What the Most Powerful Bankers in the World Are Watching Right Now

Another earnings season has come and almost gone, and just as it is every quarter, the big banks earnings calls were some of the most interesting.

Back when I started out in the markets - in the dinosaur days of Quotrons, leisure suits, and landlines - you had to listen to earnings calls with the overpaid executives as they happened. It consumed hours at a time.

Nowadays, I can quickly and easily download the transcripts from the calls, allowing me to take a closer look at just what makes the biggest American banks (and thereby, the biggest global banks) tick.

Let me say up front that there's no chance I will be investing in these financial behemoths, but they do lord over just about every aspect of the financial markets, as well as saving and investment behavior.

They're the field generals of the U.S. economy - a "rank" that makes their insights extremely valuable fodder for those of us looking to make a killing from the small soldiers known as community banks...

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Money Shocker: the Big Banks Are Still Rich

The first and most obvious takeaway from the most recent round of big bank calls was that the big three - JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), and Wells Fargo & Co. (NYSE: WFC) - are in fantastic shape.

I don't need to point out the obvious, which is that they all earned several billions of dollars between April and June. Wells Fargo is still taking some hits because of the damage to its reputation, but, barring another episode in which they trip over their own slime, that looks to be coming to an end.

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Credit conditions remain excellent, even in the scarier categories like credit cards and auto loans. Wells Fargo CFO Richard Shrewsberry's remarks pretty much mirrored the other banks': "Our strong credit results continued with our loss rate in the second quarter, declining to 26 basis points of average loans, a historically low level... We had a $150 million reserve release, reflecting strong credit performance and lower loan balances."

None of the suits expect it to end either, particularly JPMorgan CEO Jamie Dimon, the highest-paid CEO in the financial industry.

He put this in the context of the broader economy, explaining, "Homebuilding is in short supply. The banking system is very, very healthy compared to the past. Consumer confidence and business confidence are very high... So if you're looking for potholes out there, there are not a lot of things out there, and growth is accelerating."

Of course, the elephant in the room was the economic saber-rattling between the United States and the rest of the world. But when asked about looming trade war threats, JPMorgan CFO Marianne Lakes said they're not changing people's decision-making, despite certainly being on everyone's minds.

She did emphasize how the uncertainty surrounding a trade war could "lead to more challenges or slower growth because confidence is a really important part of not just the business investment cycle, but also the financial market stability. So at this point, it's more of a risk narrative than it is an actual driver, but it is important that that uncertainty is taken off the table."

Yes, the economy is doing okay. People are working and paying their bills. Companies are spending money again. Risks in the economy and banking system are measurable.

And most importantly, the banks have so far resisted the urge to do anything stupid to pick up a basis point or two of extra yield.

But there was another interesting topic on the table last week that marks a shift in the way banks are thinking about their future.

It's an emerging trend that, if not embraced, could leave some of the country's most important financial institutions in the dust.

If it is embraced, it could send several tech companies through the roof...

Here's What Could Make or Break the Wall Street Whales

The topic was the need for technology spending, as well as the ongoing development of new digital platforms.

You see, consumers are demanding more digital and mobile banking experiences. We're seeing this with the rapid rise of platforms like PayPal Holdings Inc.'s (Nasdaq: PYPL) Venmo app, whose total payment volume exploded 76% from Q1 2017 to Q1 2018.

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If you're a bank and you don't have digital applications, you won't be competitive. But of course, the more banking goes digital, the more cybersecurity spending will increase.

For instance, John Gerspach, the CFO of Citigroup, summarized the three ways his bank is moving toward digitalization: "First is how we're using digital to engage with our clients, shifting consumer activity to more convenient and efficient channels. Second is how we're using technology to streamline our own operations, things like straight-through application processing, the use of Big Data, and branch optimization. And third, a portion of the savings should come from more conventional initiatives, for example, using lower-cost locations, improving procurement and process re-engineering."

I know what you're probably thinking: The tech firms set to turn the banks' digital dreams into a reality would make a killer investment. It's a good opportunity to get in before the herd and before this billion-dollar trend turns into a hundred-billion-dollar trend.

But I only pounce on companies trading at unreasonably low prices and, unfortunately, those are hard to find in a "sexy" industry like tech - one that's often propped more by hype than strong financials.

All of that being said, I have not yet found any firms trading at the attractive valuation levels that allow us to lock in unreasonably high returns. However, I am keeping an eye on the tech firms that conduct a lot of business with the banking industry...

They include PayPal, Fiserv Inc. (Nasdaq: FISV), OneSpan Inc. (Nasdaq: OSPN), Unisys Corp. (NYSE: UIS), CGI Group Inc. (NYSE: GIB) , Oracle Corp. (Nasdaq: ORCL), and Fidelity National Information Services Inc. (NYSE: FIS), among many others.

If these companies float lower and trade at an attractive price, the profit potential will be life-changing. Once they get there, you better believe I'll be there to tell you when and where to pounce.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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