The BAN Report: Big 4 Bank Earnings / Powell Dismisses Inflation Concerns / Roubini Speaks Up / Expanded Unemployment Hurting Hiring / Calk Convicted
Big 4 Bank Earnings
The four largest banks released their earnings for the second quarter this week. All 4 beat on earnings, but revenue and loan growth were disappointing.
JP Morgan Chase
JP Morgan Chase earned $3.78 / share, exceeding estimates of $3.21 and exceeded its revenue estimate as well. Improving credit added $2.3 billion to their earnings as the $3 billion in released loan loss reserves were off-set by $734 million in charge-offs. In the prior quarter, JP Morgan released $5.2 billion in reserves. A big disappointment was trading revenue.
Trading revenue fell 30% from the year earlier period, an expected outcome after the frenzied activity in the aftermath of Federal Reserve actions to bolster markets during the early stage of the coronavirus pandemic.
Loan growth has also been tough as average loans are down 3% from the prior year, while average deposits are up 25%. It also looks as if the second quarter was particularly tough for loan growth, as the quarter-to-quarter decline was 3%.
The company said revenue fell 4% from a year earlier, driven by a 6% drop in net interest income because of lower interest rates. Lower trading revenue and the absence of a $704 million gain a year earlier also hit revenue, the bank said.
Bank of America’s results show the impact of falling interest rates on the industry. Banks gather deposits and extend loans; falling interest rates squeeze the margin between what they pay depositors and charge borrowers. The bank’s net interest margin of 1.61% in the quarter was 26 basis points lower than a year earlier and below the 1.67% estimate of analysts surveyed by FactSet.
CFO Paul Donofrio cited the “continued challenge of low interest rates” in the bank’s earnings release. The 10-year Treasury yield broke above 1.75% in March amid the economic comeback, hitting its highest level since the pandemic began. But the benchmark rate has pulled back to around 1.40% as of Tuesday.
A 1.61% net interest margin is pretty remarkably skinny. The ‘Q1 Quarterly Banking Profile showed 2.56% for the entire industry – the lowest ever. Moreover, B of A’s margin shrunk by 7 basis points from the prior quarter, which suggests the industry has not yet turned the corner on rates. The good news is B of A grew loans in the second quarter – the first time since early last year. They also released $1.6 billion in loan loss reserves.
Wells also reported a net interest margin — a measure of how much a bank earns from the difference between what it pays on deposits and what it takes in on loans — of 2.02% for the quarter. Analysts were expecting 2.05%, according to FactSet. Persistently low interest rates have continued to weigh on that part of the bank business.
CEO Charlie Scharf said in a press release that demand for the bank’s loans remains somewhat muted despite the economic recovery.
“Wells Fargo benefited from the continued economic recovery, strong markets that helped drive gains in our affiliated venture capital businesses, and our progress on improving efficiency, but the headwinds of low interest rates and tepid loan demand remained,” Scharf said in the earnings release. “Our top priority continues to be building an appropriate risk and control infrastructure for a company of our size and complexity and we continue to invest in additional resources and devote significant management attention to this work.”
Describing loan demand as “tepid” suggests Wells has not yet seen uptick in loan demand. Earlier this month, Wells announced it was shutting down all existing personal lines of credit, so Wells appears to be less focused on loan growth.
The firm’s earnings jumped after it released reserves set aside for loan losses, resulting in a $1.1 billion benefit after $1.3 billion in charge-offs. A year ago, the bank had been forced to set aside billions for expected credit losses, resulting in an $8.2 billion credit cost.
“The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising,” CEO Jane Fraser said in the release. “We saw this across our businesses, as reflected in our performance in investment banking and equities as well as markedly increased spending on our credit cards. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead.”
Like other Wall Street rivals, Citigroup posted a sharp decline in fixed income trading revenue in the quarter. Fixed income operations generated $3.2 billion in revenue, below the $3.66 billion estimate.
But the bond trading decline, which was expected, was offset by better-than-expected results in equities and investment banking.
In the second quarter, Citigroup announced it was exiting retail operations in 13 countries outside of the US.
Overall, banks continue to benefit from releases in loan loss reserves, as credit quality improves. However, margins and loan growth continue to be tough. With higher rates on the way and an economy growing in the high single digits, one would expect the rate environment to finally turn the corner for banks and loan growth should improve. For smaller banks that saw strong PPP originations, loan growth will be especially challenging as PPP forgiveness accelerates in the second half of the year.
