This podcast was originally published on April 27, 2023 on https://www.bfm.my/, and is being republished here with permission. To listen to the original podcast and for more market insights, please visit https://www.bfm.my/podcast/morning-run/market-watch/first-republic-bank-deposit-loss-us-debt-ceiling.
In this episode of BFM 89.9’s podcast, Shazana Mokhtar and Wong Shou Ning join Tony Nash, CEO of Complete Intelligence, to discuss global market news.
The focus is on First Republic Bank, which lost about $100 billion in deposits and has become a poster child for regional banking issues. According to Nash, the bank’s management team mishandled the situation from the start, leading to poor communication with investors and depositors, and the loss of half their market capitalization.
The hope is that they will be taken in by a globally systemic bank or receive a bailout from the Fed or treasury regulators.
Nash also highlights the potential for a contagion effect on other regional banks in the US. However, he reassures listeners that many regional banks have communicated well with their depositors and investors and have put solid plans together to weather any potential fallout.
Finally, the episode discusses the upcoming Fed meeting and the expected rate hike, despite persistent inflation in the US. If service industry wages slow down, the Fed may pause, but for now, the outlook remains unchanged.
Transcript
BFM
BFM 89.9. It’s 7:06 A.M. on Thursday the 27 April. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. Now in half an hour, we’re going to discuss the outlook for Asia Pacific currencies. But as always, let’s kick start the morning with at how global markets closed overnight.
BFM
Well, let’s just say the only sector that was really, really in voke was technology because the Nasdaq was up 0.5%. Meanwhile, the Dow was down 0.7% and the S&P 500 down by 0.4%. In Asia, Nikkei was down 0.7%, Hang Seng up by the same quarter. Quantum, excuse me, Shanghai, was down 0.2%. So relatively flat. Singapore Straits Times down 0.1%, and our very own FBMKLCI was down by 0.8%.
BFM
So for some analysis on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Can we start with what’s happening with First Republic Bank? Its share price plummeted after the US regional bank posted its latest quarterly results, which showed that deficits had dropped by nearly 40%. And this has reignited fears of a banking crisis. I mean, what are your thoughts on this?
Tony
Yeah, so First Republic lost about $100 billion of deposits, and I think a lot of people want to see them as a poster child for a lot of the regional banking issues. The First Republic issue was managed particularly badly by their management team from the start. Their communication with investors and depositors and regulators hasn’t really been great from the start. So we’ve seen earnings from other regional banks in South Carolina and California and other places come out and they’ve actually been okay. They’re not stellar, but they’re not as terrible as people had feared. I think First Republic today, they lost about 50% of their market cap this morning and it snapped back a little bit, but their communication just continues to deteriorate. So what’s the hope for First Republic? I don’t know. One would hope that they could be taken in by a globally systemic bank like Silicon Valley Bank was taken in by JPMorgan, but if not, then they’ll have to get a bailout from the Fed or treasury regulators to sort them out.
BFM
And this time not from other banks, which was the case because other banks lend them $30 billion, right?
Tony
Right, yeah. I mean, likely one of those lenders will take them over, one of those banks that lent money to them will take them over. Nobody really knows. Well, some people have a very good idea, but it’s likely that one of those lending banks will take them over.
BFM
Okay, but do you think this has the potential of having a contagion effect on the rest of the regional banks in the United States? Because if I’m a depositor in a small town and I’m reading this headline, I might be thinking why do I want to keep my bang in my small town bank?
Tony
Well, I think if that were to happen, that would have happened three to four weeks ago when Silicon Valley Bank went under. When that happened, the Fed and the treasury came out with very strong support to get liquidity to those banks. And so there was about a week of uncertainty where people really weren’t sure what was happening.
Tony
But again, I think a lot of these regional banks communicated very well with their depositors and with investors and with the government and put solid plans together. And as they report, they’re kind of not as bad as feared, which for now is good enough. And then when we look at, like, the JPMorgans and the Bank of Americas of the world, they’re reporting very well given the environment. So again, it’s kind of in finance, it’s kind of not as bad as we had feared type of quarter, especially for regional banks. And so that’s good news.
Tony
But again, First Republic had been managed particularly poorly. And in these types of situations, communication and cooperation are critical and it’s just not something they did very well. And so because of that, they’re seeing their market cap go down, they’re seeing depositors continue to leave. And I don’t know that they have a lot of hope going forward.
BFM
Let’s take a look at what the expectations for the FOMC meeting, or when they meet next week. What do you think is going to happen? What is the Fed going to take into account in deciding whether to raise rates or put them on pause? What are you looking at, Tony?
Tony
Yeah, there are a number of people saying that these banking issues may push the Fed to pause at the meeting on May 3, but it’s highly unlikely because we’re continuing to see inflation, persistent inflation in the US.
