CNBC’s Kayla Tausche breaks down the Citigroup’s earnings report, which says “emerging markets are still a strong suit.” Mike Mayo, CLSA bank analyst, joins the traders in a “Halftime” exclusive to share his top bank pick. “If Citigroup can go boring, they can go much higher” says Mayo.
Mike Mayo CNBC video interview and transcript below
welcome back to citi shares, higher today as the companyreports a strong quarter. kayla joins us with the highlights.scott, investors hoped that the new ceo would deliver on hispromise for upside. today’s beat was a beat on multiple levels giving a lot of investors renewed faith in this story. a few catalysts for the quarter, securities and banking strong and revenue from fixed income and equity jumping strong creditcard business as well helped but ultimately it was the absence of some bad credit in mortgages and citi holdings and the bad bank that lifted this quarter overall reducing that drag from the bad credit means the bank’s returns will get better and 9.7% is with the bank now returns on tangible equity. that’s a big improvement from last year and the cfo said the bank should hit the 10% target or beyond by its existing deadline. it is already met most of its regulatory capital requirements so no drag on earnings there like jpmorgan saw. emerging markets still a strong suit for citi. he said the volatility hasn’t changed the bank’s positioning although it did take losses on the peso and the rupee in the quarter and not the yen as many expected. it was comments about the environment here in the u.s. that took the stock off the highs early on and the north american consumer said it is still deleveraging and higher rates will challenge already low activity. citi’s margins were compressedmostly by decline in the u.s. that’s the case as we have seen for all the universal banks this quarter. investors still giving up cition the restructuring story and most of those benchmarks havealready been hit. thanks so much. the next guest has become known as the foremost banking analyst on the street for his calls his opinions, mike mayo joins us live from new york city in a halftime exclusive. welcome back. good to talk to you. thanks for having me. heard this described as fabulous and others great. what do you say? i don’t get too excited by any one quarter. this quarter you saw the benefits of optimization atcitigroup and expenses declined and less losses from what’sknown as citi holdings, and i think what you see is the secondquter in a row of more boring earnings out of citigroup and ifcitigroup can become boring, i think the stock goes much higher and the big issue at citigroup, the last two decades, when they swing for the fences and they just need a lot of singles. i think this quarter reflected that. for a guy who was so negative for so long on citi, and someone who did change his tune within the last year, i guess are you satisfied with the way that corbett is leading this company forward. am i, and you know i was negative on the company for five years. the stock is 90% lower than where it was before the crisis and i went to the annual meeting a couple months ago and i saw mike corbett and along with mike o’neill, the chairman, and they were singing the same tune. it was like sonny and share going back a couple decades ago. i think it sets the tone from the top that w not trying to double earnings over the next couple years. we’re not trying to be the next new thing. we’re simply dipping the block in and tackling so we can deliver consistent results. that is what you are seeing. it is still the early days but i would say so far so good. thus far with citi in the books and jp and wells, are you satisfied with all the bank earnings look this quarter?no. i would not encourage by the traditional banking ruls.jpmorgan, i thought they were under pressure, margin down bigand you heard citigroup say there is pressure from the northamerican consumer and margin pressure ahead. i think the decade will show the worst revenue growth the u.s. banking industry since the decade of the great depression. what sets city apart is they don’t need amazing revenue growth to get strong earnings growth given the optization potential. you wouldn’t be a buyer. i am not a buyer of jpmorgan and they’re a nice contrast to citigroup. citigroup has all sorts of tax benefits and housing benefits they’re realizing and jpmorgan’sorigination did didn’t do so great. the processing business atcitigroup is growing very well and jpmorgan’s wasn’t doing aswell and i would say the incremental change at the top of the house. they are seeing a lot of management changes. i am a buyer relative to jpmorgan. also a big buyer of morgan stanley.you didn’t for get that. i was on the show not too long ago you were indeed. citigroup, my number two pick. number one pick remains morgan stanley and that is some story here. the stocks doubled over the last year. we think it can double again.the brokerage business, wealth management as they call it,should triple over the next three years, and a few