Jerome H. Powell, the Federal Reserve chair, told House lawmakers on Wednesday that inflation had increased “notably” and was poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices will spur central bankers to rush to change policy.
The Fed chair attributed rapid price gains to factors tied to the economy’s reopening from the pandemic, and indicated in response to questioning that Fed officials expected inflation to begin calming in six months or so.
Mr. Powell testified before the Financial Services Committee at a fraught moment both politically and economically, given the recent spike in inflation. The Consumer Price Index jumped 5.4 percent in June from a year earlier, the biggest increase since 2008 and a larger move than economists had expected. Price pressures appear poised to last longer than policymakers at the White House or Fed anticipated.
“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Mr. Powell said in his opening remarks.
He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains were coming from a “small group” of goods and services directly tied to reopening.
Mr. Powell attributed the continuing pop in prices to a series of factors: temporary data quirks, supply constraints that ought to “partially reverse” and a surge in demand for services that were hit hard by the pandemic.
He said longer-run inflation expectations remained under control — which matters because inflation outlooks help shape the future path for prices. And he made it clear that if the situation got out of hand, the Fed would be prepared to react.
Given how unprecedented the economic situation has been in the past year and a half, no one really knows how this inflation story plays out. But, others are more worried, including Nouriel Roubini.
We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.
For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.
Making matters worse, central banks have effectively lost their independence because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. With both public and private debts having soared, they are in a debt trap. As inflation rises over the next few years, central banks will face a dilemma. If they start phasing out unconventional policies and raising policy rates to fight inflation, they will risk triggering a massive debt crisis and severe recession; but if they maintain a loose monetary policy, they will risk double-digit inflation – and deep stagflation when the next negative supply shocks emerge.
Mr. Roubini makes a great point – today’s high debt levels make the cure to inflation (higher rates) more painful than it would be otherwise. The Fed argues that much of the inflation is temporary and will ease when COVID-induced frictions wane.
His views on Bitcoin and cryptocurrencies are very interesting. For some reason, the CoinGeek Zurich invited him to give a keynote speech and he just eviscerated Bitcoin, arguing that it has negative value. This often-hilarious speech is worth watching.
Expanded Unemployment Hurting Hiring
For months, there’s been anecdotal evidence that employers are having difficulty hiring low-wage workers due to the more generous unemployment insurance. A poll this week provided empirical evidence of this unique employment problem.
About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday.
Why it matters: U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons.
One of the more politically controversial reasons has been the availability of unemployment insurance benefits, in particular emergency provisions that were introduced because of the COVID-19 pandemic.
Indeed, 26 states opted to cut emergency benefits early with the intention of incentivizing people to take open jobs.
By the numbers: Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021.
Of those actively collecting unemployment benefits, 29% said they turned down job offers during the pandemic. In response to a follow-up question, 45% of that group said they turned down jobs specifically because of the generosity of the benefits.
Extrapolating from the 14.1 million adults collecting benefits as of June 19, Morning Consult concluded that 1.8 million people turned down job offers because of the benefits.
Anyone who has traveled recently can see how many employers are operating with skeleton crews despite strong demand.
A federal jury in Manhattan convicted a former bank executive on charges that he helped arrange $16 million in loans to former Trump campaign chairman Paul Manafort, in exchange for help getting a high-level job in the Trump administration.
Stephen M. Calk, the founder and former chairman of the Federal Savings Bank in Chicago, was found guilty on both counts he faced: financial-institution bribery and conspiracy to commit financial-institution bribery. Federal prosecutors said Mr. Calk pushed the bank to approve the loans to Mr. Manafort, despite multiple red flags, because he hoped to be named secretary of the Army.
Mr. Calk’s lawyer, Paul Schoeman, argued at trial that Mr. Calk thought he was making profitable loans—which were unanimously approved by the bank’s loan committee—and said Mr. Calk wasn’t acting in bad faith. Instead, Mr. Schoeman said, Mr. Manafort and one of the bank’s loan officers were defrauding the bank Mr. Calk had dedicated his life to building.
