The number-crunching career of Wells Fargo Securities’ Mike Mayo goes back to 1988, not only as a securities analyst. Mayo began as a bank analyst for the Federal Reserve in Washington, shortly after Alan Greenspan started his 19-year stretch at the central bank.
In his 2012 book, Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves, Mayo wrote of how he chose that path when his lack of Ivy League connections initially kept him out of analyst jobs at securities firms.
Mayo noted during the Q&A for Citigroup during third quarter earnings season that “I’m an ex-regulator. Paul Volcker was my hero.”
Mayo has had long years at multiple firms since those early days and has been managing director and head of U.S. large-cap bank research at Wells Fargo Securities since mid-2017. He has built his career on asking the tough questions, and on more than one occasion had to move on after becoming unpopular with some bankers and the investment bankers in his own companies. Taking tough stances on an institution’s stock tended to not bring securities business to firms.
He still doesn’t pull any punches. Here are five issues that Mayo dug into during this earnings period.
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1. Bank of America’s Efficiency Ratio
A major focus for Mayo in recent quarters has been BofA’s efficiency ratio and expense levels and other key numbers.
Mayo picked up the efficiency theme afresh: “I guess I’m asking the same question each quarter, but it’s because the efficiency ratio seems to be getting worse.”
Mayo noted that on one hand, BofA has been reporting increasing digital adoption by its customers for many quarters. It’s become a familiar brag point during BofA earnings.
On the other hand, Mayo continued, growing digital adoption should improve efficiency, but BofA’s efficiency ratio has been slipping. (The lower the efficiency ratio, the better.) In the third quarter it was 65%, up from 64% in the second and third quarters and up from 63% in the third quarter of 2023. (Indeed, in the first quarter 2023 briefing, Mayo asked management when BofA could ride digital adoption and other factors to an efficiency ratio of below 60%. Not there yet.)
“What’s the disconnect here?” asked Mayo.
BofA officials made a case for the efficiency ratio level being sticky because of the expenses of success and of investment for the future.
One expense factor is incentive compensation paid in key fee-based business at BofA, according to Alistair Borthwick, CFO. The bank saw quarterly improvement in investment banking (up 18%), asset management (up 14%) and sales and trading (up 12%). That activity drives increased incentive pay, but Borthwick added “that’s a good investment and it’s a good return,” with significant fee income continuing.
Borthwick added that if such spending is put aside, “you see we’re doing pretty well in an inflationary environment.”
Read more: How Bank of America Unified Five Apps Into One Experience
2. Is JPMorgan Chase Actually a Tech Company?
During the JPMorgan Chase Investor Day in May 2024, analyst Erika Najarian of UBS Securities LLC, had asked about the outlook for Chase buybacks in the second half of the year.
Jamie Dimon, chairman and CEO, acknowledged that the company would do some more buybacks. But, he added, “we’re not going to buy back a lot of stock at these prices,” which Dimon considered overvalued. “We don’t consider stock buyback [to be] returning cash to shareholders. That’s giving cash to exiting shareholders. We want to help existing shareholders.” Dimon said capital would be conserved for times when the bank can get very good returns.
“Buying back stock as a financial company greatly in excess of two times tangible book [value] is a mistake,” said Dimon. “We aren’t going to do it.”
Fast forward to the third quarter briefing. In posing questions to Dimon, Mayo noted that the executive has been saying that the bank’s shares have been overvalued, and that that’s in the context of Dimon’s view that the entire stock market being overvalued. However, Mayo continued, in recent earnings calls Chase has been talking up its technology — especially its use of artificial intelligence — as well as market share gains, high returns, high capital.
So, is JPMorgan Chase becoming more like a tech company? Mayo wondered if Dimon and his team are “thinking more about an old school model for valuing your stock as opposed to a new school model that might put you in the category of more tech-oriented firms, especially as it relates to your progress with AI?”
“Listen, you’re making a very good point, which is I think we have an exceptional company, exceptional franchises, and the price point at which you might buy the stock,” Dimon answered. “But I’m not that exuberant about thinking even tech valuations or any valuations will stay at these very inflated values. …
“You’re going to have to judge us over time about whether we’ve done the right thing to do nothing. And remember, we could always do it. We haven’t lost the money. It didn’t go away. It’s sitting in store. The only time that would be really wrong is if the stock runs way up, we’ve got to buy at much higher prices. And I would be a real skeptic about that happening.”
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3. What Could Ignite Business Loans at Fifth Third?
Middle market commercial loan growth hit its highest level in five quarters during the third quarter for Fifth Third Bancorp. Leading this trend was the Southeastern region, where the bank has been expanding its branch network. In those states Fifth Third’s middle market loan levels were 30% up over 2023’s third quarter mark.
