Expect 'healthy consolidation' among regional & community banks in the next 2-4 years: Bob Diamond

Summary

Bob Diamond, CEO of Atlas Merchant Capital and former Barclays CEO, discusses the financial sector's current landscape, particularly focusing on the stability of large U.S. banks. He highlights strong earnings but predicts more 'utility-like' returns moving forward, with expectations of 10-15% returns rather than the high rates of the '90s and 2000s. Diamond also addresses the need for stricter capital requirements, the ongoing consolidation of regional and community banks, and the potential for stronger banks to acquire weaker ones in the coming years. Additionally, he shares his views on the independence of the Federal Reserve amid political speculation.

Takeaways

• 😀 The earnings of major U.S. banks are strong, but their returns are lower than those seen in the 1990s and 2000s, reflecting their shift toward a more utility-like model with higher capital levels.
• 😀 Bob Diamond, former CEO of Barclays and now CEO of Atlas Merchant Capital, suggests that the larger U.S. banks are becoming more concentrated and are likely to continue growing in size.
• 😀 JPMorgan's market value has surpassed $600 billion, highlighting the increasing dominance of the big four U.S. banks in the financial sector.
• 😀 Diamond believes that the era of high returns (25-30%) for major banks is over. Instead, investors can expect returns of around 10-15%, with banks becoming more stable but less profitable in terms of growth.
• 😀 There is a growing discussion about the need for stricter capital requirements for large banks, with Diamond asserting that it is necessary, particularly to prevent future failures like Credit Suisse.
• 😀 Diamond highlights the strength and potential of regional and community banks, believing that consolidation in this sector will provide investors with better returns than large banks over the next few years.
• 😀 Despite challenges, Diamond remains optimistic about the strong potential for regional banks due to high loan demand and the prospect of declining interest rates in the coming years.
• 😀 Diamond sees a potential for consolidation in the banking industry, expecting that the number of regional and community banks could decrease from 4,500 today to about 2,000 within the next few years.
• 😀 The consolidation of smaller banks is seen as healthy, with the stronger banks absorbing the weaker ones. This process will likely result in a more competitive and efficient banking sector.
• 😀 The future of U.S. regional banks looks promising with strong capital positions and solid earnings, as they continue to play a critical role in the economy despite the ongoing sector-wide adjustments.
• 😀 Regarding U.S. Federal Reserve Chair Jerome Powell, Diamond emphasizes the importance of the independence of the Fed for maintaining market credibility, even though there are speculative comments on his future role.

Q & A

What is Bob Diamond's overall assessment of the current banking environment?

Bob Diamond describes the current banking environment as 'normalized' with strong earnings. He highlights that while the larger U.S. banks are performing well, their returns are expected to be more modest, around 10% to 15%, due to higher capital levels and more utility-like operations.

What is Bob Diamond's view on the future performance of large U.S. banks?

Diamond believes that the larger U.S. banks are likely to see more moderate returns, ranging between 10% and 15%. This reflects the current reality where these institutions are larger, more concentrated, and carry higher capital, which reduces their ability to achieve the high returns seen in the past.

How does Bob Diamond view the health and stability of the major U.S. banks?

Diamond views the major U.S. banks as safe and stable. He explains that they have significantly stronger capital buffers and are becoming more like utilities, meaning their returns will be more stable but lower compared to past decades.

Why does Bob Diamond believe stricter capital requirements may be necessary for larger banks?

Diamond argues that as the larger banks grow more concentrated, they become more systemically important. He points to the collapse of Credit Suisse as an example of the potential risks posed by overly large institutions and believes higher capital requirements are essential to maintain the stability of the financial system.

What does Bob Diamond say about the potential for consolidation in the regional and community banking sector?

Diamond predicts significant consolidation in the regional and community banking sector over the next 2-3 years. He estimates the number of these banks could decrease from around 4,500 to roughly 2,000, driven by stronger banks acquiring weaker ones. This consolidation is seen as a positive development for both the financial sector and the broader economy.

How does Bob Diamond view the outlook for regional banks in the coming years?

Diamond is optimistic about the future of strong regional banks. He believes that with higher interest rates and strong loan demand, well-capitalized regional banks have a good opportunity to perform well and even outperform large banks over the next few years.

What is Bob Diamond’s perspective on the current state of treasury portfolios in banks?

Diamond acknowledges that many banks, both large and regional, have treasury portfolios that are 'upside down' due to market conditions, particularly higher interest rates. However, he believes these portfolios will eventually correct over time, as the economy adjusts and rates come down.

Does Bob Diamond believe that the Federal Reserve Chairman, Jerome Powell, could be fired during his term?

Bob Diamond does not believe that Jerome Powell will be fired. He expresses confidence in Powell's performance, stating that Powell has two more years in his term and emphasizing the importance of the Federal Reserve's independence.

What role does Bob Diamond believe regional and community banks play in the U.S. economy?

Diamond sees regional and community banks as crucial for the U.S. economy, particularly for providing localized financial services and supporting small businesses. He believes the consolidation process could lead to stronger institutions that are better equipped to contribute to economic growth.

What does Bob Diamond think about the possibility of further bank failures or regulatory changes?

Diamond acknowledges that regulators are encouraging stronger banks to absorb weaker ones, which could lead to more bank failures, but he believes this is ultimately healthy for the sector. He also believes that stricter capital requirements may be imposed to prevent systemic risks in the future.