The bank agreed, and Mr. Manafort asked Mr. Calk to join the campaign’s economic advisory council. Bank underwriters soon uncovered trouble with Mr. Manafort: his credit score had plummeted, he had no income in 2016, and he had a $300,000 credit card bill. He was in default, on the outs with the Trump team, and facing foreclosure.
Prosecutors and several witnesses said at trial that nobody at the bank supported the loan—which had grown to $9.5 million—aside from Mr. Calk and Mr. Raico, who stood to earn a commission. Mr. Calk’s lawyers said bank employees and executives didn’t tell Mr. Calk about their concerns.
This wasn’t an easy case for the government to prove, but making a loan in excess of the bank’s lending limit to a borrower with financial problems was such an outlier that the government obtained a conviction without a clear quid pro quo. It does suggest that bank should be extremely careful about making exceptions on loans to politically-connected borrowers.
The BAN Report 7/1/21
The BAN Report: Home Prices Soar / Office Return Battles / Record Stock Sales from Unprofitable Firms / Surfside Tragedy / NCAA Opens Up College Athletes / The 9MM Midwest CRA Portfolio-7/1/21
Home Prices Soar
First off, Happy Bobby Bonilla Day! Today, we fully appreciate the beauty of compound interest. We can also wonder at the remarkable strength of the US housing market. Home prices in April rose by 14.6% from the prior April – the largest increase in the history of the index.
Housing prices accelerated their surge in April 2021,” says Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The National Composite Index marked its eleventh consecutive month of accelerating prices with a 14.6% gain from year-ago levels, up from 13.3% in March. This acceleration is also reflected in the 10- and 20-City Composites (up 14.4% and 14.9%, respectively). The market’s strength is broadly-based: all 20 cities rose, and all 20 gained more in the 12 months ended in April than they had gained in the 12 months ended in March.
“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data. Housing prices in all 20 cities rose; price gains in all 20 cities accelerated; price gains in all 20 cities were in the top quartile of historical performance. In 15 cities, price gains were in top decile. Five cities – Charlotte, Cleveland, Dallas, Denver, and Seattle – joined the National Composite in recording their all-time highest 12- month gains.
“We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.
“Phoenix’s 22.3% increase led all cities for the 23rd consecutive month, with San Diego (+21.6%) and Seattle (+20.2%) providing strong competition. Although prices were strongest in the West (+17.2%) and Southwest (+16.9%), every region logged double-digit gains.”
While these increases will likely taper off, the current home price rally is not being driven by loose lending like the last crisis, although it is being fueled by high commodity prices, government stimulus, a loose Fed, and foreclosure and eviction moratoriums. Moreover, home prices are rising globally.
From the U.S. to the U.K. to China, housing is riding an extended boom. Global valuations are soaring at the fastest pace since 2006, according to Knight Frank, with annual price increases in double digits. Frothy markets are flashing the kind of bubble warnings that haven’t been seen since the run up to the financial crisis, a Bloomberg Economics analysis shows.
On the ground, outrageous stories are rife, with desperate buyers promising to name their first-born after sellers and derelict buildings selling for mansion prices.
In the US especially, rapid home price appreciation is a direct result of a lack of new construction. As we have been arguing for as long as this blog has been in existence, the US went from over-subsidizing home ownership to over-subsidizing renting. It is still difficult for smaller homebuilders to get enough credit to build homes at the rate of demand. Fortunately, lumber futures tanked more than 40% in June, so the lumber bubble appears to be bursting.
Before Covid, Blaze Bullock, 34, was on the road one week a month as a marketing consultant in the auto industry.
Then, when the country shut down, Bullock began working remotely. “Now they want me to start traveling again and visiting car dealerships,” he said. “I don’t want to do that at all.”
Bullock said he likes working from home and spending more time with his friends and family in Salt Lake City. “I realized this is the only way I want to live.”
The pandemic has caused a lot of people to reevaluate, particularly when it comes to work.
In what’s been dubbed the “Great Resignation,” a whopping 95% of workers are now considering changing jobs, and 92% are even willing to switch industries to find the right position, according to a recent report by jobs site Monster.com.
Most say burnout and lack of growth opportunities are what is driving the shift, Monster found.
“When we were in the throes of the pandemic, so many people buckled down, now what we’re seeing is a sign of confidence,” said Scott Blumsack, senior vice president of research and insights at Monster.
Already, a record 4 million people quit their jobs in April alone, according to the Labor Department.