However, overall commercial loans were down 1% in the quarter, primarily because of increased paydowns of existing loans and softness in use of revolving credit arrangements, according to Bryan Preston, CFO.
Mayo followed up on the middle market trend and the remarks about the impact of paydowns. He also asked what sort of predictions management could make, given their initial comments that there were some “signs of life,” in the analyst’s words.
Preston explained that paydowns for the third quarter were about $900 million, an elevated level, and use of revolving business lines was down about 1%. He added that in the second part of the quarter, and into the fourth quarter, use of revolving lines was stabilizing and that business loan growth will return soon.
Tim Spence, chairman, CEO and president, said the outlook hinges to a high degree on the presidential election and the resulting direction the economy takes. He based his view in part on visits with business customers.
Key considerations, for Spence: “Who wins the election and, probably more importantly, which of the things both candidates are campaigning on that actually make their way into policy, and how they elect to govern.”
Spence said many clients have been working their balance sheets harder, to avoid borrowing at higher rates, and paying down debt. Wholesale distributors in the bank’s business portfolio have also been working down inventories. These had hit higher levels from 2021-2023 to meet the needs of people moving from one region to another. He said this had been a shift from “just in time” inventories to “just in case” inventories — which has gone by the boards.
Spence said one Fifth Third distributor client’s term for this trend is “destocking.”
“If interest rates come down and more M&A and capital investment starts to make sense, you should see a pickup,” said Spence.
If all the positives come together, Preston said, the bank’s objective would be to grow commercial loans at the level of the market, “plus a point or two.”
Read more: How Fifth Third Is Delivering on the Promise of Digital Transformation
4. How Can Truist Make Its Shareholders Happier?
Mayo noted that shares in Truist have underperformed the market pretty much since the announcement of the merger of BB&T and SunTrust that formed the company. (The deal was finalized in 2019.) Mayo also pointed out that after the company completed the sale of Truist Insurance Holding in May of this year, management lowered its targets for ROTCE — return on tangible common equity — but granted special bonuses to certain executives (not including Chairman and CEO Bill Rogers).
“Can you give us more detail on financial expectations after the fourth quarter and the key metrics that you think should drive a higher stock price?” asked Mayo.
Rogers explained that the sale of TIH brought in a large amount of capital, which lowers the return on capital in the short term. He said management plans to use the capital “as a lever.”
“But as we deploy that capital, we increase that return,” said Rogers. “Our capacity to increase that return is that we’re in the best position of anybody because we’ve got that capital and that capacity to deploy it quickly, both in our business and as a return to our shareholders.” A key strategy is to use the capital to expand relationships with existing clients.
“If you think about our strategy, it’s not focused on long-term paybacks and going to markets and trying new things,” said Rogers. “This is about executing against the opportunities we have in our existing franchise and increasing that return faster with higher paybacks.”
Rogers told Mayo that the bank’s commitment to positive operating leverage was a continuous one and that 2025 would be a transition year when the strategy would begin to bite, the speed depending in part on interest rate levels and asset growth.
Mayo then said that he had “cuddled up” with the bank’s proxy statement and other documents the night before the earnings briefing to study the bank’s executive compensation structure.
Mayo pointed out that the bank’s documents reveal a dozen key financial metrics and five nonfinancial metrics that influence compensation.
“If you had to pick one or two key metrics that we on the outside can monitor and focus on that should drive shareholder value, what should they be?” asked Mayo.
Rogers said the two key measures are ROTCE and growth in the bank’s businesses. Those measures and those deriving from them are, according to Rogers, those metrics with the highest potential share price return.
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5. How Can U.S. Bank Improve Its Operating Leverage?
For banks, operating leverage is defined as the difference between the growth rate of revenues and the growth rate of noninterest expense. The better a positive operating leverage is, the better. U.S. Bank officials had indicated the bank had seen “modest positive operating leverage” in the quarter, excluding net securities losses and prior year notable items. The leverage was “flattish,” in the word of Andy Cecere, chairman and CEO.
After asking about U.S. Bancorp’s merger plans — that exchange appears in “5 Takeaways from Major Banks’ Q3 Earnings Briefings” — Mayo asked about both revenue and expense aspects of operating leverage. LINK
Cecere projected that in 2025, with the bank’s investment in key areas made over the last three to five years, expenses would come in below revenues, even if they rose modestly.
“I would expect growing revenue and those jaws widening from the expense/revenue differential,” said Cecere.
Revenue initiatives come under Gunjan Kedia, president. One of the prongs of the revenue strategy is greater emphasis on “interconnectedness,” reflecting the bank’s belief that the best customers are those that can be sold on multiple relationships with U.S. Bank. The bank has emphasized businesses that can scaled, which Kedia said deliver “good positive operating leverage, including expense management” and strong organic growth — notable because the bank is counting on that rather than growth through acquisitions.
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