Why Big Banks Are Selling-Off

0:03Every year, hundreds of thousands of people from all over the world flock to Las Vegas for the Consumer Electronics Show. And they spend a week trying to sell each other on the weirdest gadgets you've ever seen in your entire life. This week on The Vergecast, we're talking all about everything happening at CES. From the TVs, to the AI gadgets, to the humanoid robots that everybody is hoping might someday do your laundry and wash your dishes. All that and much more on The Vergecast, wherever you get podcasts. Today's number? 100. That's how many body parts were stolen from cemeteries by a man in Pennsylvania last week.

0:41Authorities confirmed this after they broke into his storage unit when asked what they found. The officer replied, remains to be seen. Money market's mad. If money is evil, then that building is hell. The show goes on! Get back in there and watch the show! Show! Welcome to Prof. G. Markets. I'm Ed Elson. It is January 15th. Let's check in on yesterday's market vitals. The major indices all ended the day in the red for a second day. The Nasdaq led those declines dragged down by Nvidia after Trump announced new security requirements for H200 chip exports to China. Bank stocks also fell following their earnings.

1:24We will talk about that in a second. Oil prices dropped after President Trump's signals an attack on Iran is not imminent. And finally, gold, silver, and copper all hit record highs. Okay, what else is happening? Fourth quarter bank earnings delivered a mixed picture, but Wall Street's verdict on bank stocks was quite simple. Sell. Citigroup fell 3%. Bank of America dropped 4%. Wells Fargo slid 5%. That's the most in six months. And JP Morgan fell for a second day. It's down more than 5 % since its Tuesday earnings. Let's take a look at the earnings themselves. Citigroup beat estimates but saw profits slide.

2:07Bank of America beat on revenue and net income with quarterly profit actually rising 12%. Wells Fargo disappointed with its net interest income. And JP Morgan topped expectations. However, profits fell 7 % after a one-time hit tied to its Apple Card deal. But mixed results weren't the only thing weighing down. these earnings calls. Bank executives also had to contend with fresh political pressure after President Trump floated a proposal to cap credit card interest rates at 10%. On top of that, the sector is still reeling from the news about the DOJ's investigation into Federal Reserve Chair Jerome Powell.

2:46A lot here, a lot to unpack. Today, we're speaking with Saul Martinez, head of U.S. financials research at HSBC. He will break down these earnings for us. Saul, thank you for joining us on Prof G Markets. Thanks for having me. So we want to get your reactions to this earnings. We've seen earnings from all the big banks here and generally a sell-off. Any initial reactions? I think the divergence between what were generally good results and outlooks and negative share reactions, it is telling of high expectations going into these results. So I've characterized these results as good, not great. Now, in many respects, the results did really validate the bull case for banks.

3:36Net interest income is growing, loan growth is picking up, capital markets revenues have been good, credit quality is good, they're managing their costs effectively. the expectations from the banks for that profit levels will go up. As you said, though, Ed, the stocks reacted negatively. JP Morgan is down 5 % since they reported on yesterday and Citi, Bank of America, Wells Fargo were all down 35%. Now, I think this, you know, does reflect that the big banks have become, you know, darlings. They've outperformed considerably last year. they outperformed in 2024 valuations are historically elevated.

4:19And I think there's some disappointment that results weren't even stronger. I think that is reflected in the guidance. The guidance that banks gave for 2026 is pretty much in line with where analysts are at and likely doesn't trigger material upgrades from analysts. And if you overlay concerns about policy, which I expect we'll probably get into with cards, it shifted sentiment a little bit towards the bank. So I think it's a reflection of high expectations coming in and the fact that the results were good, but they weren't great and they're not necessarily going to lead analysts and investors to really ramp up their expectations, their baseline expectations for earnings and profitability going forward.

5:09Just looking at some of these businesses, I mean, wealth management was a success at Citigroup, Bank of America, Wells Fargo. Some really impressive M &A numbers from Citigroup, 84 % record dealmaking. I'm just thinking about what Wall Street is expecting and what they wanted in 2026 and what they didn't get in that guidance. Is there a story that you think that Wall Street was expecting perhaps to do with investment banking revenue, perhaps to do with maybe the IPO market? What do you think they wanted that they didn't see? I think it varies a little bit by think. You're right. Right. You know, some of the elements of the results are good.

5:57But again, like the, you know, the expectation, what is in the market consensus is that capital markets revenues will be strong. We'll be strong. There is an expectation that we may be entering into a super cycle of investment banking activity. So I don't think folks are concerned about investment banking or capital markets related businesses. I think to a large degree, though, there's probably some, you know, some disappointment with net interest income. So the traditional business of banks, lending, investing in securities. And part of the bull case, Ed, for banks is that we're now living in an environment where there's positive real rates across the curve.

