Community bankers seem to expect a lump of coal for the holidays.
The industry has a lot going for it. National unemployment is low, hovering around 4% in October, according to the Bureau of Labor Statistics. Third-quarter banking profits rose more than 5% from a year earlier, based on data from the Federal Deposit Insurance Corp. Bank stocks are up by double digits this year.
Still, bankers have a grim outlook for 2018. Several factors are at work, ranging from concerns over lackluster loan demand and low yields, rising deposit prices and competition and persistent regulatory burden.
In short, bankers are finally adjusting to the industry’s new normal.
“Even though the economy seems a little bit better there’s still a lot of issues out there in the market,” said Tim Scholten, founder of Visible Progress, a consulting firm. “I don’t think things are necessarily as great as what sometimes it feels like it should be. It’s a different world than what we’re used to.”
For the first time in its nearly three-year history, a banker confidence index from Promontory Interfinancial Network remained below 50 for two straight quarters, indicating pessimism among respondents. The index, which is based on a scale of up to 100 points, tracks views on access to capital, loan demand, funding costs and deposit competition.
“Why aren’t bankers more confident?” said Paul Weinstein, a Promontory senior adviser. “We’re trying to figure that out. There are lots of potential possibilities. It could just be the initial exuberance that some had with what they thought would happen in Washington has faded.”
Muted enthusiasm is likely being influenced by customers’ reactions, said Jon Winick, CEO of Clark Street Capital. For instance, many banks are chasing commercial-and-industrial credits at a time when borrower demand is below many bankers’ expectations.
Total C&I loans on Sept. 30 were flat on a linked-quarter basis, according to FDIC data.
Almost 51% of the bankers surveyed by Promontory said current loan demand had moderately or significantly improved from a year earlier. About the same percentage expected demand to rise in the next 12 months.
Bankers often assert that businesses are waiting for certainty, such as last year’s presidential election or tax reform, before deciding to borrow and make investments.
Winick questioned that logic, postulating that potential borrowers may have become more debt-averse since the financial crisis. Others may simply have enough cash on hand to fund their operations.
“I don’t buy that a trucking company in suburban Chicago is holding off on buying new trucks because it is waiting to see what Washington does,” he said.
Concerns over regulatory issues could also be forcing some banks to pass on certain loans, said Trent Fleming at Trent Fleming Consulting. Overall, “a downward creep” in regulation makes lending more difficult for banks, he said.
“I’m little bit pessimistic myself just from the regulatory burden,” Fleming said. “In our industry, the burden of regulation is the single biggest drag on what’s going on. Bankers have been hoping for relief.”
Deposit competition and the possibility of higher funding costs was another concern. About 64% of respondents to the Promontory survey said deposit competition had increased over the past 12 months. About 57% of bankers felt that way in the second quarter.
Nearly 90% of the survey’s participants expect funding costs to rise.
“The price for deposits has gone up, while the loan pricing hasn’t changed all that much,” Scholten said. “It is creating added pressures on margins.”
Deposit competition is on the rise as banks with at least $50 billion in assets look to comply with rules tied to their liquidity coverage ratios, said Ciaran McMullan, president and CEO of Suncrest Bank in Visalia, Calif.
While optimistic about his $529 million-asset bank’s operations, McMullen said he understands why other may have a gloomier outlook.
“I think bankers have always been a bit pessimistic,” McMullan said. “There are plenty of bankers that remember staring at the ceiling at night wondering how they would get out of the fix they were in during the crisis. … It’s hard to shake that.”
The survey, which was conducted during the first half of October, took place before some important developments for banks. Tax reform has since progressed in Congress, and Richard Cordray stepped down as director of the Consumer Financial Protection Bureau.
“If tax reform happens that will probably change the needle a lot,” Winick said. “After the election things haven’t happened as fast as people had wanted. But there are a lot of very encouraging changes, so this [pessimism] could be short term in nature.”
Clark Street Capital Featured in SNL-12/1/17
Wells Fargo CEO to face investors amid drawn-out, mounting woeExclusive
Regulatory scrutiny of Wells Fargo & Co. could escalate as the bank continues to grapple with fraudulent sales tactics, putting its chief executive in a precarious position as he prepares to meet with investors.
Wells President and CEO Timothy Sloan — who has spent the past year trying to resolve extensive problems that range from phony deposit accounts to blunders in Wells’ auto-insurance and mortgage operations — is scheduled to address investors Dec. 5 at a Goldman Sachs conference in New York.
