Meredith Whitney on Banks, Buybacks, and Fintech

Financial analyst Meredith Whitney joined Bloomberg Talks to discuss the current economic climate, the performance of major tech companies, and the strategies of the banking sector. Whitney, a prominent figure known for her prescient calls in the financial world, shared her views on everything from Visa's historical growth to the strategic decisions of bank CEOs in the post-2008 era.

Visa's Fintech Dominance and Rightsizing Trend

The conversation began with a look back at the impressive growth of Visa, which Whitney recalled recommending enthusiastically years ago. She noted its evolution from a bank-owned entity to a publicly traded company with significant operating leverage. Whitney also drew a parallel between Visa's past and the broader trend of companies rightsizing their workforces. She observed that while many tech companies have downsized after pandemic-driven hiring, banks have been slower to do so. "A lot of companies that hadn't rightsized that had overhired during co um have to face the reckoning that... the only way to achieve operating leverage now is to get rid of is to downsize," Whitney stated.

Whitney also highlighted the foundational role of payment networks like Visa and Mastercard in the burgeoning fintech sector, calling them the "OGs of fintech." She emphasized that virtually all fintech innovations ultimately rely on these established platforms.

The full discussion can be found on Bloomberg Podcast's YouTube channel.

Bank Stock Performance and M&A Strategies

Turning to the banking sector, Whitney commented on the strong performance of bank stocks, noting that many are trading at or near all-time highs. She contrasted the current M&A activity with the pre-2008 financial crisis era, when transformational deals were common. "Historically, pre great financial crisis... bank stock valuations were trading at all-time highs, they would do transformational deals. There was massive M&A, massive consolidation," she recalled.

However, Whitney observed that since the crisis, banks have primarily focused on share buybacks and dividend increases, even when their valuations are high. She pointed out that some banks, like Citigroup, have seen their tangible equity decrease significantly, with earnings growth being artificially boosted by these buybacks. "If you look at Citigroup for example their tangible equity is below what it was before the great financial crisis... they've just been buying back shares otherwise they would have negative earnings growth," she explained.

JP Morgan as an Outlier and Fintech Acquisitions

Whitney singled out JPMorgan Chase and its CEO Jamie Dimon as an exception to this trend, suggesting that Dimon possesses the drive to pursue significant deals. She speculated that JPMorgan Chase might make a major fintech acquisition, potentially valuing a company like Revolut at over $15 billion. This contrasts with the more cautious approach of other banks, who she believes are hampered by the lingering effects of the 2008 crisis.

She elaborated on the psychological impact of past M&A failures, such as Washington Mutual and Bear Stearns for JPMorgan Chase, and Countrywide for Bank of America. These events, she suggested, have led to a form of "PTSD" that makes banks hesitant to undertake large, transformative deals.

The Path Forward for Banks

Whitney discussed the current regulatory environment, noting that while banks have largely emerged from the "doghouse" they found themselves in after the financial crisis, the situation is still evolving. She suggested that the EU's stance on potential deals, rather than the U.S. government, might be the primary factor influencing major cross-border banking or fintech acquisitions. With the current administration having just over two years left, Whitney believes the window for significant action is now.

She concluded by reiterating her view that while many banks are focused on buybacks, the potential for strategic M&A, particularly in the fintech space, remains a key opportunity for those willing to act decisively. StartupHub.ai data indicates that while Visa has a score of 21/100, competitors like Chime (77/100) are performing significantly better in the fintech space, suggesting potential acquisition targets for large banks looking to innovate.