Magazine article American Banker

Wall Street Vet Moves Margins to Forefront

Magazine article American Banker

Wall Street Vet Moves Margins to Forefront

Article excerpt

Byline: Heather Landy

Guy Moszkowski has seen a lot in his two decades on Wall Street, but he has never seen a bank price deposits below zero.

This earnings season the Bank of America-Merrill Lynch analyst will be listening for how executives plan to cope with a low-rate environment that could quickly become damaging to net interest margins.

Talk of potential deflation and quantitative easing seems to be picking up among monetary policy watchers, and with interest rates already low, "that's not a great environment for banks," Moszkowski said. "If their asset yields are coming down, then they get squeezed."

Look for Moszkowski - an aggressive questioner of bank executives during their quarterly presentations to analysts - to ask plenty about margins on the upcoming round of earnings calls. He shared his earnings outlook in an interview with American Banker.

Other challenges facing the money-center banks that Moszkowski follows include the murky economic picture and new regulatory burdens, along with a sharp slowdown in riskier trading activity by investment banking clients.

But the impact of these pressures on third-quarter results was likely tempered by a continued decline in credit costs, an increase in debt issuance and relative strength in flows for basic capital markets businesses such as rates and foreign exchange trading. That's why Moszkowski maintained his third-quarter earnings estimate for JPMorgan Chase & Co. at $1.12 a share, while slashing his forecasts for Goldman Sachs Group Inc. and Morgan Stanley & Co., which depend more on trading flows in riskier asset classes.

Moszkowski also trimmed his forecast for Citigroup Inc., to 6 cents a share, but the 2-cent reduction represents the loss Citi announced it would take on the sale of student-loan assets.

Moszkowski expects both Citi and JPMorgan Chase to release more reserves for loan losses in credit cards, as delinquency rates in that business continue to drop.

"When reserves are being released, obviously that's creating unsustainable levels of earnings, but it is a very good sign that the worst has passed, at least in certain parts of credit," Moszkowski said.

The part of the credit universe that Wall Street still can't wrap its arms around is the housing market. "We watch the house price data and volume data from month to month, and it's been pretty inconclusive lately," Moszkowski said. "But it certainly has not given the banks any reason to say, 'We're over-reserving here. …

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