Mike Mayo, managing director at CLSA Americas, spoke with Tom Keene and Michael McKee on Bloomberg Radio this morning. Mayo said Citigroup, Bank of America and Comerica should move faster to restructure, including selling more assets, to catch up with competitors that are generating better returns: “All three of those banks have failed to create value for every year for the last eight years. And so our question for the board of directors is if you’re not getting it done, what is your plan B?”
He said: “You have some banks like JPMorgan and Wells Fargo with very good returns. Citigroup has poor returns. That’s why our team is going to the annual meeting on Tuesday to say some of your peers are getting it done.”
On annual meetings, Mayo said: “In this Bank of America case, that meeting lasted less than 15 minutes. Who is more important than the owners of your company? So what I’d like to see just for starters is for Bank of America to answer the questions that are asked next Wednesday and don’t artificially end the meeting after two hours or one hour or 15 minutes. At least go three hours. These are your owners. You have one time a year to ask questions of Bank of America’s board.”
Mike Mayo: Bank Management Teams Need To Be Held More Accountable
Tom Keene: This is a thrill, folks. Most people in the media get Michael Mayo for one minute, two minutes, three minutes here. He goes this, this, this. We get a longer battle with him here today. And to drive forward the idea of governance at banks and the idea of what they do at their annual meetings.
But first, Michael Mayo, you are optimistic on the banks as a business plan, right?
Mike Mayo: Absolutely. Tom, we’ve changed our position on the banks. As you know, we were very negative last decade before and through the financial crisis.
But now the bank balance sheets are safer than they’ve been in decades. Risk is lower than it has been any time since the financial crisis. And you’re seeing early signs of traditional lending revenues improve. So in the words of Karen Carpenter, we’ve only just begun.
Tom Keene: [Humming], okay. I’m not going to sing –
Michael McKee: Don’t get him singing.
Tom Keene: Okay. Don’t get me singing my Carpenters.
But, Mike, at the same time, you want to hear more about their business plan. Why is a bank annual meeting different from John Deere or Caterpillar’s annual meeting?
Are you picking on Brian Moynihan and the others? Or is there something unique about their quiet and their secrecy?
Mike Mayo: So we’re more positive on banks. But it’s not a blind recommendation. We think that the management teams of the banks need to be held more accountable.
And for me personally I’ve written research reports on Wall Street –
Tom Keene: Right.
Mike Mayo: – and got shut down. Testified to Congress, got shut down. Wrote a book. Things still haven’t changed yet.
And you have the new proposal for payrolls on Wall Street. That’s not going to do it. All the micro-management in the world is not going to do it.
At some point, you say we see management teams come and go. Let’s hold the boards of directors more accountable. In other words, if your sports team keeps losing games and they get a new coach year after year, at some point you want to talk to the general manager. And this is the equivalent of doing that.
Michael McKee: I wonder what – to follow up on what Tom said in terms of the business plan, the business plan used to be you take deposits and you lend them out and you make money. And then it evolves into everything from investment banking to trading on your own account. And we’ve seen how well that worked out in the last quarter.
So what is a successful financial institution going to look like next?
Mike Mayo: A successful financial institution generates returns above the cost of capital. That would be something called return on equity. And some banks have good returns, and some banks have bad returns.
So the annual meeting next week for Citigroup, Bank of America, and a regional Bank of America – all three of those banks have failed to create value for every year for the last eight years.
And so our question for the board of directors is if you’re not getting it done, what is your plan B? And maybe your plan B should be some asset sales for restructuring, or even in the case of Comerica, an absolute sale.
Michael McKee: Well, do they become utility like?
Do they go back to the old retail banking model of deposits and lending? Or is all the other financial engineering that they do still a key part of how you get that return on equity?
Mike Mayo: It’s a little bit back to the future directionally like the 1950s where not banks as utilities, but banks with more utility-like outcomes, where banks are pillars of strength and stability.
And, by the way, collectively we’re fighting the last war. There is not going to be a bank calamity coming up. Banks have more capital than they’ve had in 80 years. They can absorb another financial crisis and still have more capital than they had before the last downturn.
Tom Keene: How do you respond to what I’m sure you hear from bankers that we need to keep our plans quiet? We can’t tell Mike Mayo at the annual meeting what we’re doing.
Mike Mayo: Enough. Tom, you’re setting me up here.
Tom Keene: I know I can tell.
Mike Mayo: No, we’re not doing enough. I’ve been doing this 25 years. You have one time a year to ask questions of the directors at banks, one time a year.
By the way, these are your owners. And the one that infuriates me the most is Bank of America.
Tom Keene: What do they do specifically? Quickly here, and we’ll come back.
Mike Mayo: Okay, well, if it’s too quick save it because –
Tom Keene: What’s the number one thing they do? They don’t give you Rangers tickets?
Mike Mayo: Well, we recommend Bank of America’s stock now. So we’re positive we’d have much more upside if they had a better tone at the top. Their September 22nd shareholder meeting they literally pulled the microphone away from somebody midstream, mid-sentence while he was asking a question.
Tom Keene: Okay, well, we’ll come back. It’s a fired up Michael Mayo of CLSA. A lot to talk about, and what a distinction. He is enthusiastic on the banks, but. We’ll continue with the but of bank transparency.
Michael McKee: We’re talking with Michael Mayo from CLSA, a bank analyst. And before the break you were talking about banks, as you go to their annual meetings, are going to have to explain themselves and what their plans are.
Some shareholders already concerned about what Citigroup’s plans are. (Inaudible), I think it is called Proposition VIII, something like that. Isn’t that what Michael Corbat has been doing?
Hasn’t Citi been trying to essentially shed the unprofitable parts of the business?
What would this do that isn’t already being done?
Mike Mayo: Well,