Tony
And what we need to watch is this metric called SuperCore inflation. And SuperCore inflation is really a proxy for service industry wages. And so if service industry wages slow, then we could see a Fed pause. Right. So we saw all the inflation with goods and commodities last year, and that’s kind of subsided. What’s really been persistent is service industry wages, and that’s pushed into a lot of other industries. So it would be good if those wage rises would slow. However, we are headed into the summer vacation period in the States, so we’re likely to see upward pressure on service wages from here. So we don’t expect the Fed to pause, certainly not in May, maybe in the June meeting. But we really won’t see inflation show a real downturn until August, because we see the base effects of, say, the energy prices and other things from last summer really come off at that point.
BFM
Okay, Tony, last evening, the House Speaker managed to pass his debt limit bill, but there’s still no sign of a workable deal with the White House. So is there the risk that the US. Government will run out of cash at some point?
Tony
Well, there was just some news out of the IRS today. The IRS is the tax, the revenue, inland revenue in the US. It’s called the Internal Revenue Service. And they just announced today that they have kind of an extra month of cash that they didn’t know about, which is a little weird. But we can count on this debt ceiling going as far as it can. So it could go into July. So we had thought that we’d be done with this by say, end of May, early June, but it’ll probably go into early July. And so we’re going to hear this droning kind of threat back and forth from the House to the White House for the next two months.
Tony
And so honestly, all this is doing is Republicans want spending cuts. We’re at historic spending levels and Democrats don’t want spending cuts. And that’s really what’s being pushed back and forth and all of them are playing to their base constituencies over this period. This is just a really dumb political issue and so we just need to get past it and it won’t end until July. Nothing will happen until July. We’ll have bills passed, they’ll go across, they won’t be signed. It’s going to happen several times over the next two months.
BFM
Well Tony, let’s turn our attention over to the tech sector. It was expected to be under earnings pressure last quarter, but it’s come through with stronger than expected results this earnings season, especially from names like Alphabet, Microsoft and today Meta. How have they been able to achieve that?
Tony
Yeah, Meta really impressed today and after hours their price action was just stunning. So all the talk in tech is about AI and both Microsoft and Google have cloud businesses that have really thrived because of the extra compute that people need with AI. Microsoft saw huge growth in its Office, Microsoft Office software, they saw 18% growth there, which is pretty amazing. So it’s really AI tearing up cloud capacity and AI capabilities across these tech companies that are doing well.
Tony
We saw a tech company called Roku report this evening and it was terrible. So not all tech companies are doing well. What we’re seeing is say, ad revenue isn’t as bad as people had thought and so that’s a relief. So some of this is a relief, but some of it is actually legitimate really good earnings at a time where people didn’t think they’d be very good.
BFM
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead, really casting doubt on the debt ceiling debate and whether it’ll end anytime soon. We’re going to likely see this argument prolong until July, which is pretty baffling. Really?
BFM
Yeah. I can’t imagine a government actually running out of money. But it’s amazing, right? Your tax department can suddenly find one month extra money.
BFM
It’s akin to finding that extra five ringgit in your jeans pocket when you put your jeans on, and, hey, I’ve got money here. Yeah, I love that. That’s a great surprise.
BFM
You’re a government, right? I wonder whether this will ever happen in Malaysia. Like our government wake up and say, “oh, my goodness, you’ve got all that money.” But he did bring up Meta results. And yes, they were rather spectacular, actually. Beating street expectations by a mile.
BFM
Well, beating street expectations on revenue. Yeah, I think because net income, it still fell. Net income, company wide, fell 24% to $5.71 billion, or $2.20 per share. But they did see a rise in revenue of 3% to $28.7 billion. And this was better than what the street expected. They beat street expectations by 4%.
BFM
So this year for them has been the year of efficiency. Right. Because we know that they’ve actually been very aggressive when it comes to job cuts. 21,000 expected, so expenses will come down for sure. But what’s interesting to me is that their Meta Reality Lab, which is developing their virtual reality and augmented technology for the Metaverse, everybody seems to have forgotten that, but it’s still going ahead. It brought in close to $340 million in sales, but it’s losing has lost $4 billion. Painful, right?
BFM
This was something that they really went all in on not too long ago.
BFM
And now everyone’s just met the Apatu, moved on to AI. Does the street like it though a prairie? Yes. 46 buys, eleven holes, five sells. Consensus target price for this stock, $232.56 during regular market hours, it was actually up $1.85. Think we got time to squeeze in one more ebay?
BFM
Sure. Let’s talk about Ebay. Ebay also did pretty well. I think they projected current quarter revenue to be above Wall Street projections after they beat March quarter earnings estimates. And this is thanks to a selective push from the ecommerce firm on items like sneakers and watches and refurbished products that’s helping to drive its sales at a time when consumer spending has moderated.
BFM
If you look at it right, in terms of the street, do they still like this name? And the answer is coming up on Bloomberg. No. Okay, so that was my drum roll. Nine buys, 21 holds, only two sells. Consensus target price, $49.11. Last time price during regular market hours was actually $43.36. It was down $0.65.