About a third of the employees of a regional bank have returned to working onsite, and the president holds a weekly all-staff town hall meeting by videoconference. Employees are encouraged to submit anonymous questions for him or other senior leaders to answer. For the past six weeks, an increasing number of people have asked, “How do we know if the people who are still working from home are actually working?” Some employees have even suggested specific technology-based monitoring approaches to track remote workers’ onscreen time and activities.
Each week, the president assures his employees that the business is on track and that measures of productivity (like the number of loans taken out) are above expectations. “But it’s exasperating,” he said. “No matter how much I try to convince them or even use numbers and other kinds of evidence, it’s not sinking in. You’d think that if I can trust people, surely they can trust each other, right? But no.”
The crisis of trust this bank is facing is increasingly common as the strains of remote working wear down company culture and people’s goodwill.
If you have high-performing employees that are performing effectively remotely, how do you let them go if they won’t come back to the office? And, if you make exceptions, does that harm your overall culture? This is such a delicate issue and companies have to balance numerous competing interests. How organizations deal with this topic will be critical to their futures.
Since the end of March, almost 100 unprofitable companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to data compiled by Bloomberg.
Granted, troubled companies are tapping into buoyant demand during a 16-month rally to beef up their balance sheets. And it’s further evidence that the capital market functions as smoothly as it’s supposed to. Yet some warn that the flood of shares coming from money losers is becoming extreme.
During the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982, data compiled by Sundial Capital Research show. “That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies,
“That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies, that could be a signal we’re closer to a top than a cyclical bottom.” In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear
In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear market, or already in one.
Well, bankers always tell unprofitable companies that they need more equity, not less debt. So, it’s certainly better that these firms are improving their balance sheets, thus allowing them to ride out a period of unprofitability. But it certainly could be a sign that the market is overheated, especially if companies with poor current and future prospects are able to tap strong equity markets.
The collapse of the Champlain Towers South building in Surfside, Florida, has already claimed 18 confirmed lives and is likely to be significantly higher as 145 people are still missing. This tragedy has important implications for condominium and rental buildings everywhere, as the costs to repair structural problems can be exorbitant. The WSJ had a visual analysis of the problems with the building.
A 2018 engineering report on the south tower released by the town alleged the building had a flaw that inhibited proper drainage, allowing water to pool near its base.
“The main issue with this building structure is that the entrance drive/pool deck/planter waterproofing is laid on a flat structure. Since the reinforced concrete slab is not sloped to drain, the water sits on the waterproofing until it evaporates. This is a major error,” Morabito Consultants, which has offices in Florida and Maryland, wrote. “The failed waterproofing is causing major structural damage to the concrete structural slab below these areas. Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”
The Champlain Towers South condo association approved a $15 million assessment in April to complete repairs required under the county’s 40-year recertification process, according to documents obtained by CNN.
The documents show that more than two years after association members received a report about “major structural damage” in the building, they began the assessment process to pay for necessary repairs.
Owners would have to pay assessments ranging from $80,190 for one-bedroom units to $336,135 for the owner of the building’s four-bedroom penthouse, a document sent to the building’s residents said. The deadline to pay upfront or choose paying a monthly fee lasting 15 years was July 1.
Condominium associations are notorious for dragging their feet to complete needed repairs because no one wants a special assessment. Local governments are going to increase building inspections and enforcements, thus forcing buildings to take action sooner. But will every building have the resources to make these repairs? There will be buildings that need repairs, but the condominium owners may not have the resources, potentially creating unsafe zombie buildings. In Florida, Hurricane Andrew in 1992 led to much tougher building codes, so buildings constructed earlier are especially vulnerable to structural issues and exorbitant repair costs.
Companies that sell everything from fast food to protein powders are preparing to court student-athletes after the National Collegiate Athletic Association moved to transform the world of college sports and players’ ability to make money.
The NCAA voted on Wednesday to allow student-athletes to exploit their names, images and likenesses — a move that will let players profit from autographs, social-media posts and commercials. With the landscape set to change after decades of strict rules, brands such as Six Star Pro Nutrition are looking to lock in deals with newly eligible athletes.
The potential for partnerships goes beyond just promoting brands and products and could result in big payouts for autographs. Fanatics Inc., a sports-licensing giant with partnerships across the college landscape, expects to connect with student-athletes to make merchandise and collectibles.
