Better valuations are ahead for bank stocks following stress test results: Christopher Marinac

RESILIENT. IT'S THE VENTRAL BAN'S FIRST STRESS TEST SINCE THE COLLAPSE OF SILICON VALLEY BANK LET'S BREAK DOWN THE REPORT WITH CHRIS MARINAC. GREAT TO SPEAK WITH YOU. >> THANK YOU >> SO, WASN'T JUST A SEVERE RECESSION THAT WAS TESTED, BUT ALSO, 40% DECLINE IN COMMERCIAL REAL ESTATE VALUES, AND SO I'M WONDERING IF YOU THINK THAT THIS TEST REALLY GIVES YOU SORT OF THE GREEN LIGHT HERE

>> WELL, IT DOES GIVE A GREEN LIGHT THAT THE BANKS ARE SECURE AND THE BANKS HAVE PLENTY OF CASH FLEW TO COVER THE ISSUES OUT THERE. AND THAT'S REALLY THE KEY FOR THE INDUSTRY, BECAUSE AS YOU LOOK AT THE NEXT 2 1/2, 3 YEARS, WHATEVER ISSUES WE HAVE, I THINK THE WEATHER WILL CHANGE, WE'LL HAVE COLDER WEATHER, SNOWSTORMS THAT WILL OCCUR ON CREDIT, BUT BANKS CAN

HANDLE IT WITH BOTH THE CAPITAL, AS WELL AS THE OFFERING IN EARNINGS FOR PPNR THAT THEY HAVE SO, IT JUST CONFIRMS WHAT WE THOUGHT WAS OUT THERE. FROM AN INVESTOR STANDPOINT, THE STOCKS ARE REALLY CHEAP. WE'VE SEEN EXPECTATIONS FOR EARNINGS AND CASH FLOW COME DOWN 15% AT MOST YEAR TO DATE AND STOCKS ARE DOWN 30%. SO, I THINK IT'S BEEN AN OVERREACTION SEVERAL MONTHS IN THE

MAKING NOW, IT'S TIME TO SEE SOME REVERSAL. SO, WE'RE IN A TRADING RANGE, BUT I THINK WE CAN HAVE BETTER VALUATION AHEAD. >> YOU SAID THE STOCK, OF COURSE, THAT'S A BIG SWATH OF DIFFERENT KINDS OF BANKS, CHRIS, SO, WHICH ONES ARE THE BEST VALUES RIGHT NOW IN YOUR VIEW? >> WELL, THE REGIONAL BANKS HAVE THE BEST LIQUIDITY AND THEY HAVE BEEN THE AREA OF MOST

CONCERN. IF YOU LOOK AT A FIFTH-THIRD BANK, WINTRUST BANK, WE LIKE PACWEST AS A COMEBACK, THE COMPANY HAS NOT FAILED, IT IS NOW SELLING ASSETS AND IMPROVING THEIR POSITION SIGNIFICANTLY, AND THAT'S A COMEBACK STORY. WE STILL LIKE STORIES OF A MID CAP NAME LIKE AN OCEAN FIRST, ABC B AND THERE ARE MANY OTHERS IN THAT, YOU KNOW, MID CAP AND EVEN LARGE REGIONAL BANK ARENA MOST

OF THE COMPANIES ARE PROFITABLE THEY MAY HAVE LOWER EXPECTATIONS, WHICH, I THINK, IS THE KEY PAIN POINT FOR COMPANIES RIGHT NOW. BUT OVERALL, THEY'RE STILL VERY HEALTHY, WHICH THE STRESS TESTS JUST REINFORCED. AND AS THAT GETS APPLIED, OTHER BANKS ON DOWN THE SIZE CHAIN, YOU WILL SEE THE SAME RESULTS APPEAR THEY PASS THE STRESS TEST THAT HAPPENED FOR THE COMPANIES >> CHRIS, IT'S KAREN LET ME