Sloan was promoted to the San Francisco-based bank’s top job shortly after former CEO John Stumpf stepped down in the wake of regulators, in September 2016, fining the bank and alleging that it had allowed employees to open millions of accounts without customers’ permission. Regulators said retail staffers worked in a pressure-cooker environment to meet exceptionally high sales goals.
Sloan has since tried to win back the trust of customers, investors and regulators. During his tenure as CEO, the bank has made changes to its board, fired managers linked to improprieties and reshaped the ways it motivates employees.
But a cloud of scandal continues to hang over the bank, and regulators reportedly are ramping up their scrutiny. That development could further damage Wells’ reputation at a time when the bank is struggling to attract new customers and grow revenue, observers say.
That in turn would worry investors, said Jon Winick, president of bank advisory Clark Street Capital.
“It is remarkable that it’s taking them so long to deal with this,” Winick said in an interview. “What else is there for regulators to find? That’s what everyone is going to ask.”
Wells has acknowledged that its staffers opened up to 3.5 million fake accounts. In its community bank division, where those bogus sales occurred, net income fell in the third quarter, as did Wells’ overall revenue.
Wells also has reported a range of other problems. These include wrongly charging hundreds of thousands of auto loan borrowers for insurance and unjustly charging some mortgage customers fees to extend interest rate commitments.
At issue now: The Office of the Comptroller of the Currency has cautioned Wells that it is considering a formal enforcement action against the bank over the auto-insurance and mortgage issues, according to a Wall Street Journalreport. Such an action would involve ordering the bank to correct problems within a set time period, and with that, regulators would bolster their inspections of Wells’ operations, said Kevin Jacques, the finance chair at Baldwin Wallace University.
Heightened supervision would increase the likelihood of regulators unearthing additional problems, and it would surely consume precious time that Wells managers would otherwise devote to growing the business, said Jacques, who spent a decade from the late 1980s to the late 1990s working on risk management matters for the OCC.
“It is much more than a negative headline,” Jacques said in an interview. “When the OCC takes action, it means they are ratcheting up the steps they are taking against a bank, and that kind of progression is exactly what Wells Fargo does not want to see happen.”
According to the Journal report, which cited people familiar with the matter, the OCC wrote a letter to Wells in November accusing it of willingly hurting the auto and mortgage customers and, additionally, of repeatedly failing to address problems in an array of other areas. Also, this week the Journal separately reported that some business clients in Wells’ foreign-exchange operation were overcharged, though the bank disputed that report.
“At Wells, like at all the really big banks, there is a team of regulators onsite year-round,” Jacques said. “If there is an enforcement action, you can be sure it means that onsite team is really digging in, trying to get ahead of problems rather than responding to them.”
Should substantial new problems emerge, pressure on Sloan could mount. When he was promoted from COO to CEO last year, Wells emphasized that Sloan was not responsible for the division in which the sales scandal erupted. But, with problems widening, it could become increasingly difficult for the 30-year company veteran to avoid blame.
Winick said it “could take years for somebody from the outside to get up to speed” as a new CEO, given Wells’ size and complexity. But he also said that, if Wells’ problems worsen, critics may demand a change in leadership and push the bank to look outside for a turnaround expert.
“It is very disappointing, this continuous drip, drip of problems,” Winick said.
SNL: Latest Midland States Bancorp Deal-10/17/17
Latest Midland States Bancorp Deal Lands Company in Community Bank Sweet Spot
On Oct. 16, the Effingham, Ill.-based company announced it will acquire Belvidere, Ill.-based Alpine Bancorp. Inc. in a cash-and-stock deal valued at about $181.0 million, making it the fourth-largest community bank in the state, according to executives.
“This will be our 12th announced acquisition since 2008, so we have a very good process in place for evaluating, negotiating and integrating acquisitions that add value to our franchise,” Vice Chairman, President and CEO Leon Holschbach said on an Oct. 17 call to discuss the deal.
Stephens analyst Terry McEvoy noted in an interview that the Alpine deal comes on the heels of Midland completing a similarly sized transaction in June — the nearly $173 million buyout of Centrue Financial Corp.
Midland also announced it completed a $40 million private placement of subordinated debt to certain institutional investors. The company will use the funding for the cash portion of the Alpine deal. “This debt issuance will help us maintain strong capital ratios following the acquisition, so that we can continue to execute on our organic and acquisitive growth opportunities,” Holschbach said.
The two deals together would tack on more than $2 billion in assets and push Midland to around the $6 billion-asset level, giving it heft to absorb costs, more deposits to fund loan growth and business-line diversity to bolster earnings when lending is slower, McEvoy said. The deal will also add a boost to its wealth management business, giving it just under $3.0 billion in assets under administration, the company said.
