Jon Curran, senior bank analyst and portfolio manager at abrdn, joins Yahoo Finance Live to discuss three inflection points for the financial sector, fourth-quarter earnings for Goldman Sachs, and the outlook for banks in 2022.
JULIE HYMAN: We are watching bank earnings once again today. Goldman Sachs front and center after the company came out with numbers, particularly on the earnings side, that seemed to miss estimates a bit. The shares are down 8%. There's some concern it seems over expenses, some concern over the company's trading revenue. Jon Curran is with us now. He's a senior bank analyst and portfolio manager at Aberdeen. Jon, it's good to see you. What's up with--
JON CURRAN: You too.
JULIE HYMAN: --Goldman Sachs? Do you share the market's concerns about the numbers?
JON CURRAN: Well, I think it's all about the outlook and the relative expectations because the banks throughout the pandemic have been a reliable source of good news, and they've shown that trend continues this quarter. Really, there are three inflection points. We're starting to see loan growth, which I'll unpack. We're starting to see loan growth, we're starting to see expenses come up, and we are starting to see the end of the Reserve releases, which you've seen in successive quarters.
As it pertains to Goldman Sachs, the expense line is I think what's really in focus. And then what I was explaining with the loan growth, we're starting to see higher interest rates, but we're starting to see the beginning of a change in fees. So investment banking results based on surging advisory were really evident at Goldman Sachs, but I think trading revenues are going to be a little lighter because the pandemic-induced volatility is beginning to abate. And so that, I think, in tandem with the expense outlook, is what the market may be reacting to today.
BRIAN SOZZI: Yeah, Jon, you saw the market reaction negative to JPMorgan last week, now a big sell off in Goldman Sachs. Did the results out of these companies, whether it's weak trading revenues or higher-than-expected operating expenses, does that make the case that you should rotate into those money center banks or those regional banks?
JON CURRAN: Well, I think the money center banks offer a diversification of earning sources. Any one of JPMorgan's businesses could be a standalone company. And again, JPMorgan took their expense outlook up from $75 billion to $77 billion. But we are starting to see the salutary impact of higher rates and higher loan growth coalescing to higher net interest income. So you're going to see more of a balance between net-interest income and fee-based sources.
But, you know, Morgan's numbers are nothing to sneeze at with $30.3 billion in revenues and $10.4 billion in profits. You know, I think their diversification is very evident, asset management generating $4.5 billion of revenues for the top line. So again, terrific across the board, and again, I think it's just the expense outlook. But also, these banks are-- part of the higher expenses is, these banks are investing in their businesses, and part of the expense uptake is a function of the growth that they're expecting.
JULIE HYMAN: At the same time, when you look at the consumer-facing banks, the regional banks-- you know, we had PNC and Truist that were out this morning as well-- because they are more sort of directly tied to that net-margin expansion that you're talking about, what's the sort of relative value of that proposition in this environment versus that more diversified, but maybe also higher expense picture that we're getting at the money center banks?
JON CURRAN: It's a very interesting point because, I think, on the one hand, you have loan growth and higher rates coalescing into higher net-interest income, which will benefit the regional banks, which have really good loan portfolios. On the other hand, the asset management businesses that a Bank of America or JPMorgan and some of the diversified banks have also confer a big benefit to the fees. So, you know, interest-rate cycles won't make or break a bank, but bad underwriting will.
So I do like the diversification play of the money center banks. Of course, the regional banks will benefit from higher rates and loan growth. I mean, the top 25 banks in the United States saw 3.5% higher loan balances year-on-year at the end of the fourth quarter versus a flat year-on-year comparison at the end of quarter three. So we are starting to see loan growth, and it's beginning to take effect.
BRIAN SOZZI: And Jon, it sure seems like we're right-- we're headed down a path where banks are going to have to be paying a lot more for top talent. So on the JPM results, heard it from Jamie Dimon on the call, saw it in the Goldman Sach's results here-- should investors just expect now lower returns on equity because they're having to pay these top performers more?
JON CURRAN: Well, I'm a bond guy. It's an excellent question for an equity investor. But what I would say is that the banks, in order to attract and retain the best talent, they're going to have to pay for that. I mean, JP Morgan called it the war for talent. I really do think that these banks are going to have to pay up if they want to get the best people, the best and brightest to work there. And again, I think that JPMorgan said it, and all the other banks are going to be saying the same things.