From tax reform to technological advances, the banking industry is undergoing a pretty big shift.
A full transcript follows the video.
This video was recorded on July 16, 2018.
Michael Douglass: Let's step back to general, broad summary. When thinking about this quarter -- we just have the Big Four so far -- we're definitely seeing brokerage and wealth management assets increasing, generally speaking. There are some stand-outs. Wells Fargo's wealth management revenue is down, actually. Those assets are increasing largely due to inflows and stock returns. It's been a great market, and a lot of people are getting more excited about investing.
Of course, the question will be, on the flip side, when the stock market hits the skids -- which inevitably, it will, at some point -- what happens for those business units, and just how sticky are those relationships? That'll be an open question.
Matt Frankel: Yeah, definitely. Especially in some of these cases, they've been building up their platform for basic retail investors, like Merrill Edge. Those are generally the first to pull their money out when things go bad. We'll see, like Michael said, how sticky that is when things take a turn in the other direction.
The number you want to keep an eye on is inflows or outflows, in the bad case. Don't pay too much attention to, say, if you hear that such-and-such bank grew their assets under management by $20 billion. You want to pay attention to whether there were net inflows or net outflows in that money. That excludes market performance and tells you how many people were putting money in that could help the bank on more of a long-term, sustainable basis.
Douglass: To step back to the regulatory environment for a moment, tax reform boosted earnings, boosted return on equity and return on assets pretty much across the board, with Wells Fargo being the stand-out that really struggled vs. everybody else. Not surprisingly, we see an environment that's much more positive for banks than it was, say, a year ago. Relatedly, interest margin generally expanding because the Fed is generally raising rates. This definitely a time in the sun for the big banks. Generally speaking, they should be having a pretty good few quarters, and hopefully years, assuming that the economic recovery continues to hold.
Frankel: That's what I was talking about with Wells Fargo. This penalty where they're not allowed to grow couldn't possibly have come at a worse time. If they had been not allowed to grow in, say, 2009, it wouldn't have been that big of a deal. But this is a great growth environment for banks. To take away that growth engine is really disheartening as an investor.
Douglass: Yeah, absolutely. We've talked a little bit about expense management. I've harped on this a few times, this idea of the shift toward digital, trying to find ways to run leaner and leaner operations, reducing branch counts, but just to give you a sense of things --76% of Bank of America's deposits are now digital. Mobile and ATM, that's how they get those deposits. 24% are at the actual bank at this point. That's about a 10% shift in that direction in about a year.
Really, we can expect that trend, which is visible across all the big banks, and I assume all of banking, to intensify, particularly as things like Capital One Cafés really highlight people's ability to do more and more of their banking online. It's more convenient for them, of course, they don't have to leave the house; and it's also more profitable for the banks, because then they don't have to have has many expensive banking centers. So, that can help them manage expenses.
Capital One Cafés are really designed to help facilitate that and educate people about that. That's a really interesting opportunity to help brand that as the big banks try to push into a more digital world and control those expenses.
Frankel: Michael and I disagree on how quickly this going to happen, but it's a clear trend. Here's the takeaway: banks don't want to run branches. Branches are expensive. You not only have to build or rent a building, you have to build out the inside, you have to pay for staff, you have to pay benefits to those staff, you have to buy all the equipment and furniture. Every time someone makes a deposit in person, they have to hand them a receipt, they put it in an envelope -- those all cost money.
Mobile deposits cost roughly one-tenth of what an in-person deposit does. The same goes for an ATM deposit. It's a huge cost difference for banks to be able to shift their business away from physical branches. Even ATMs, like I said, are infinitely cheaper than having an actual branch. This is definitely a trend. I think it'll take a long time, probably the rest of my lifetime, before bank branches become really antiquated. But it's definitely heading in that direction.
Douglass: For sure. My guess would be more like 15 to 20 years, but we'll see. That'll certainly be something that I think Matt and I will keep in touch on, just to get a feel for how things go. But, the question with all of this, the banks are generally firing on all cylinders, will be, what happens when the cycle turns? When the market declines, wealth management assets probably will, too, just because the amount of money that they have -- if they have a fund that's worth $X, and then you take 20% off the value of that fund because the stock market declines by 20%, then assets under management will decline by 20%.
Of course, there are inflows and outflows to also consider. If there's a recession, credit quality will fall off, too. People tend to pay their debts when the economy is doing well, and unemployment is low. It's a different ballgame if what has been a long and substantial economic recovery and a long and substantial bull market really turn.
That's really where we're going to get the sense of who really made the smart loans and who really trimmed the right expenses -- when things get tougher. In the meantime, banks will probably enjoy their time in the sun, and we'll be right there with them.