|Bank Earnings Roundup
Most banks have released their 2nd quarter earnings. We decided to look at a few of the regionals.
M&T Bank Corporation
Tough quarter for M&T Bank Corporation, as the market was surprised by higher expenses and increased loan loss provisions.
M&T Bank Corporation delivered a negative earnings surprise of 9.7% in second-quarter 2019, on account of higher expenses and provisions. Net earnings of $3.34 per share lagged the Zacks Consensus Estimate of $3.70. The bottom line, however, improved 2% year over year.
The company’s results were affected by rise in expenses and deteriorating credit metrics. However, rise in net interest income and fee income was a driving factor. Further, strong capital position remains a tailwind.
For M&T Bank, credit metrics deteriorated during the April-June period. Provision for credit losses surged 57.1% year over year to $55 million. Also, net charge-offs of loans came in at $44 million, up 25.7%.
The economy is slowing, so increases in provisions and charge-offs are to be expected, but they are still at very low levels. Non-accrual loans represent only 0.96% of total net loans.
Zions Bancorporation missed estimates, due to higher expenses and lower non-interest income.
Zions Bancorporation’s second-quarter 2019 earnings per share of 99 cents missed the Zacks Consensus Estimate of $1.09. Nevertheless, the figure compared favorably with the prior-year quarter’s earnings of 89 cents.
Results were adversely affected by an increase in expenses and lower non-interest income. Moreover, the company recorded higher provision for credit losses during the quarter, which was a negative factor. However, rise in net interest income (NII) was a tailwind. Also, the balance sheet position remained strong.
Zions missed on top-line revenue as well. Despite a few rate cuts, net interest margin contracted 2 basis points from the prior year, which shows how the abrupt shift in rates has challenged banks.
Northern Trust had a solid quarter, beating analyst estimates.
The $126.6 billion-asset custody bank reported net income of $379.7 million, compared with $379.5 million a year earlier. Its earnings per share of $1.75 were 8 cents higher than the mean estimate of analysts compiled by FactSet Research Systems.
Interest income rose 12% to $647.9 million as the bank shifted more of its holdings from lower-yielding investment securities to loans and other earning assets with higher short-term interest rates.
However, net interest income rose just 1% to $417.4 million as deposits costs soared. Interest expense increased 44% to $222.8 million. One reason was that cheaper non-interest-bearing deposits fell 17% to $22.1 billion, far outpacing a 2% decline in interest-bearing deposits to $78.1 billion.
As rates rose, customers began to shift money from non-interest-bearing deposits to interest-bearing deposits. Lower rates do mean that banks will pay less on these interest-bearing deposits
Comerica missed on earnings estimates and revenues.
Comerica reported second-quarter 2019 earnings per share of $1.94 that lagged the Zacks Consensus Estimate of $2.01. However, the bottom line was up from the prior-year quarter adjusted figure of $1.87.
Higher revenues, rise in interest and non-interest income, and lower expenses were recorded. Moreover, rise in loans was another tailwind. However, lower deposits and rise in provisions were undermining factors.
Comerica guided loan growth of 3-4% with declines in deposits of about 2%, thus leading to slightly higher funding costs.
Overall, a few common themes emerge. Banks are having a tough time meeting earnings expectations due to a weakening economy and a falling rate environment. Many banks are facing higher funding costs due to a shift from non-interest bearing to interest-bearing deposits. Credit costs generally have only one direction to move as well.
Deutsche Bank Skids
This week was tough week for Deutsche Bank, as they announced their largest loss since 2008.
Deutsche Bank on Wednesday morning announced a loss that was bigger than the bank previously indicated, sending the shares plunging.
The German bank’s loss in the second quarter was €3.1 billion ($3.5 billion) after “strategic transformation charges” of €3.4 billion — the Financial Times said the loss was the worst quarterly result for Deutsche since the 2008 financial crash.
Credit Suisse analysts said the loss was wider than the €2.8 billion loss the bank previously flagged to the market, and in a note to clients called the results “disappointing.” The analysts said adjusted pretax profit was a big miss — €588 million euros versus consensus of €806 million.