“We look forward to doing this the right way and build long-term value for the student-athletes and our campus partners,” said Derek Eiler, an executive vice president for Fanatics’ college division. “This is an evolutionary day in college athletics.”
Jim Walter, a sports agent, and CEO of YSK Agency, gave us some context on what this all means.
“It is arguably the biggest day in college sports, perhaps all sports, since Title IX was passed in 1972.
Today’s college student athletes are resilient. They are hometown heroes and have an acute understanding of social media and personal branding on a national scale. These young men and women are exceptional at leveraging their NIL for unique influence. It is incredible that they now have the ability to defray and diminish the cost of living and support their families.
The floodgates are now open, and the student athletes are no longer deprived of the Hallmark of American business — simply the opportunity and chance to turn their brand into their own business.
There is a lot of uncertainty from all parties. However, it is truly refreshing to hear first-hand how respectful and ready both the student athletes and national brands are to partner together to change the collegiate landscape. The rules and governance are being written right before our eyes. Today is truly evolutionary.”
The 9MM Midwest CRA Portfolio
Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 9MM Midwest CRA Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:
A total outstanding balance of $8,981,900 comprised of three loans to two borrower relationships
The loans are secured by first mortgages on 7 multi-family buildings, located in Chicago, IL and Dayton, OH
This newly originated portfolio has a weighted average coupon of 5.822%, a weighted average LTV of 69.7%, and all loans have prepayment penalties
All loans include full personal guarantees with a weighted average FICO of 731
All of the properties are located in low- and moderate income geographies, thus helping institutions meet Community Reinvestment Act (“CRA”) requirements
Sale announcement: July 1, 2021
Due diligence materials available online: Tuesday, July 6, 2021
New York City is aiming for a full reopening on July 1, Mayor Bill de Blasio said Thursday, suggesting a total removal of COVID-19 restrictions that have been in place for well more than a year by early summer.
“Our plan is to fully reopen New York City on July 1. We are ready for stores to open, for businesses to open, offices, theaters, full strength,” the mayor said on MSNBC.
De Blasio is expected to elaborate further on the plan later in the day. It’s not clear if additional COVID requirements — like proof of vaccinations — would apply to his plan to bring restaurants, gyms, shops, hair salons and arenas back at full capacity.
The mayor has also said indoor masking will remain the norm for some time — a statement he reiterated Thursday as it relates to the full reopening.
“I want people to be smart about, you know, basic – the rules we’ve learned, you know, use the masks indoors when it makes sense, wash your hands, all the basics,” de Blasio said. “But what we can say with assurance now is we’re giving COVID no room to run anymore in New York City. We now have the confidence that we can pull all these pieces together and get life back really in many ways to where it was, where people can enjoy an amazing summer.”
New York State also announced that all indoor and outdoor curfews for bars and restaurants will be lifted by the end of the month. Las Vegas saw its best March since February 2013.
Las Vegas is bouncing back to pre-coronavirus pandemic levels, with new economic reports showing increases in airport passengers and tourism, and a big jump in a key index showing that casinos statewide took in $1 billion in winnings last month for the first time since February 2020.
“I don’t believe anyone imagined this level of gaming win,” Michael Lawton, senior Nevada Gaming Control Board analyst, said of a Tuesday report showing 452 full-scale casinos in the state reported house winnings at the highest total since February 2013.
Cruise operators could restart sailings out of the U.S. by mid-July, the Centers for Disease Control and Prevention said, paving the way to resume operations that have been suspended for longer than a year due to the Covid-19 pandemic.
The CDC, in a letter to cruise-industry leaders Wednesday evening, also said cruise ships can proceed to passenger sailings without test cruises if they attest that 98% of crew members and 95% of passengers are fully vaccinated. The move was a result of twice-weekly meetings with cruise representatives over the past month, the agency said.
The Centers for Disease Control and Prevention took a major step on Tuesday toward coaxing Americans into a post-pandemic world, relaxing the rules on mask wearing outdoors as coronavirus cases recede and people increasingly chafe against restrictions.
The mask guidance is modest and carefully written: Americans who are fully vaccinated against the coronavirus no longer need to wear a mask outdoors while walking, running, hiking or biking alone, or when in small gatherings, including with members of their own households. Masks are still necessary in crowded outdoor venues like sports stadiums, the C.D.C. said.