Jon Winick, president of bank consultancy Clark Street Capital in Illinois, said that with the latest deal Midland would get into a sweet spot of sorts for larger community banks. It would be big enough to spread regulatory costs and other expenses over a broader base, compete for larger loan deals and attract the attention of more institutional investors. But yet, at around $6 billion in assets, it still would have plenty of room for growth before reaching the $10 billion threshold, a point at which banks face more regulatory scrutiny and compliance costs.
“So Midland is getting into a range where they can really benefit from economies of scale,” Winick said in an interview.
Alpine will provide Midland with about $1.0 billion in assets under management, and the seller would also provide Midland with about $830 million in gross loans and $1.1 billion in deposits, based on June 30 data. The target has a loan-to-deposit ratio of 73%, leaving plenty of room to put more deposits to work via loans to the combined company’s larger customer bases. Alpine’s deposits, too, are lower-cost at 19 basis points, McEvoy noted. Core deposits compose 94% of Alpine’s total deposits, executives said.
According to Holschbach, Alpine’s loan portfolio is “very similar” to Midland’s. He said there will be “almost no change” in the overall mix once the two portfolios are combined, but it will reduce the company’s commercial real estate regulatory ratio to 233%.
Alpine “appears to be a solid community bank with a very strong deposit base,” McEvoy said. “I think this is a nice move. It’s good to see them back with another deal that will help them really build out the business.”
Although analysts on the call sounded mostly positive regarding the deal’s metrics, some questioned whether projected cost savings, at 36%, could be higher. Midland will gain 19 branches in the transaction, but Holschbach said there are no branch consolidation opportunities. He said the greatest opportunity for cost savings will stem from consolidating systems.
Holschbach said Midland will focus on the Alpine deal in the “near horizon,” but will continue building capital for future transactions.
“And frankly, the stronger our stock price gets, the more likely we’ll look at opportunities to boost capital with [an] equity raise,” he said.
The deal is expected to be 10% accretive to 2019 EPS. Tangible book valued dilution of about 6% is estimated to be earned back in 3.5 years, using the crossover method.
CEO Jon Winick Interview SNL-8/14/17
Seasonality helps big banks grow loans in Q2 but forecast remains dim for year
Lending at the nation’s largest banks grew compared to a seasonally sluggish first quarter of 2017, but the industry remains subdued on expectations for growth in the coming quarters.
All 10 of the largest banks saw quarter-over-quarter growth in total loans and leases, with stronger performance coming from consumer lending. But commercial and industrial, or C&I, lending did not appear as strong for the quarter, namely at three of the big four banks: JPMorgan Chase Bank NA, Wells Fargo Bank NA and Bank of America NA. In its most recent survey of senior loan officers, the Federal Reserve noted that the flattening activity in C&I is the result of weaker demand in the second quarter, since banks left their standards “basically unchanged.”
In residential real estate, the Fed noticed banks slightly easing standards as demand strengthened. Most of the largest banks saw higher mortgage and home equity lending, although Capital One NA saw its portfolio fall 4.5% quarter over quarter as it continues to carry out a planned runoff of its mortgages.
On commercial real estate, or CRE, the Fed saw tighter lending standards as demand weakened. But most of the big banks saw quarter-over-quarter increases in lending, with the exception of Bank of America NA and U.S. Bank NA.
Chris Kotowski, analyst at Oppenheimer & Co. Inc., said in an interview that the big banks have broadly grown more slowly than the industry. S&P Global Market Intelligence data shows that only three of the 10 largest banks grew loans in the second quarter at a higher rate than the U.S. commercial bank aggregate of 1.7%: Wells Fargo, Citibank and PNC Bank NA.
“We are in a slow, steady state,” Kotowski said in an interview.
On earnings calls, executives of the largest banks also painted a bleak forecast of loan growth in coming quarters.
At Bank of America Corp., CFO Paul Donofrio said July 18 that the company expects only a “little bit of growth,” with total loans expanding at a rate in the low single digits. Wells Fargo & Co. CFO John Shrewsberry said July 14 that his company is also targeting low single-digit loan growth for the year.
SunTrust Banks Inc. Chairman, CEO and President William Rogers Jr. said his company is focused on adapting to pockets of different lending categories where there are growth opportunities.
“If we’ve been in a cycle and we’ve been unable to achieve that kind of return, we’re totally willing to move on and move to another opportunity where we think we can benefit more substantially,” Rogers said.