6:48So a lot of the loans and investments and securities that banks made in a low interest rate environment are effectively repricing to a higher interest rate environment. And you're getting a positive benefit on asset yields that's thriving net interest income. And I think the expectation was that banks would be even more positive on net interest income. J.P. Morgan gave some guidance in December about net interest income, growing 30%. I think there was some hope that maybe they would increase that. I think the same story applies to Wells Fargo and Bank of America. So I think there was some hope that the traditional revenue driver of banks, net interest income would actually be a little bit better than it It actually was, but banks are basically saying that what analysts are expecting from that, from, um, for revenues is, is probably just about right.

7:46I think there was some hope that they would raise guidance and, and, and that would, um, you know, lead to higher earnings estimates going forward. Yeah. Something that we should also bring up, certainly putting pressure on these stocks, um, Trump's proposal to put a 10 % cap on interest rates on credit cards. Yeah. which the banks do not like. Wells Fargo didn't like it. Citi didn't like it. J.P. Morgan's CFO said everything is on the table to push back against this proposal. Can you tell us a little bit more about the proposal, how it will affect these companies, and if these companies should really be worried about it?

8:29Yeah. Well, first of all, there's a lot to unpack here, and there's a lot of uncertainties. You know, right now it's a social media post as opposed to an actual proposal. You know, and there's some questions about how it could even be implemented. I think most policy analysts, legal analysts would tell you it requires legislation. It's very hard to see legislation passing on this by January 20th. And it's hard to see legislation passing that would implement a cap of 10 percent. And an executive order on this would likely be met with legal action. So how this would be implemented is a very big question.

9:12It would have a devastating effect on the credit card business, though. A 10 % interest rate cap on lending would make large swaths of the credit card business unprofitable. Broad swaths of the population would lose access to credit. Banks won't make, banks cannot make money and credit card companies cannot make money given the loss rates on credit cards with a 10 % interest rate. And there would be, you know, so you would have to see a material change to the business models. Rewards would be cut. You would see more late fees. And, you know, for JP Morgan and Citigroup, they would be affected, right?

9:52These are important business for them. It would have a material impact on earnings. But, you know, especially for more pure play credit card companies who do have more exposure to riskier segments of the population, somebody like a Capital One, it would be, you know, have a, you know, it's just a fairly devastating impact on their earnings and profitability. I think that, if I could make one additional point, though, because I think it ties into what we were talking about earlier about, you know, the bull case for banks and what's in the expectations of the market. And, you know, part of what has made the banks, you know, so attractive to investors is the view that their primary beneficiaries of deregulation, that the direction of travel on policy is a good one.

10:37You're going to see, you know, capital requirements cut, less stringent enforcement from regulators. And I think this was a reminder that policy can cut both ways. It's not a one-way track to, you know, easier, more favorable regulation. And so this really threw cold water on an important part of the bank bull thesis. And I think it was a reminder that, you know, there are risks. And this is something we did highlight and report very recently as one of the key risks for 2026, especially as we head into the midterm election. and if you know if you do get a situation where democrats do really well in the midterm election investors will be you know we'll start to look to 2028 and it will be a reminder that maybe the the very favorable regulatory policy um that you've seen may not always be that way but we got that reminder i think a little bit earlier than expected with um with the social media post last Friday.

11:38100%. It is fascinating the extent to which Trump is influencing everything, including the markets and businesses of these businesses. I mean, as you say, it's like, it was all about deregulation. That was the idea. And then that's what the market was getting excited about. Now it appears that maybe the banks aren't friends with the White House, who knows. But the point being, this is what is moving the markets. This is what decides the whole game. Just before we end here, I'd love to hear what we learned from the banks about Trump's investigation or the DOJ's investigation into Jerome Powell.

12:19We were discussing this earlier in the week, and one of our guests said, you know, it'll be very interesting to see what these titans of finance, what these leaders say about one of the most cataclysmic events that we've seen when it comes to the Federal Reserve in the past few years. What did we hear from the CEOs? Did they speak about it? Yeah, I mean, it wasn't a topic of conversation that was, you know, front and center. I think it did come up in the J.P. Morgan earnings call. I think that, you know, I think the view of the banks, and I think Jamie did express this, was central bank independent is is important and it's important for you know for you know pretty obvious reasons yeah um uh so i think banks you know bank ceos will you know you know will express that that view i think you know i think it is fair to say that you know bank uh ceos have to be you know they represent the bank and they have to be you know pretty um you know they have to be you very judicious with what they say and how they say it in the current political environment.

