandos

Industrials:

Corporate travel volume is only 15% of last year’s levels

“Corporate demand has shown signs of modest improvement. And while the volume of corporate travel at the end of the quarter was 15% of last year’s levels, corporate volumes are trending upward across all industries and we expect this to continue into 2021.” – Delta Air Lines (DAL) CEO Ed Bastian

Corporate travel may start rising

“…though we saw an uptick in FTE relative to what we’d seen the month before, I wouldn’t be surprised if you continue to see some of that. Travel expenses, I wouldn’t be surprised, again, if you saw that come up from where it’s been.” – Fastenal (FAST) CEO Dan Florness

The auto market remains hot

“…market trends remain encouraging. Industry new vehicle sales closed the gap to prior year levels throughout the quarter. In fact, the rebound in sales over the past five months took five years to achieve following the past financial crisis. Used vehicle sales have demonstrated particularly strong performance, outpacing prior year levels every month since May. As a result, overall dealer profitability rebounded to the highest levels in several years during the quarter, more than offsetting a difficult Q2.” – Ally Financial (ALLY) CEO Jeffrey Brown

“…the COVID-19 has a major impact on the automotive market and supply chain this year have all been affected. But we are seeing the sign of recovery in 4Q.” – Taiwan Semiconductor Manufacturing (TSM) CEO C. C. Wei

People want personal travel options

“The recovery in sales from the trough in April has been driven by a combination of three factors, including a shift towards personal vehicle ownership replacing mass transit and ride sharing, where usage has declined 50% to 70% from pre-COVID levels.” – Ally Financial (ALLY) CEO Jeffrey Brown

Healthcare:

Hospitals are much better prepared for any Covid resurgence

“As I said on our second quarter earnings call, hospitals are much better prepared for any potential COVID resurgence…While we certainly continue to watch closely as the rest of 2020 plays out, we remain optimistic heading into 2021.” – Johnson & Johnson (JNJ) CFO Joe Wolk

There’s a growing backlog of non-Covid healthcare patients

“…diagnostic procedures such as colonoscopies and PSA tests have been delayed and may not be back to pre-COVID levels now. The delay in diagnostic visits will delay disease detection and like prostate screening changes in 2012 create a reservoir of patients with more advanced disease.” – Intuitive Surgical (ISRG) CEO Gary Guthart

Miscellaneous Nuggets of Wisdom:

Be adaptable

“Since 2000, 52 percent of Fortune 500 companies have either gone bankrupt, been acquired, or gone out of business. The world’s largest organizations are facing a sort of Digital Darwinism, and it’s not the strongest who will survive; it’s those most adaptable to change.” – Okta (OKTA) CEO Todd McKinnon


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