On July 7, Deutsche Bank announced a radical overhaul of the business. It entailed a cut of 18,000 jobs by 2022 and dropping the stock sales and trading unit. At the time Deutsche said the cost of restructuring would be €6 billion.
It is never a good idea to guide lower to the Street and underperform the revised expectations. The bank would have been profitable without the restructuring costs. Meanwhile, the New York Times reported that DB had done business with convicted felon Jeffrey Epstein as late as last year!
At least one bank dropped Mr. Epstein as a client in the years after his guilty plea. But it wasn’t until late last year, after The Miami Herald published an investigation into the earlier sexual abuse allegations, that Deutsche Bank decided to sever ties with him. The process proved more complicated and time-consuming than executives had initially anticipated because Deutsche Bank’s private-banking division had opened several dozen accounts for Mr. Epstein and his businesses.
Not a good look for DB. Internal compliance officers warned the bank as early as 2016, but it took over two years to sever ties?
Easing Small Biz 401ks
The Labor Department is finalizing a rule that would make it easier for small business to create 401(k) retirement plans for their employees.
Small businesses would have an easier time banding together to create joint 401(k) retirement plans for workers under a rule the Labor Department is set to finish soon, according to a senior administration official.
The expected rule would broaden the ways companies could join together to offer retirement accounts. Under a proposal floated in October, different types of businesses, say landscaping companies and real-estate firms, could create a joint plan as long as they are located in the same state or metropolitan area. The proposal also would make it clear that similar companies located across the country could band together.
Such arrangements, often called multiple-employer plans, are currently limited to employers with an affiliation or connection, such as a common owner or being members of an industry trade group.
Small businesses lag larger businesses in providing retirement benefits, so this ruling will make it easier for them to offer 401(k) plans.
“Safe” Deposit Boxes?
It turns out that many customers are losing their valuables within safe deposit boxes at banks and have limited recourse to recoup their losses.
There are an estimated 25 million safe deposit boxes in America, and they operate in a legal gray zone within the highly regulated banking industry. There are no federal laws governing the boxes; no rules require banks to compensate customers if their property is stolen or destroyed.
Every year, a few hundred customers report to the authorities that valuable items — art, memorabilia, diamonds, jewelry, rare coins, stacks of cash — have disappeared from their safe deposit boxes. Sometimes the fault lies with the customer. People remove items and then forget having done so. Others allow children or spouses access to their boxes, and don’t realize that they have been removing things. But even when a bank is clearly at fault, customers rarely recover more than a small fraction of what they’ve lost — if they recover anything at all. The combination of lax regulations and customers not paying attention to the fine print of their box-leasing agreements allows many banks to deflect responsibility when valuables are damaged or go missing.
Many banks view them as a headache as well. Capital One has stopped renting new ones since 2016, for example, and many new bank branches do not include them. Banks typically limit the liability for the contents to a multiple of the yearly rent.
Subway Mistreats Franchisees
Despite its recent underperformance, Subway is still the largest-fast food company in the world by store count. An investigation by the New York Times showed that the private company often uses conflicted development agents to shut franchisees down for minor violations.
Subway parcels its vast network of stores into more than 100 regional fiefs. Each is overseen by a development agent, who recruits new franchisees, approves buyers for existing stores and sends inspectors — known as field consultants — to conduct monthly reviews. But usually, development agents are also franchisees themselves. When that is the case, they are both in charge of and competing with other store operators, and their own locations are inspected by people they hire.
These feel like conflicts of interest to many Subway owners — giving development agents the means and motivation to shut down competing stores and take over profitable ones by manipulating inspections. Many franchisees who have lost their restaurants say that they have recouped little of their original investments. Intervention from Subway’s headquarters in Connecticut is rare.
In May, US Senator Catherine Cortez Masto wrote a letter to the SBA acting administrator, launching a probe into Subway’s practices. Many prudent franchise lenders for years have avoided loans to Subway owners. I asked a leading SBA 7(a) lender who commented: “They have ‘franchisor’ predatory behavior and put competition close to you. They don’t protect their franchisees.”