But one notorious Wall Street veteran who’s covered banks for decades says those investors are missing the point. Wells Fargo Senior Analyst Mike Mayo says technology will transform the banking sector over the next decade.
“Our view is that technology is having a greater impact on the banking industry than ever before,” Mayo said in an interview on Yahoo Finance’s The Final Round. “So we are very structurally bullish on the banks, especially the largest banks.”
In a research note to clients, “Banking on Tech,” Mayo writes that the coming decade “should reflect the biggest tech transformation in the history of banking.”
Technology is key for big banks
Mayo points out that technology can enable banks to lower costs and keep expenses under control, leading to “record efficiency and market share gains.”
“As long as expenses are kept under control, banks won’t have to stretch for that last bit of revenue growth [which got them into financial trouble in the past]. Then you should have more annuity-like earnings streams for banks,” he said. “But the key to that is keeping expenses under control, and to do that, you use technology.”
Between the flattening (and sometimes inverted) yield curve and the Federal Reserve cutting interest rates, third quarter was a challenging environment for the banking (XLF) industry, Mayo said.
“Third quarter was lousy. You had fed rate cuts, a flattening yield curve, soft capital markets, and guess what? Citigroup (C), Bank of America (BAC), J.P. Morgan (JPM) — they grew revenues faster than expenses,” Mayo said. “That's what's missed by the market. That's what's missed by all these people, missing this tidal wave of change when it comes to technology and banking.”
Mayo points out in the research note that banks spend more on tech than any other industry — $150 billion per year — and that they “deserve a payback for their tech investments.” That’s one of the reasons why Mayo and his team at Wells Fargo (WFC) are structurally positive on banks. Their favorite large cap banks are Citigroup (C), J.P. Morgan (JPM), and Bank of America (BAC), which are all Outperform rated at Wells Fargo.
Iryna Kirby is a Producer for Yahoo Finance. Follow her on Twitter at @IrynaNesko.