As executives exuded cautious optimism for future loan growth, analysts appear to be closely watching credit markets. A July 31 Oppenheimer note acknowledges that current year-over-year growth, based on the Federal Reserve’s H.8 data, is cause for concern because it is running just under nominal GDP.
“What would really worry us is if banks and borrowers had started pulling in their horns because of signs of credit issues,” the note reads.
Jon Winick, president of bank adviser Clark Street Capital, said in an interview that his overall outlook for loan growth is “flat to negative,” pointing to weaker C&I lending that can’t be overcome with stronger residential mortgage activity. He added that he talked with one corporate lender at a large bank who described current loan pipelines as “dead,” presenting some anecdotal evidence that loan growth may not pick up soon.
“In the aggregate it’s hard to be optimistic on loan growth,” Winick said.
Clark Street Capital in American Banker: The Two Ways to Read into Lenders’ Low Chargeoffs-8/8/17
Net chargeoffs are at a 10-year low. That’s a good thing … right?
Well, as a wise grandma might reflect, the answer to such questions depends on where you are at in life, or in the case of lenders, where they are at in the business cycle.
Look at the numbers over the past decade: Net chargeoffs peaked at 3.14% in the fourth quarter of 2009, according to data from the Federal Reserve Bank of St. Louis. Then they began to plummet, and since the first quarter of 2014 the chargeoff ratio has hovered around a half of a percentage point, which is right where it stood in the first half of 2007, before the financial crisis began.
A chargeoff rate of 0.47% — the reading for the first quarter of this year — would have seemed like a gift from the heavens for most banks in the immediate years after the crisis, but now, in an era when lenders are scrounging for growth and the tepid economic recovery persists, the low figure raises questions about whether bankers are being too cautious for their own good and everyone else’s.
One reason that chargeoffs are low is that the value of assets has increased “so that you’re not taking a loss when these deals go bad,” said Jon Winick, CEO of the banking advisory firm Clark Street Capital in Chicago.
Banks, too, perhaps have learned from the past and improved their risk management skills.
“Certainly chargeoffs are at a level where bank lending is very profitable,” Winick said.
At the same time, it could be argued that several years of such low chargeoffs means banks are not taking enough risk, he said.
What is the optimal rate, the right balance between systemic risk and macroeconomic reward? Winick said his estimate “is probably somewhere between where we are and 1%.” When the rate tops 1%, it typically means real estate prices have fallen or the economy is in a recession, Winick said.
Eventually the ratios have to rise, but bank executives recently have sounded content with the status quo. In fact, some seemed to relish it.
Thomas Reddish, the chief financial officer for TriCo Bancshares in Chico, Calif., said the $4.5 billion-asset company’s current loan-loss allowance is 1%.
“It’s hard to establish an allowance when you don’t have any losses,” Reddish said at the Keefe, Bruyette & Woods Community Bank Investor Conference last week. “I don’t think we’ve had any net chargeoffs in the last five years.”
Susan Cullen, CFO at Flushing Financial in Uniondale, N.Y., said the $6.3 billion-asset company has not recorded a loan-loss provision for the past 18 months and charged off only $54,000 of credits in the second quarter.
“Those are very low numbers that we’ve had for a long time,” Cullen said at the KBW conference. “We have not taken a charge in quite a while.”
Michael Scudder, CEO of the $14 billion-asset First Midwest Bancorp in Itasca, Ill., said its chargeoff rates are lower than normal.
“Our credit performance in the quarter was also favorable again, reflective of the current benign credit environment, as chargeoffs of 16 basis points were well below what we would call our normalized range of 25 to 40 basis points,” he said during a July 26conference call on second-quarter results.
Andy Schornack, president and CEO of Flagship Bank Minnesota in Wayzata, said there is some speculation that marketplace lenders are possibly “taking some of the high-risk borrowers out of the banking market.” While banks are doing well, the online lenders are seeing higher chargeoff rates, he said.
“You’re looking at two models that are seeing diverging paths, and you’ve got one with the banks that are really performing really well on a credit-quality standpoint,” Schornack said in an interview.
As much as ever, the numbers and the satisfaction that bankers are expressing about them can be alternatively viewed as signs of success, underachievement or a calm before the storm.
The current environment is good in that it means portfolio performance is safe, Winick said, but the problem is now things can only get worse.
“What comes next I think is harder to predict,” Winick said.
