Company Notes Digest 9.12.14

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

It sounds like people are busting down AT&T’s door for the new iPhone

“it was amazing for me to see the amount of volume that we have seen just in a few hours this morning and our systems are rocking. Everything is going well…[pre-orders] are better than last year and they are better than the prior year.” ($T)

Consumers are spending more

“We continue to see positive indicators in customer shopping behavior both what our customers tell us and what their actual shopping behavior says…looking at things that would be discretionary. What kind of performance are we having there, so if you think about Starbucks, or Boar’s Head, some of our cheeses, some of our upscale items, customers continue to engage in a much more positive way than before. And that’s performance that’s year-on-year.Also if you look at some of the non-foods, general jewelry, all those types of discretionary items, customers continue to be willing to spend money.” ($KR)

But if you ask them, they still say that they’re cautious about the economy

“customers continue to be willing to spend money. And we also survey our customers on their perception and customers are continuing to tell us they feel the economy is a little bit better, but they continue to be nervous in terms of their outlook on things. So it’s cautious optimism, I think is probably the best way to put it.” ($KR)

Loan pipelines remain strong

“We spend a lot of time, as you might imagine, in the markets today talking with clients and prospects. And I would tell you that for the most part, nothing has changed relative to our client’s perspective. The pipelines are still good from that regard. ” ($FITB)

It’s a competitive environment though

“We are seeing though a more competitive environment than last quarter. I’m sure it’s going to be more competitive tomorrow than it was today, and we are sensitive to that at this point. So credit spreads are tightening, not giving us or not giving a lot of room relative to making a mistake from that perspective.’ ($FITB)

There’s a natural evolution to the credit cycle, but we haven’t gotten that aggressive yet

“he natural evolution of how credit markets work is at places like this in the life cycle, the first thing that happens is pricing comes down. And then finally, when pricing reaches an industry sort of a cycle average, then lenders tend to start compromising on loosening some of the credit standards, starting with the least impactful ones, and that’s probably what I would call term in the Auto business. And then we just – in a natural progression, they start moving the more consequential metrics” ($COF)

Capital One warns that C&I lending is probably the first place that we will see deterioration in the credit cycle

“for several years now, I’ve been saying the first place I would look and I am looking is in the C&I business…if you think about how banks behave…they look in the rearview mirror and say where was lending really successful in the Great Recession. That was C&I lending…It went well, and you can just predict that that’s where banks are going to be running and you already see in those markets.” ($COF)

Financial institutions could really use a tailwind of higher interest rates

“We’ve been in a near-zero interest rate environment here for almost six years. It’d be nice to have a – it has a tailwind. It’s not a headwind anymore, but it’d be nice to see it as a tailwind” ($AMTD)

Talking to Starwood, an analyst notes that China is becoming an afterthought

Analyst comment: “Two years ago I probably would have led off this whole discussion with China. And now, I made it 30 minutes without bringing it up.” ($HOT)

Starwood defends China’s growth prospects

“China, today, is probably halfway through the process of urbanization that began 30 years ago. There’s no reason to think that that fundamentally will stop… China has been around for 5,000 years. I think it’ll be around for another 30 years…the reality is that there is a pace of urbanization and growth, and a commitment now to expansion in Tier 2, Tier 3, and Tier 4 cities.” ($HOT)


Six years since Lehman, the effects of the crisis still loom large over the Financial industry

Banks have de-risked:

Citi has shrunk its balance sheet by a lot from the peak

“Our balance sheet is down roughly 20% – 22% from where it was at the height of the crisis. So there has been a great deal of simplification. We have radically changed our strategy. It’s a much more focused strategy.” ($C)

Consumers have de-risked too

“Consumer behavior right now is so conservative that it manifests itself in just extraordinary quality of their credit. And the intersection of bank conservatism and consumer conservatism has led, I think, for most of us, and the reason that we get surprised by the credit getting even better than expected is because there’s a positive selection inherent with the actual whoever is out getting loans these days, just there’s even positive selection associated with the performance.” ($COF)

But regulators are still pressing their case:

Wells Fargo thinks that more regulation is coming from the Fed

“they have been saying this or alluding to this for a while. So, I think they mean business… I assume that it’s imminent because we’re fastly approaching the CCAR kick-off for the coming year. But I think it’s a relatively big deal.” ($WFC)

It could have a pretty significant impact on earnings power

“If this is all incremental and if it could really be as high as the couple of hundred basis points, that’s going to be somewhat of a game changer for people who have to absorb that…Those are the things that we are all going to have to react to. ” ($WFC)

Regulators aren’t letting banks merge either:

Banks don’t feel like regulators will approve an acquisition because a high profile merger has been held up for two years

“being a bank transaction, you have to get the approval of federal reserve and anybody in banking will know that basically you’re watching M&T and Hudson or whatever the one they do, but it’s sitting out there for two years, waiting for approval. So, I think there’s nothing that we’re aware of that will get in the way from an approval point of view. But I think in today’s world, getting a bank transaction approved I think you can take nothing for granted.” ($AMTD)