13:37But I think they did express the view, and they will express the view that central bank independence is an important part and having those safeguards are important for the U.S. economy and important for the central bank's ability to carry out its mission of maintaining inflation under control. So, you know, but I don't think we necessarily learned anything or, you know, bank CEOs, you know, stuck their necks out in one direction or another during their news calls. Yes, absolutely. Okay, Saul Martinez, head of U.S. financials research at HSBC. Saul, really appreciate your time. Thank you for joining us.

14:24Yeah, anytime. After the break, an update on Warner Brothers Discovery's bidding war. And if you're enjoying the show, give Prof. GMarkets a follow.

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17:26We're back with Prof G Markets. Netflix is reportedly preparing an all-cash bid for Warner Brothers Discovery as the company moves to fast-track a potential sale. This news comes shortly after rival bidder Paramount launched a proxy fight on Monday. The company is also suing Warner Brothers Discovery and its CEO, David Zaslav, for failing to disclose information about its sales process. Netflix and Warner Brothers and Paramount stock all closed down on this news. Here to break it down for us and also to give us a fresh scoop on this bidding war, we are speaking with Rohan Goswami, business reporter at Semaphore.

18:06Rohan, welcome back to Profit Markets. Ed, great to be back with you. Hope you've been doing well since we've last spoken. Absolutely. And we do want to get an update since we last spoke. I mean, last time we spoke, we saw that Warner Brothers Discovery had told its shareholders to reject the Paramount bid. They were encouraging shareholders to go with Netflix. That was three weeks ago. We're going to hear about your scoop. But just before that, can we just get an update on what has happened since we last spoke in these past three weeks? Yeah. You know, setting the scene in the last three weeks somehow, Paramount came back again and said, look, we've made some changes.

18:45We've made our money a little bit more certain. Like you and I talked about, remember, we talked about how their money wasn't totally shored up. Jared Kushner had just left. There were some concerns about the sovereign wealth funds. So Larry Ellison, right, David Ellison's old man, actually stepped in and personally guaranteed $40 billion, a huge portion of this check, and basically said, I'm good for it. I'm here for it. It really must be wonderful and nice. And Paramount said, all right, Warner, let's give this another go. You want to come to the negotiating table, talk with us? And Warner, over the holidays, sat around, thought about it for a little bit and said, nah, we're good.

19:23We like what we've got with Netflix. And shareholders got pissed off, truly furious. Because from their perspective, we're talking about$30 a share for a whole company in cash. Everyone loves cash. Versus$21.75 for part of the company. So less money for less of the company. It was more complicated. It was more muddled. Warner rejected it again. Paramount said, well, okay, fine. If you don't want to do that, Warner Brothers board, we're ready to fire you. We're going to mount a proxy fight. We're going to try to take control of your board because we think shareholders are pretty pissed off about this and want a chance to get their hands on all our cash.

20:00So they did that earlier this week. Now it's come out. Bloomberg first broke this news. We've confirmed it. Several other outlets have confirmed it as well. That Netflix is pretty close to making its bid all cash. So it's trying to solve for some of the problems that shareholders have pointed out. Mostly, they don't really want to own Netflix stock, right? They don't want to own Netflix at all. They want cash in hand. Who doesn't want cash? That's where we are today. And as we reported earlier, right before we're getting on to talk about this right now, both Paramount and Netflix have been making their case to regulators in Europe, but also in the U.S., trying to sort of say, look, we are the pro-competition deal here.

20:38Even though, remember, Paramount, as we know, doesn't have its own bid yet. It hasn't been approved. So that's sort of where the lay of the land is as we stand today. So, so much in there. I think one of the most important pieces is the fact that Paramount comes back and gives a better offer. I mean, they said before, oh, we don't trust that you have the money. Then Dad comes along and says, no, no, I have the money. And we know that he does. They make the offer again. And then Warner Brothers says no. And this is interesting because one thing that we saw from David Ellison before all of this unfolded, before Netflix was getting involved, before we even knew that Netflix had made the offer, is he wrote this letter to Warner Brothers saying, hey, I think you guys are biased against me.

21:27And something that you reported is that you've been speaking with shareholders. Shareholders think there is a, quote, inexplicable personal animus between Zaslav and David Ellison. This is what you wrote. So it sounds like maybe David Zasloff and the board actually are biased against David Ellison. I thought it was kind of a ridiculous statement, but it sounds like maybe it's true. What do you think? I'll be honest. Look, remember, when we first spoke, I thought Netflix had it. I thought that Paramount had not done enough to solve the problems, the real problems that Warner Brothers has. But time has gone on.