SNL: Analysts look for new growth cues from Wells Fargo
By Kevin Dobbs
When Wells Fargo & Co. reports second-quarter earnings next week, analysts will look for signs that it is increasing profits after a lull in growth that followed the bank’s 2016 sales-tactics scandal.
Regulators last September said they had fined the San Francisco-based bank after learning that bank staffers opened millions of deposit and credit card accounts for customers without their permission. New account opening dropped in the ensuing months, hurting revenue growth, and both legal and regulatory costs rose. The result: Wells posted fourth-quarter 2016 and first-quarter 2017 earnings that were below year-earlier levels.
But an S&P Global Market Intelligence analysis of Wall Street’s expectations found that, on average, analysts expect Wells to post revenue and earnings per share figures that are higher than the previous quarter and a year earlier. “They have gone through a lot of pain, but I think they can now start focusing on growing earnings again,” Vining Sparks analyst Marty Mosby, who covers Wells, said in an interview.
In June, Wells got a key nod of approval from regulators: After the bank passed an annual stress test designed to ensure it could navigate a financial crisis, Federal Reserve officials approved the bank’s plan to increase its dividend and stock buyback program. Both moves are signs of capital and overall strength, Mosby said. He added that the Fed’s nod indicates the effects of the sales fraud, while still hindering the company in terms of legal costs and lingering reputational damage, are temporary and starting to fade.
“It’s kind of a stamp of approval,” Mosby said of the Fed checking off on Wells’ capital deployment plan.
He said Wells had “ring-fenced” the sales issue and publicly outlined important steps it took to prevent such a debacle from occurring again, including changes to the way it pays and motivates retail bank employees.
“Ultimately, I don’t think it was really a threat in terms of what they asked the Fed for with their capital planning,” Mosby said. “I think this is the inflection point for Wells.”
Jon Winick, president of bank adviser Clark Street Capital and a long-time Wells observer, agreed. “Wells is so big that the damages aren’t going to be that impactful as far as their capital position,” he said in an interview. Regulators “are probably seeing that the actual cost of the Wells accounts issue is pretty low and quantifiable.”
Mosby anticipates that Wells will gradually rebuild sales levels in its retail bank over coming quarters. That, in concert with an ongoing cost-cutting effort, should help the bank shake off the aftershocks of the scandal, lower its efficiency ratio and gather notable earnings momentum in 2018. Mary Mack, head of Wells’ community bank division, said while speaking at a conference in June that the bank is continuously looking for new ways to increase efficiency, even while it is in the midst of carrying out a plan to consolidate 450 branches and reduce expenses by some $4
billion by the end of 2019.
Wells’ first-quarter efficiency ratio, which measures noninterest expense as a share of revenue, increased to 62.7% from 58.7% a year earlier. The expense reductions are part of an effort to bring the ratio back down below 60%, where Wells has historically operated.
Speaking at a separate June conference, Wells President and CEO Timothy Sloan said it was realistic to expect that the bank could bring the efficiency ratio into a range of 55% to 59% by next year.
Later that month, Wells said it would sell its commercial insurance business to USI Insurance Services LLC, an anticipated move aimed at reducing staffing costs in noncore business lines.
That sale, and perhaps others to follow, are the kinds of moves that, on top of branch consolidation, “will help Wells get the expense ratio down to their long-term target,” Mosby said. “I think they are getting on that path now and can really get things going again by 2018.”
Wells is slated to start big-bank earnings season July 14 along with JPMorgan Chase & Co., Citigroup Inc. and PNC Financial Services Group Inc.
Clark Street Capital’s BAN Report 6/21/17
The BANReport: Oil Prices in Bear Market Again While Banks Step Up Lending / Banks Curb Provisioning:SNL / Cred Report Black Marks Vanish / Uber CEO Out-6/21/17
Oil Prices in Bear Market Again While Banks Step Up Lending
Oil prices are back in bear-market territory, frustrating OPEC members that cut production in an attempt to boost prices and renewing fears that falling prices could spill into stocks and other markets.
A persistent glut has weighed on prices for most of the past three years, a blow to investors who believed that the Organization of the Petroleum Exporting Countries’ move this year to limit production would provide relief.
Instead, U.S. producers ramped up production when the world was already swimming in oil as OPEC members, Russia and other producing nations curtailed output.
U.S. oil production is up 7.3% to 9.3 million barrels a day since OPEC announced plans in November to cut output, and the number of active rigs in the U.S. is at a two-year high.
Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.
The current price range in the $40s is more economically feasible for lenders that specialize in exploration-and-production loans — essentially mortgages secured by the mineral rights, said Jared Shaw, an analyst at Wells Fargo Securities.
