CFRA's Ken Leon Previews Big Bank Earnings

Ken Leon · CFRA Research

Bank stocks have pulled back to more reasonable valuations, with opportunities in capital markets and investment banking.

Bank stocks have pulled back since they started correcting in mid-August, so valuations now look more reasonable than before. Leon sees opportunities tied to capital markets and investment banking. He frames the setup as high on both risk and reward and says the key question is whether banks can keep generating strong earnings in the third quarter and give directional fourth-quarter confidence.

“The bank stocks have pulled back. The valuations seem more reasonable than they did before they started to correct in the middle of August. We see opportunities clearly related to the capital markets and investment banking.”at 0:55

Ken Leon · CFRA Research

Large banks are shifting toward recurring fee income to stabilise earnings and lift valuation multiples.

Leon says banks are very conservative about the capital they put at risk on trading desks and in principal trading, including derivatives. He argues the strategic goal is durable, recurring fee income that produces stable earnings and drives higher earnings multiples, and he cites Goldman Sachs and JPMorgan as examples of this model.

“Banks generally are very conservative in terms of this area. What they are striving to do is give durable, recurring fee income that generates stable earnings and drives higher earnings multiples.”at 2:08

Ken Leon · CFRA Research

Large banks should show no significant credit-quality deterioration in the third quarter.

Leon says he is seeing no significant increase in loan loss provisions across banks. He does not see a credit-quality risk for the large banks in the third quarter. He puts the main near-term concern on deposit pricing, not on loan losses.

“We're seeing clearly no significant increases of loan loss provisions... I don't see a a risk, you know, for the large banks on credit quality in the third quarter.”at 3:23

Ken Leon · CFRA Research

Consumers are moving deposits to higher-yield options, pressuring banks to pay competitive rates.

Leon argues that consumers have become much smarter about chasing higher interest, and that phone apps let them move money even overnight, as some large banks already allow. He says the real question is whether banks can or will offer competitive rates. He also points to a shadow-bank market and AI-enabled startups, such as Stripe, Ramp and Plaid, as alternatives that can capture higher yields on deposits.

“The question whether banks can or will provide competitive rates because by just using your phone, you could be moving money even overnight as some of the large banks do.”at 3:34

Ken Leon · CFRA Research

AI-driven efficiency gains could let banks cut headcount, mainly in back-office roles.

Leon says banks have a possible chance to reduce headcount as they become more efficient. He breaks the bank into front, middle and back offices and says most of the AI-driven change is happening in the back office. He also says financial advisers are already using AI agents to understand clients' financial objectives and portfolios.

“The banks clearly have a chance possibly for headcount reductions as they get more efficient.”at 5:20