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.' "
He expects that net chargeoffs for JPMorgan Chase's real estate portfolios rose 4% from the second quarter. But he anticipates a $1.5 billion reserve release for the cards business. In investment banking, revenue from mergers and acquisitions looks to have shrunk more than a third, while revenue from equity underwriting and debt issuance increased. Moszkowski expects JPMorgan Chase to post $7.5 billion of investment banking revenue, which would be a 1% increase over the second quarter but a 15% drop from a year ago.
JPMorgan Chase will kick off the earnings season Wednesday.
At Citi, which reports third-quarter results on Oct. 18, Moszkowski expects that revenue from securities and investment banking fell 2% from the previous quarter, while rising 19% from the year-earlier period. He also expects modest quarter-to-quarter declines in global transaction services and regional consumer banking revenue. But he said Citi is well positioned to capitalize on positive trends overseas.
"I think the international aspects [of banking], especially in emerging markets, are some of the brightest growth areas" for the industry, Moszkowski said. It's a trend he can relate to directly. Born in the U.S. to Argentine parents who brought him back to Buenos Aires before returning to the states soon after, Moszkowski, who speaks Spanish and Portuguese, got a job after college at Bankers Trust as a lending officer in the Latin America group. "I was always fascinated by finance," he said. "Don't ask me why — my parents were doctors."
After graduate school, he went to McKinsey & Co. The consulting firm sent him to Brazil to work on banking and other projects in the region. He shifted to Wall Street in 1989. At Sanford C. Bernstein & Co. he took a job in strategic planning before becoming an analyst for capital markets and asset management companies.
After stops at J.P. Morgan and Citi, he moved seven years ago to Merrill Lynch. He had a firsthand look at how the financial crisis reshaped Wall Street — and sees how it's still reshaping investor sentiment.
Bank stocks "are very controversial right now," Moszkowski said. "On the one hand there's the view that they historically have been, in recoveries, excellent vehicles for making money. On the other hand, there's a lot of concern over the housing market and what it means for credit costs, and there's a lot of concern over net interest margins."