“Oil … seems to have stabilized in the high-$40s, low-$50s kind of range,” Harris Simmons, chairman and CEO of the $64 billion-asset Zions, in Salt Lake City, said at a May 31 investor conference. “At that level, there is enough activity going to … continue [loan] demand.”
Cheaper oil has also created a credit environment that is more appealing for some banks, such as the $33 billion-asset BOK Financial in Tulsa, Okla., which has added $1 billion of energy loan commitments in the past 12 months, said Stacy Kymes, executive vice president of corporate banking. Key segments of the industry “are exhibiting growth characteristics that are positive for loan demand,” Kymes said.
About three-quarters of BOK’s energy loans are to oil and gas producers, which means the loans are secured by oil and gas reserves. That provides BOK with some insulation from the sector’s volatility, Shaw said. “They’re seeing better pricing and better structure, and it’s less competitive than it was before,” he said.
A recovery after a correction is often a good time for banks to increase lending, as they can see which energy producers are viable when the price of oil is in the 40s. Moreover, many banks moved so quickly to shed energy loans that some very strong companies saw their access to credit curtailed.
Smaller banks, on the other hand, have elevated provisioning, providing community banks with a larger buffer against loan losses if delinquencies rise. A key measure of provisioning looks at the amount set aside for losses relative to the bank’s net charge-offs for the quarter. If the amount exceeds 100%, it means banks have provisioned more than their loans lost, typically resulting in an increase of aggregate reserves. But if the ratio is below 100%, banks have likely released reserves, providing a boost to profits but shrinking the bank’s buffer against a credit downturn.
After years of releasing a mountain of reserves built up from the 2008 credit crisis, banks with more than $250 billion in assets increased the ratio of provisioning to charge-offs to above 100% in the first and second quarters of 2016. But since then, the ratio has fallen below the key threshold and declined again in the 2017 first quarter, reaching 85%. Meanwhile, banks with less than $10 billion in assets have continued to build reserves, posting a ratio of provisioning to charge-offs of 147% in the first quarter of 2017.
Banks have enjoyed exceptionally strong credit quality in recent years, but some analysts warn that could be coming to an end. In a June 15 report, analysts at Sandler O’Neill wrote that credit had reached a Jack Nicholson moment: “Credit is ‘As Good As It Gets’ right now.” Analysts from Credit Suisse offered a similar assessment in a June 9 note on large-cap banks, writing that “credit costs have passed their cyclical trough and that the predominant trend is now upwards.” At the same time, the analysts did not express concern at the current low level of provisioning of the largest banks as there are not many signs of credit quality deterioration.
It’s very hard for outsiders to determine whether a bank is skimping on reserves, as it would require a better understanding of the bank’s credit quality. A bank could be increasing reserve levels, but they may still be woefully inadequate. Or, they could be reducing them and still have excess provisions. And, there are differences between the risk profile of a bank’s loans. For example, Capital One reserves 2.89% of all gross loans, but they are a large player in credit cards, especially sub-prime borrowers. Nevertheless, these banks are all heavily scrutinized by multiple banking agencies, the investment community, and their auditors.
On July 1, about half of tax liens and almost all civil judgments — both big negatives — will be expunged from consumer credit files, thanks to an agreement the big three credit bureaus made under pressure from regulators and state attorneys general to improve the accuracy of credit reporting.
In September, the three bureaus — Experian, Equifax and TransUnion — will also make consumer-friendly changes in the way medical debts are reported.
Studies suggest that people with liens and judgments could see their credit scores rise after these items are expunged, generally by less than 20 points but in some cases by 40 points or more. In some cases, scores could decrease. How it actually plays out depends on how lenders and credit-scoring companies respond to the changes.
Lenders who want the missing data could simply ask borrowers on a loan application if they have outstanding liens or judgments. Or they could obtain the information from the public record.
Starting on that date, the bureaus will no longer display tax liens and civil judgments on a credit report unless they include the person’s name, address and either Social Security number or date of birth. About half of tax liens and virtually all judgments do not have a Social Security number or birth date, which can cause mix-ups, especially for people with common names or large families.
This creates some big problems from lenders, as they will have to work harder to identify outstanding liens and civil judgments. Lending based solely on credit bureau scores that does not take these items into account could be significantly mispricing credit. Naturally, there will be products available to supplement the credit file, but lenders will have to rethink “FICO-only” underwriting.
