JP Morgan at Merrill Lynch Conference Notes

Douglas B. Petno – Commercial Banking CEO

Good to get certainty on election, but health of economy is industry by industry

” I think it’s more of an industry story where you sit in the economy, where you sit geographically. Sentiment is impacted by a combination of factors and you can sort of see the election effect on sort of management confidence and board’s confidence sort of once you get certainty around something like a big outstanding event like that. But depending on where you are in the country, the story is a little different and it’s not so much a size issue, more the industry specific dynamics that we see amongst our client base.’

There is a lot of pent up demand out there

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winter. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the [indiscernible] in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder. Revolver utilization has been essentially flat for us, about 30%, since the financial crisis. And there is a tremendous cash build across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A, and I think the other thing that’s outstanding and on the minds of a lot of our clients is sort of local fiscal uncertainty put aside the federal situation and tax climate and fiscal climate in Washington is one thing, but a lot of these businesses are more impacted by what’s happening in their towns and in their states. And so if that stuff can get resolved, you’ll see an even bigger catalyst behind these businesses, but there is definitely a lot of pent-up appetite.”

Invest adequately ad be ready to self disrupt

“No, when I go in front of Jamie, it’s more of a conversation about like what’s not in your [investment] [ph] that should be in there and tell me why you took it out, and I think our point of view is that self-disruption innovation is all about bringing more value to our client. We have the financial wherewithal to do it. Now is the time to seize the opportunity. The landscape is shifting dramatically. These are not discretionary investments in many respects. A lot of it is for cyber, better control on your operations and product offering. A lot of the innovation will drive dramatic efficiency across our operations. So, his point of view is, if you’re taking it out to dress up your P&L, you are borrowing from your future and you better be explaining to me why you’re doing it, and those are not the easiest conversations to have because you obviously are mindful of near term performance, but as I said, it’s very often the case that you’re going to borrow from your future if you under-invest today.”

There’s no question we are in the later stages of the real estate cycle

” Look, there’s no question, we are at later stages of the real estate cycle. I mean we watch it very, very carefully. We look at every component of every geography, we look at rental rates, vacancies, supply, permitting, every metric that you could possibly study, we study it at very granular level and there are parts of the United States where there’s been a tremendous amount of new construction. I think multifamily specifically, I think what you should be most worried about is construction financing for high-end luxury condos. That is not what our multifamily lending business is. And just to remind everybody, for stabilized properties, the average loan is about $2 million. We’re substantially in markets where supply constraint rent by necessity, markets where construction costs are prohibitively expensive. So what that means is, if you’re going to build a new apartment building, because the construction costs are so high and the land costs are so high and there is such scarcity of land, you’re going to have to build a high-end offering, otherwise the economics don’t work. That is not what we are financing.”

Having branches certainly helps

“Having branches certainly helps. As I mentioned before, over half our clients use the branches. Just having a physical branch shows community presence and commitment. It matters a lot. It may not be intuitive to you sitting in the room but our clients care if you are there in the community and if you have a physical retail presence. “