weeks agothey closed the remaining part of the brokerage joint venture.they didn’t own, and they will be on the cover of every business magazine in a year or two. we’re getting ahead of that curve because you will see explosive growth out of wealthmanagement, morgan stanley, and that will be half the company. you know, we like good debate on this show, mike, and i have a gentleman sitting to my right who i think is fair to say does not like morgan stanley nearly smps you do, and i would like to bring him into the conversation to find out exactly why. morgan stanley is fine. i prefer goldman sachs because it is the gold standard in the business, and it is great to have a big wealth management business. that really is the double edged sword. have you huge costs. if you don’t see the assetsflowing into there, and we have seen pressure on fees, andeverybody is building up their business then you won’t see thegrowth are you talking about. let me ask you about the new risk-based capital requirements. there is talk people arespeculating if it does go to 6%, that morgan stanley is going tobe the one most adversely affected. let me have your feedback on those two points. first, my third pick has been goldman sachs. i agree with you. best of breed. should show some market share improvement, especially if and when markets pick up. i would say for morgan stanley, how many wealth managers, how many private banks do you find that trade below tangible book value? i start right off with the valuation. i would also say you don’t need great revenue growth out of morgan stanley. i am only stuming mid-single digit revenue growth because the difference is the profit margin is improving and it is likely to double into 20% or higher over the next couple yearswhat basis is it going to double? what do you need to happenfor it to double. you don’t need a whole lot to happen. they’re getting synergies. the biggest day in their corporate lifecycle was july 10th of last year. that’s when completed theoperational integration. you get the synergy from four years of working on this combination of the old smith barney franchise with morgan stanley. then you buy the last 100% of the franchise which was just a couple weeks ago, and you getadditional savings there. one thing is for sure. you are still seeing the trafficking of teams, so you still have to pay up for teams. if you take a look, credit suisse private bank, they don’tmake money. take a look at others. they don’t make money because they have to pay up. you have a group of player that is are the also rans that don’t really generate the big business, so still competitive. asking it a different way, what kind of returns do you think you can see in the private wealth management business at morgan stanley? i think the roe at morgan stanley is going to go above the cost of capital over the next two to three years and that’s a huge inflection point that gets the stock trading above tangible book again. as far as the profit margin inthe brokerage business, the wealth management business, ithink it goes back over 20%. what is missing here is with theacquisition of the 100% brokerage joint venture they have 60 billion of additional deposits embedded inside morgan stanley is the amount of deposits equal to a regional bank. as you redeploy you get all sorts of spread revenues. right now it is way below, around 1.7% versus 2.5% for peers. you just invest the deposits in securities. you get the remaining integration savings, and by the way, if they pick up all the better but i don’t need a great one. thanks for coming on. appreciate the insight.we have regionals to talk about. they’ll be reporting earnings. i think if you look at the revenue forecast for a lot of those in the mortgage banking industry, it might be time to do a little rotation to the capital markets place. i disagree with you on morganstanley. i will buy all the morgan stanley from you. i am not saying shorting stanley. hold on one second. in the middle of a financial services competent, conference rather, come out and lift margin e answer. it is an incredible disapply of confidence and tells you something about the direction of the business. i think all the anecdotal data coming out, the trading up and the volatility we have seen over the market and the currencies, i think it is going to benefit goldman sachs. i think definitely going to be. if you look at all the companies so far, that’s what it is in.loan growth is disappointing. i don’t have to own goldman.goldman has a much stronger management team in my view.quickly before we head to break, your name, jpmorgan, left out in the cold here. what dow make of that, doc? like they did fabulous last week and i still like them, judge, but like i said, i think tomorrow — i don’t know if you can call it fabulous. the others say something different. i will take their performanceyear-to-date. then i am looking at goldman and bank america.bank america because very similar in very many of the sameverticals as morgan stanley. i like them to out perform as well.