Pressure from investors, who’ve poured more than $15 billion into a company that has burned through billions, ultimately did what the board could, or would, not: It convinced the 40-year-old chief executive to step aside. Five of Uber’s major investors, including Fidelity and Benchmark, asked Kalanick to step aside in a letter to him entitled “Moving Uber Forward,” according to people familiar with the matter.
Kalanick began an indefinite leave of absence on June 13 and left the day-to-day management of the company to a committee of 14 top executives. Regional operations heads continue to oversee much of the company’s business.
Uber’s been searching for a chief operating officer. With Kalanick’s departure, the company is now also looking for a chief executive officer–a far more desirable position for a business leader. Whoever takes the helm will have to plug a leadership vacuum. Uber needs to hire a COO, an independent board chair, a chief marketing officer, and a general counsel. Many of the company’s top executives were promoted internally after their bosses left, including heads of business, policy and communications, and product.
What’s interesting and noteworthy here is that Uber, like many other tech companies, was set up to ensure that the founder maintained control of the company. But, Uber is burning cash and reliant on continued funding from outside investors. If those investors are not on board with the current CEO, they can make continued funding difficult. Mr. Kalnick’s missteps were plentiful:
He called the company “Boob-er.” He argued with a driver about pay in a video published by Bloomberg. He’s said to have questioned whether a female passenger had been raped by a driver who was convicted of the crime in India. Kalanick co-authored corporate values that included “Let Builders Build, Always Be Hustlin’, Meritocracy and Toe-Stepping, and Principled Confrontation.” Uber now plans to scrap many of those tenets on the advice of former U.S. Attorney General Eric Holder, who just concluded an investigation into the cultural failings of a company built in Kalanick’s image.
Since he owns 10% of the company, his continued involvement was hurting his investment. Uber had hired Eric Holder, former attorney general, to make recommendations in improving the work culture, and all the findings were adopted by the Board. Here’s a timeline of the downfall, which came in just a few months. Even if you are not in a heavily regulated industry, investors and boards are just not going to tolerate a cowboy CEO and culture for too long!
Effects of scandal linger, but Wells execs paint picture of improvement
Wells Fargo & Co. continues to grapple with the aftershocks of a sales-fraud fiasco. But during the company’s annual investor day May 11, executives touted improvements and vowed to bolster an efficiency ratio recently headed in the wrong direction.
Driven in part by higher regulatory and legal costs tied to the fallout from a sales scandal that erupted last September, when regulators fined Wells and said it had opened millions of phony accounts to meet overly aggressive sales goals, the San Francisco-based bank’s expense base expanded in 2016.
The trend continued during the first quarter of this year, when expenses rose 6% from a year earlier. That increase, combined with a roughly 1% decline in revenue generation that was hindered by customer apprehension tied to the sales matter, pushed up the company’s efficiency ratio. Wells’ first-quarter efficiency ratio, which measures noninterest expense as a share of revenue, increased to 62.7% from 58.7% a year earlier.
“Operating at this level is completely unacceptable,” President and CEO Timothy Sloan told investors and analysts. First-quarter earnings were flat, again hindered by the sales issue and lower levels of lending and new customer generation tied to it. Wells said new consumer checking account openings in March declined 35% from a year earlier, while new credit card applications fell 42%, continuing a trend that took hold early in the fourth quarter of 2016. Total average loans declined during the first quarter.
In previous years, Wells targeted a sub-60% efficiency ratio, and during the investor day presentations, executives said they will build on a sweeping branch reduction effort already in motion to squeeze out billions of dollars in costs and bring the efficiency ratio down into a range of 55-59% in coming years. “We’ve undertaken a rigorous review across the company,” CFO John Shrewsberry said. Wells executives previously said they planned to close about 200 branches in 2017 and 200 more in 2018, among other steps to reduce expenses by $2 billion annually. Mary Mack, head of Wells’ community bank division, told investors May 11 that the bank is on pace to meet the 200 goal for this year and that executives now envision
closing some 250 in 2018. Savings from those efforts are slated to be reinvested in new technology and other innovation endeavors, among various business needs, with the goal of both operating more efficiently and driving revenue growth.
Wells joins a broader industry movement toward fewer branches amid a yearslong trend of customers visiting branches less and increasingly doing routine banking online and via mobile devices.
“Branch visits have been free-falling for years,” Jon Winick, president of bank adviser Clark Street Capital, said in an interview. “In my opinion, the banks in
this country can’t close branches fast enough.”
In addition to the branch consolidation, Wells executives say they now aim to ring out another $2 billion in annual expenses by the end of 2019. These savings would flow directly to the bottom line, executives said.
