April ’17

The BAN Report: Big 4 Report Earnings / CIBC & PrivateBancorp in Danger? / Grocery Wars-4/20/17

Big 4 Report Earnings

The nation’s four largest banks (Bank of America, Wells Fargo, Citigroup, JP Morgan) all have reported 1st quarter earnings.

Citigroup

Citigroup had a great start for the year, beating estimates on both revenue and earnings.    Net income rose 17 percent from the prior year to $4.1 billion, led by higher revenue, lower credit costs, and strong fixed income trading revenue.

Interest revenue dropped from a year ago, but they except a significant increase in interest income for the rest of year, largely due to higher interest rates.    They are expecting one more Fed rate hike in June.    Their revenue beat was impressive – as they generated $18.12 billion versus the estimate of $17.76.

Wells Fargo

Wells Fargo, still reeling from the reputational hit from the account scandal, beat expectations on earnings, but fell short on revenue.

“Wells Fargo continued to make meaningful progress in the first quarter in rebuilding trust with customers and other important stakeholders, while producing solid financial results,” Wells Fargo CEO Tim Sloan said in a statement.

The bank said total average loans were $963.6 billion in the quarter, down $502 million from the fourth quarter. Mortgage banking revenue fell 23 percent to $1.23 billion.

The earnings report came three days after the bank’s independent directors decided to initiate corporate pay clawbacks, following a six-month investigation into the scrutinized institution’s retail banking sales practices.

Wells has been also hurt due to its lack of an investment banking operation, which has boosted the earnings of its peers.     Loan growth dropped by nearly 1% from the prior quarter, which was the largest decline since 2011, which was blamed by seasonality, reductions in oil and gas lending, and tighter underwriting standards for auto loans.

Bank of America

Bank of America has a great quarter, beating expectations across the board.

Here’s Bank of America’s report card for the quarter:

The bank also said its loans business grew by 6 percent in the first quarter.

Bank of America is also cheering higher rates, as it expects earnings to be boosted by additional rate increases from the Federal Reserve.

JP Morgan Chase

JP Morgan Chase had a great quarter, boosted by strong loan growth and trading revenue.

“We are off to a good start for the year with all of our businesses performing well and building on their momentum from last year,” CEO Jamie Dimon said in a statement.

“U.S. consumers and businesses are healthy overall and with pro-growth initiatives and improving collaboration between government and business, the U.S. economy can continue to
improve,” he said.

Like Citigroup, Chase saw a surge in revenue from fixed income trading, rising 17 percent.   It was remarkable that trading revenue was nearly one billion higher than estimates.

Overall, the largest US banks are enjoying a great start to the year, and most expect to benefit from higher rates.    The biggest concern for investors is on valuations, as bank stocks have soured since Trump won the presidency.

CIBC & PrivateBancorp in Danger?

The bank stock rally has caused problems in bank mergers, as sellers are reconsidering whether to walk away from deals consummated before the rally in bank stocks.     The proposed acquisition of PrivateBancorp by CIBC is in jeopardy, as both sides are under pressure to walk away from the altar.

Under normal circumstances, a deal to buy PrivateBancorp might have been barely a blip on the banking radar. But the election-inspired run-up in U.S. bank stocks has upped its visibility. Since the U.S. election, the company’s shares have risen about 30%, compared with CIBC’s 10% gain.

The deal has drawn high-powered hedge-fund investors. Daniel Loeb’s well-known activist investor firm, Third Point LLC, invested in PrivateBancorp late last year and recently had a 3.75% stake, according to FactSet. Another investor, Glazer Capital, said in an open letter to fellow shareholders in December that PrivateBancorp should push for better terms since there had been a “seismic shift” in bank valuations since the deal was first announced. Both Third Point and Glazer Capital declined to comment.

Chris McGratty, an analyst at Keefe, Bruyette & Woods, said he would vote no if he were a shareholder. He calculates that PrivateBancorp has a stand-alone value of about $63 per share, and that a buyer should plan to spend a premium price of $70. CIBC’s current offer valued PrivateBancorp shares at $58.84 as of Wednesday’s closing price, 40 cents above the bank’s actual closing price.

PrivateBancorp’s shareholders are scheduled to vote on the deal on May 12, which was already improved by about $1 billion last month from the initial agreement last summer.

Grocery Wars

In an effort to battle Amazon and other online retailers, Wal-Mart has slashed prices on groceries, forcing its competitors to drop as well.

The world’s biggest retailer is investing heavily to lower prices in its U.S. stores, the company’s executives say, as competition heats up against Amazon.com Inc. and European deep discounters Aldi and Lidl. Wal-Mart is spending to beat competitors’ prices and test strategic price drops, mostly on food and household goods sold at Wal-Mart stores in the Southeast and the Midwest, say people familiar with the tactics.

Wolfe Research recently found prices for a basket of grocery items at Philadelphia area Wal-Mart stores were 5.8% lower than a year ago, while those in the Atlanta and Southern California markets were 4.9% and 2.7% cheaper, respectively.

The price war, coupled with Wal-Mart’s renewed focus on refurbishing stores, is hurting the nation’s biggest grocers. Operating profits for U.S. supermarkets declined about 5% last year, Moody’s Investors Service said.

Kroger Co., the biggest U.S. supermarket chain, recently reported its first quarterly decrease in same-store sales in 13 years. Cincinnati-based Kroger’s shares fell 3% in February after Wolfe Research reported that Wal-Mart was cutting prices in the Midwest. The stock later recovered, but remains down 13% this year.

2016 was the first year since 1959 that the consumer-price index for food at home was negative at 1.3%, and grocery prices should stay low for the future.   Like lower oil prices, what’s bad for producers is good for the rest of us!

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