Fifth Third is not optimistic that the M&A environment clears up in 2015

“I don’t know when that gets better. I think it will get better. I’m not particularly optimistic that 2015 is the year that happens.” ($FITB)

If you prevent smaller banks from merging, it keeps them from being able to compete effectively with the larger ones

Smaller banks are having trouble competing on price because the big guys use loans as a loss leader to charge for other services that small guys don’t have

“I think that’s real. There is a lot of competition in the middle market for loan business. And if you are a loan and deposit only bank and frankly if you are a deposit taking bank but you don’t have sophisticated treasury management and information management capability for the customer to rely on, all your earnings in that relationship is the spread on the loan which probably generates a relatively lackluster ROE on its own. We do have all the banking products that middle market customers could possibly want. And when we think about the return in the relationship for the amount of risk that we have extended, it’s going to be a lot higher if we fully penetrate the relationship which is what we tend to do.

So, rather than competing on proceeds or making a risky loan or rather than just booking low yielding relationships, we are in a position to be competitive on price and actually generate a good return for shareholders. I would not want to trade places with those smaller banks trying to compete in that environment, it’s hard for them to offer the customer what the customer needs and as a result it’s hard for them to get paid for the extension of credit. I think that’s real.’ ($WFC)

There are some signs that the clouds are parting. Regulators realize that they need to promote lending

FHFA open to putting a statute of limitations on rep and warranty claims against lenders

“a couple of months ago, our colleague Mike Heid who runs Wells Fargo Home Mortgage had commented that he’s been in discussions with regulators FHFA in particular around agreeing on some sort of a sunset for when the risk of lost passes between an originator and — I’ll use the term insurer but an agency.” ($WFC)

“making lenders more comfortable operating closer to some of the agency guideline minimums, so that more first-time home buyers and more cuspy home buyers can be served, is absolutely a policy goal.” ($WFC)

More positive effects: the financial crisis gave lenders great data points on credit-worthiness

“when we look back at what happened in the crisis, we’ve been able to identify the segments of customers who were profitable to us through the entire cycle and really leverage that in all of our underwriting criteria, so we’re able to be laser-focused now on finding those people who we believe will be profitable through cycles and exhibit lower volatility.” ($AXP)

Other effects, consumer distrust of Wall Street:

If you want to gather assets under management you have to be independent

“So, I think, if you want to be a premier asset gatherer in today’s world, you’ve got to be in to be independent whether as a broker, dealer or RIA.’ ($AMTD)

Capital One believes that the key to banking in the future is in digital leadership

“I deeply believe that the answer to the case for where banking is going is real digital leadership in the context of some physical distribution. It makes a lot of difference to people to have some physical presence. But what we’re trying to work backwards from is a – what’s the physical presence that will be needed for the future instead of work forward from the physical presence that we happen to have today. So none of all this exciting stuff will you see in the next 12 months, but over time it gives you a little bit of a window into how we’re thinking about banking in the future.” ($COF)

American Express had interesting things to say about the outlook for NFC chips

There’s nothing broken about swiping a credit card

“there’s been a lot of energy and discussion for several years now around NFC. It’s my opinion that the swipe isn’t especially broken…that’s just not a problem customers want solved” ($AXP)

People aren’t just going to adopt NFC because it’s a cool technology

“What I want to say is that we need to actually do something powerful for customers in order to make that happen. There’s a significant investment merchants need to make in new terminals, billions of dollars. There’s a real change customers need to make in behavior, and they won’t do that just because this is a cool new piece of technology. We’ll do that because it does something new and interesting for them.” ($AXP)


Consumers want a grocery store that does everything, not just a couple of things really well

“Our customers don’t want to compromise by choosing retailers who do only well in only one or two areas. In short, customers are looking for a food retailer that can offer it all…great overall shopping experience, excellent customer service, a full assortment of both national and corporate brand products and everyday low prices and promotional offerings” ($KR)

The ranks of organic consumers are changing and growing

“it appears to us that the natural organic customer is changing and growing in numbers. And those that shop the grocery store are also crossing over and the blurring of grocery and natural foods is becoming more and more difficult when you look around the store and you can see organic items on the regular grocery shelves. So it seems that the customer base is getting much larger for these types of products. I don’t know where the end is. It might be a lifestyle change for our customers that they are just deciding to eat better’ ($KR)

Higher margins on organic food wont last forever though

“Margins I tell you what, there’s more margin pressure now on natural and organic than there’s ever been. It seems that it’s becoming more and more of a competitive category. And so although margins tend to be better in natural and organic, I don’t know that’s going to continue for the foreseeable future.” ($KR)


It’s exciting times in the US Telecom industry

“I think this is the probably the most exciting and dynamic time I have seen in the U.S. market.” ($VZ)

Carriers are offering innovative pricing, but will consumers adopt it en masse?