Mack and other Wells leaders spoke mostly in generalities about how the additional savings would be produced. But they emphasized Wells is capitalizing on advancing technology to improve efficiency in everything from call centers to the delivery of products, including plans for the second half of this year to begin allowing customers to submit one credit application for multiple product approvals.
Executives also noted efforts to increase the use of data to more quickly identify and meet customer needs, as well as ongoing facility reductions, among other efforts. Wells also is reportedly considering business line divestitures. Bloomberg News reported this week that Wells is exploring the potential sale of an insurance brokerage unit that employs about 3,500 people.
In the near term, Mack said that while Wells continues to endure the effects of the sales scandal, its consumer account openings have begun to improve on a month-over-month basis, and customer satisfaction surveys also are now trending favorably. “We are emerging stronger than before,” Mack said. Winick, however, said that at least in the near term, with the cloud of scandal still hovering over it, Wells likely will struggle to grow lending and revenue. That makes the cost-cutting paramount, he said.
Longer term, it could prove difficult for big banks such as Wells that are reliant on loan growth to boost revenue meaningfully, said Ken Mayland, president of ClearView Economics and a bank adviser. He said the strong credit quality environment that banks have enjoyed for years has begun to deteriorate and recent indications from the likes of Wells suggest a trend could be forming.
Wells’ first-quarter credit card charge-off rate of 3.54% was up from 3.09% at the end of last year and up from 2.82% at the end of the third quarter of 2016. Its first-quarter auto loan charge-off rate, at 1.10% of average loans, was up from 1.05% at the end of the 2016 fourth quarter and up from 0.87% atthe close of the 2016 third quarter.
After Wells reported those figures, Mayland said in an interview that the bank may need to pull back on lending in key areas. “I think risk aversion only grows from here,” he said. During the investor day, Wells executives said they had already eased up some in auto lending and are more broadly willing to give up some market share to guard against risks to the strength of the company’s balance sheet.
CEO Jon Winick SNL: Q1 Big Banks in Holding Pattern
Lending by the largest U.S. banks was flat in the first quarter, held in check by a seasonal pullback in demand and uncertainty in the nation’s capital.
Total first-quarter loans and leases among the 10 biggest commercial banks by assets inched down 0.1% from the previous quarter on an aggregate basis,
according to an S&P Global Market Intelligence analysis of regulatory filings.
Commercial-and-industrial lending rose 2.2% during the quarter among the big banks, a decent advance but mild relative to expectations heading into the
quarter. Commercial real estate and multifamily lending advanced more modestly, by less than 1% in both categories.
Lending in other key categories fell notably during the first three months of the year, including a 3% dip in consumer lending, offsetting moderate gains
Analysts say that loan demand among consumers often slows during the first quarter, as Americans ease up on borrowing after holiday spending sprees
and shop less amid winter weather. Demand for credit also often stagnates some among commercial clients, who tend to tap credit lines late in a given year
in order to shore up business plans for the following year, leaving them with fewer borrowing needs early in a new year.
But analysts noted throughout first-quarter earnings season that investors had expected more for the start of this year, largely because of lofty optimism fueled by promises in Washington for healthcare reform, deregulation and, perhaps most significantly, corporate tax cuts.
Republican President Donald Trump, who took control of the White House in January, has vowed to work with a GOP-controlled Congress to get legislative
wins on each of those fronts — wins that would lower costs for many businesses and provide them more resources for expansion, the thinking goes.
Banks could finance such expansion, lenders say.
Trump also has touted plans for new international trade policies and domestic infrastructure spending that could benefit American businesses.
But Trump and allies in Congress have made little progress to date on the legislative front, and the likelihood and timing of major reforms remain uncertain,
analysts say. “There is a lot of waiting to see what happens,” among business owners, “a lot of questions and not a lot of answers yet,” FIG Partners bank
analyst Christopher Marinac said in a post-earnings interview.
“So with the slow first quarter loan growth, right now, it’s hard to tell how much of what we saw is seasonal and how much of it has to do with people
waiting to see what Trump can accomplish,” Jon Winick, president of bank adviser Clark Street Capital, said in an interview.
Minneapolis-based U.S. Bancorp, whose first-quarter commercial lending was essentially flat from the previous quarter, attests to the uncertainty.
“Our large corporate customers tell us that they are optimistic about the future but are awaiting more clarity regarding potential changes in tax and regulatory
reform, infrastructure spend and trade policies,” U.S. Bancorp President and CEO Andrew Cecere said during the company’s first-quarter earnings call.