22:04They've stepped up the certainty of their financing. They've said, look, we're willing to negotiate. Please just come to the table with us. and talk to us. And Warner, again, this is Warner's board. We can't all put it at David Zaslav's feet, but David Zaslav is also the CEO of this company and has a lot of influence over this board, has just said no time and time again. No, I might add, in kind of an insulting way. I mean, their last response, as you know, Ed, was to compare it to a leveraged buyout, which is not something that sits well with anybody when you're trying to talk about how much you care about a brand, how much you care about these assets, how you want to steward these assets.

22:39When we think LBOs, we think, you know, what private equity used to do. Let's buy an asset up with someone else's money. Let's strip mine all the good stuff out of it. And let's make a ton of cash for ourselves. Screw the shareholders. Screw the employees. That's what Warner Brothers compared the Ellison's offer to. And as we reported, it was super insulting to these guys. So, yeah, some shareholders really do feel, and certainly my reporting hasn't gotten to the bottom of this. I would love, David Ellison, if you want to pick up the phone and let me know what you're thinking here. I would love to understand this, but certainly the shareholders I spoke with said, look, it makes no sense.

23:11These guys have all the money in the world. And if that wasn't enough, they've got three friends, right? These sovereign wealth funds who have all the money in the world. Why aren't they picking up the phone and talking unless Zaslav has some beef with Ellison? Remember, these guys went out to dinner together. They went on walks together. They had all these conversations leading up to this auction. Ellison even offered to make him co-CEO. That's David Zaslav, co-CEO of the combined company. That's not a joke. That's a real offer. that was in a lot of the merger documents. As it stands, you know, Zaslav will make a ton of money off this either way.

23:42So it's left to, you know, it's left to our imaginations what we think. But this is what M &A bankers call the social issues of a deal. The price might be right. The structure might be right. But if two CEOs don't like each other, if two boards don't like each other, it's the same as real life. It becomes hard to get anything done. Ultimately, this looks like maybe a shareholder lawsuit. I mean, Zaslav has a fiduciary responsibility to get the best price, to get the best offer, if the shareholders are saying, we think the best offer is from Paramount and he's not doing it because, because I don't know, because he doesn't like him, because he doesn't like his dad, because they're buddies with the president.

24:23I don't know what it is. But doesn't that seem like a lawsuit? Shareholders are always going to sue. In fact, shareholders already have in San Francisco. I think the very week this deal was announced. Shareholders always want more money, and if they don't get the money, they're always happy to complain. What has happened, right, is this proxy fight, right? So this board fight that Paramount has threatened to kick off. And that is the easiest way for shareholders in the short term to express how unhappy they are. Now, one big shareholder, that's a shareholder called Pentwater, already went on CNBC and has said, look, this is insane.

24:53This is crazy that they're not talking. We're going to block the Netflix deal. We're going to vote to block the Netflix deal because we feel like it's absolutely crazy to turn down$30 for this company. Because remember, before we talked, when we talked, the closest comp to the plan spinoff from Warner Brothers Discovery was a company called Versant. That's my former employer, CNBC, MSNBC, a bunch of grab bag assets that were leaving Comcast. That company hadn't started trading yet. And everyone kind of thought this company is going to be a better play than Warner Brothers Discovery spinoff. That hasn't been the case.

25:24That stock is in the tubes. It's terrible. And so when that happened, a lot of shareholders went, well, Versant has less debt than Warner Brothers plan spinoff. Theoretically, it's a better, higher performing, higher end collection of assets. And it's trading like crap. No one wants to touch this thing. If that thing, that quote unquote quality asset, it's all relative because it's TV. But if that quality asset is trading so badly, what chance do I have of making up for my $2.75 or sorry,$2.25 off this spinoff? I'd rather go with something more certain. So, you know, we'll see how this proxy fight shapes out if they even need to do it.

25:59But it's certainly shareholders are not happy, not in the slightest. Something you said earlier, we'll leave it to the imagination why he's not going with Paramount. You've been studying this for a while. You've been reporting on this. You're speaking with sources. Let's use our imagination. Why do you think he's saying no? Why do you think David Zaslav doesn't want to take the deal? That's a tricky one. If I had to guess, look, Warner Brothers, the combination of Warner Brothers and Discovery, it was supposed to be a crowning achievement for Zaslav and John Malone, who helped orchestrate this deal.

26:33And that was almost, that was five years ago now. It's 2021. You were going to marry these two assets and you were going to build something better and bigger than the sum of their parts. And to do that, they took on a lot of debt, a lot of debt. And to his credit, David Zaslav has managed to pay down a tremendous amount of that debt. The company is far healthier. financially than it was when it merged. But that wasn't reflected in the stock price, right? The stock ticked down and down and down, really until this bidding war started, which, by the way, created tens of billions of dollars of value for shareholders.