“I think when the iPhone rolls up, it’s going to be very interesting to see whether customers want to pay for it on installments or want to pay for it under a subsidy model.” ($VZ)

The carriers have priced plans so that they don’t really care which option consumers take

“we’re agnostic. I like being agnostic, letting customers make their choices and that’s where we will continue to stand.” ($VZ)

T-Mobile has been taking market share, but Sprint’s new CEO is vowing to fight back

“T-Mobile has proven it. You can attract new customers. They have done a phenomenal job. Well, now we are the new ones here and we are going to make sure that we become the disruptive to the industry” ($S)

Sprint is going to make a value play

“the first thing that we do, we did was let’s launch Sprint Family Share Pack and we just kept it simple and it’s always going to be simple. It’s going to be the same price or lower price than AT&T and Verizon and we are always going to give you double the data.” ($S)

The company has deep pockets backing it

“Masa is a very, very unique person. So, Masa came a few months back, he says, hey, I want you to run Sprint. I said, I can’t, I have my own company, I am very happy. He says, well, what about if I buy your company? Then, I said okay, that wasn’t the planned exit strategy for myself. Masa is a winner. Masa likes to win. Masa is a long-term – he has a long-term view on any investment. You have never seen Masa come in on investment and get out. He has made some of the most amazing investments.” ($S)

Telecom has always been a competitive business though

“I’ve seen this industry go through cycles and we’ve been very competitive. That doesn’t mean that we have been less competitive in the past.” ($T)

The internet of things is finally about to take off

“The entire Internet of Things is finally I think on the verge of taking off, led by telematics and transportation, but followed very closely by healthcare and education, and energy management. So that I think is a tremendous scene, if I’m looking as an investor.” ($VZ)

At the end of the day, customers just want a fast, seamless, secure experience with their data

“Customers really don’t care if their data travels on LTE, Wi-Fi, macro-cell, small-cell, [user] (ph), broadband, VPN, fiber; they just want an experience that is seamless, that is fast, that is secure and is ubiquitous and we’ve invested and upgraded aggressively in our networks to provide it.” ($T)

There’s still room for innovation in smart phones

“There are still a quite a thirst for new innovation, it’s innovation across multiple technology areas, it’s not just one…You’re also seeing a desire for…sort of the context awareness category of features, where you have an audio path it’s on all the time or maybe you have a camera that’s doing more than just taking pictures it’s doing some rudimentary form of computer vision.” ($QCOM)

The adoption curve for smartphones is happening very quickly in developing markets because people are looking at their phone as an internet device

“its different than the 2G world where it didn’t move very rapidly, its moving pretty rapidly because remember this is a device that people are using not just for talk and text, they use this in many case the first or primary device to get onto the internet. And so they want a lot of functionality” ($QCOM)

Capital One had an interesting discussion on what it takes to weave technology into a company’s DNA:

It takes commitment

“For companies that really want to build digital capability, it’s really not about in a single year what’s an episodic amount of investment. Digital is something that you can’t kind of say, hey you know what, we’ve got to catch up this year. We’ve really got to invest in digital, let’s go out and do this. Digital starts with – I think to really be a digital company requires it being a way of life as opposed to something that you decide episodically to invest in” ($COF)

The back-end is more important than the front-end

” the reality of being a great digital company is, from an investment point of view, it’s a lot less about the presentation layer and a lot more about the layers that are beneath it. Most specifically the middleware layer” ($COF)

Middle-ware is the most important

“the layer in between the presentation layer and the foundational technology layer is the middleware layer, where the great technology companies are all driving to go, is to have that built on APIs, which are essentially reusable building blocks that enable – but then, when you hire the digital folks to come in and say, let’s build some great digital capability. They can vary. If they want to say, okay, let’s build money movement, let’s do this, they’re pulling out and using basically the building blocks of the middleware layer that don’t have to be reprogrammed again. The companies that are episodic about doing this and want to show progress on digital will work on their presentation layer and try to do some cool things…The Amazon of the world and the great technology companies are way ahead of most of the world on those underlying layers.” ($COF)

Miscellaneous Nuggets of Wisdom

Technology is just a tool to get things done

“coming from Silicon Valley, I think it’s important to recognize that technology is just a tool to get things done.” ($AXP)

An institutional sales force will always push the hot dot

“And now the enterprise sales force is starting to take notice, like, oh, wait, I used to be — it used to be the Office was the big dog in every account and that’s where I would spend all my energy, but now there’s the SQL thing showing up that suddenly is bringing in similar size deals. Okay, I need to learn more about this, I need to drive this more.” ($MSFT)

Study the cycles of your industry

“We are junkies about watching the lending cycle. The lending cycle is not always right on top of the business cycle. But I would say in things like commercial lending, there is as much leverage in really studying and acting on the cycle as there is for the underwriting you take one loan at a time.” ($COF)

It’s amazing what a team is capable of when they believe in what they are doing

“When I say I want to change our pricing, somebody came to me I said that takes 60 days to change our pricing…And I told them that wasn’t acceptable. So, we change our pricing in 4 days and it’s amazing once you get a team to start believing in what you are doing, what they are going to be capable of doing.” ($S)

Just communicate honestly and openly

“it’s amazing what happens to a culture of a company if you are honest with your employees and if you truly communicate what’s going on. And it’s amazing what happens to sales people if you give them the tools for them to win.” ($S)

Full transcripts can be found at