ASK YOU, WHERE WE HAVE SORT OF A TALE OF TWO CITIES IN THE BANKING WORLD. WE'VE GOT THE JPMORGANS OF THE WORLD AND THEN THE REGIONALS I WOULD THINK WE HAVE TO SEE MEANINGFUL CONSOLIDATION TO BE ABLE TO LEVERAGE THE BALANCE SHEET, LEVERAGE THE TECHNOLOGY COSTS. HOW QUICKLY DO YOU THINK WE'LL SEE THAT LANDSCAPE CHANGE IN FEWER BANKS? >> I THINK IT WILL TAKE THREE, FOUR

YEARS, KAREN. I REALLY THINK THE INSIDE OF THE FED, PARTICULARLY THE BOWLELS OF THE EXAMINERS, WE DON'T SEE THEM IN A RUSH. THE FOLKS WHO APPROVE DEALS ARE JUST NOT IN A HURRY TO DO THEM IT'S GOING TO TAKE A COUPLE OF YEARS FOR THAT TO HAPPEN BUT THE BANKS WILL RECOGNIZE THE PROBLEMS THIS QUARTER COMING UP WILL HAVE A LOT OF RESERVE BUILDING, EXTRA PROVISION

EXPENSE. THAT'S PROBABLY WHY THE ESTIMATES HAVE TO COME DOWN A LITTLE BIT BUT THE STOCKS HAVE REFLECTED THAT >> CHRIS, WE'RE JUST PUTTING UP THE CRITERIA FOR THE STRESS TEST IN TERMS OF WHAT, YOU KNOW, THE HURDLES THE BANKS HAVE TO CLEAR. AND I'M WONDERING, YOU KNOW, MAYBE THIS IS TOO TECHNICAL, I'M JUST CURIOUS HOW THESE TESTS ARE IMPLEMENTED. IS IT, TODAY YOU HAVE THIS BALANCE

SHEET, WE'RE GOING TO ENACT THESE, YOU KNOW, THIS CHANGE IN YOUR WORLD FOR BANKS, AND THAT'S IT, OR, IS THERE TIME BUILT IN FOR THE BANKS TO ADJUST IS IT AN OVERNIGHT KIND OF THING, YOU KNOW, EMPLOYMENT PIECE AT 10% TOMORROW? >> SURE, IT'S A NINE-QUARTER PROCESS, WHERE YOU CHANGE THE ECONOMIC SCENARIOS, YOU HAVE BOTH STOCK PRICES AND REAL ESTATE PRICES FALL ABOUT 40%, AND THEN

YOU HAVE NINE QUARTERS TO KIND OF IMPLEMENT THOSE CHANGES AND SORT OF ACCEPT, IF YOU WILL, INTERMS OF WRITING OFF PROBLEMS THAT YOU HAVE SO, THAT'S THE ISSUE IT'S NOT A SHOCK, WHICH, OF COURSE, DID HAPPEN IN REAL LIFE IN MARCH, WHEN YOU HAD A SHOCK TO THE SYSTEM WITH THE TWO AND THEN THREE BANKS THAT FAILED AND PERHAPS ADDING A SHOCK ANALYSIS WOULD BE BETTER

COMMENTARY FROM THE FED, AND WE MAY GET THERE, BUT THAT'S NOT WHAT THIS IS AND OF COURSE, THE OTHER FLAW TO YOUR QUESTION, I THINK, IS ALSO THAT INTEREST RATES FALL IN THE THIS SCENARIO, WHICH REALLY UNLOCKS A LOT OF THE UNREALIZED LOSSES THAT ARE IN BANK SECURITIES PORTFOLIOS, SO, THAT'S A KEY REASON WHY THE STRESS TEST DOES HAVE ITS FLAWS, BUT YOU KNOW, THE TIME

A SIX-MONTH OR THREE-MONTH PROCESS, TO SEE HOW BANKS ADAPT TO A SUDDEN SHIFT IN INTEREST RATES, OF COURSE, WE'VE SEEN THAT OVER ABOUT FIVE QUARTERS WITH WHAT THE FED'S DONE FROM MARCH TO NOW ALMOST JULY I THINK FROM AN EARN STANDPOINT OF HOW LONG IT TAKES COMPANIES TO RECOGNIZE CREDIT PROBLEMS, IT DOES TAKE LONGER THAN A FEW QUARTERS AND AGAIN, I THINK A TWO TO THREE-YEAR

TIME FRAME IS FINE FOR TH