The CDC ruling opens the door up for outdoor concerts and sporting events this summer. In Massachusetts, for example, new rules announced by the Governor will allow large venues at 100% by August 1, thus allowing the Boston Marathon, full capacity at Fenway, and full crowds at Gillette Stadium. By the second half of this summer, Americans can enjoy a world that looks more like 2019 than 2020.
Big Four Bank Earnings
Banks reported robust earnings this month, buoyed by strong trading and releases of loan loss reserves.
The bank posted a first-quarter profit of $8.1 billion, or 86 cents a share, exceeding the 66 cents a share expected by analysts surveyed by Refinitiv. The company produced $22.9 billion in revenue, edging out the $22.1 billion estimate.
“While low interest rates continued to challenge revenue, credit costs improved and we believe that progress in the health crisis and the economy point to an accelerating recovery,” CEO Brian Moynihan said in the release.
Like other banking rivals, Bank of America saw a large benefit from the improving U.S. economic outlook in recent months: It released $2.7 billion in reserves for loan losses in the quarter. Last year, the firm set aside $11.3 billion for credit losses, when the industry believed that a wave of defaults tied to the coronavirus pandemic was coming.
Instead, government stimulus programs appear to have prevented most of the feared losses, and banks have begun to release more of their reserves this quarter.
Expenses were higher than expected and loan growth was not great, but overall a good quarter.
JP Morgan Chase
JP Morgan Chase had a great quarter, exceeding expectations on earnings even without the $5.2 billion release from loan loss reserves.
The bank posted first-quarter profit of $14.3 billion, or $4.50 a share including a $1.28 per share benefit from the reserve release, higher than the $3.10 per share expected by analysts surveyed by Refinitiv. Excluding the impact of a $550 million charitable contribution, which lowered earnings by 9 cents, the bank earned an adjusted figure of $4.59, exceeding the $3.10 estimate.
Companywide revenue of $33.12 billion exceeded the $30.52 billion estimate, driven by the firm’s trading operations, which produced about $1.8 billion more revenue than expected.
JPMorgan’s release of $5.2 billion in reserves is the biggest sign yet that the U.S. banking industry is now expecting to have fewer loan losses than it did last year, when it set aside tens of billions for defaults anticipated from the coronavirus pandemic. A year ago, the firm had added $6.8 billion to credit reserves.
“Overall, this was a great quarter for JPMorgan,” said Octavio Marenzi, CEO of consultancy Opimas. “It is now increasingly clear that the bank over-reserved, and that money is now flowing back into its earnings, concealing some of the weakness in consumer banking.”
Wells Fargo results were helped by a net benefit of $1.05 billion from reserve releases. Banks bulked up their credit loss reserves last year as the pandemic pulled the U.S. economy into a sharp recession, but the financial firms have started to release those reserves as the recovery takes shape.
“Our results for the quarter, which included a $1.6 billion pre-tax reduction in the allowance for credit losses, reflected an improving U.S. economy, continued focus on our strategic priorities, and ongoing support for our customers and our communities,” CEO Charlie Scharf said in the earnings release. “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.”
The bank expects to see its commercial and middle market loan portfolio to grow later in the year as the economic recovery gains steam, chief financial officer Michael Santomassimo said on the earnings call.
“The demand across most commercial client segments has been pretty weak, and it seems to have stabilized over the last couple of months … we do really expect to see that commercial banking demand start to pick up as the economy picks up,” Santomassimo said.
Commercial loan pipelines take time, so it will be another quarter before any uptick in commercial lending is seen by banks.
Citigroup on Thursday posted results that beat analysts’ estimates for first-quarter profit with strong investment banking revenue and a bigger-than-expected release of loan-loss reserves.
The firm also said it was shuttering retail banking operations in 13 countries across Asia and parts of Europe to focus more on wealth management outside the U.S., one of the first big strategic moves made by CEO Jane Fraser, who took over in February.
The bank reported profit of $7.94 billion, or $3.62 a share, exceeding the $2.60 estimate of analysts surveyed by Refinitiv. Revenue of $19.3 billion topped the $18.8 billion estimate.
Citigroup said it had released $3.9 billion in loan-loss reserves in the quarter, which resulted in a $2.06 billion gain after $1.75 billion in credit losses in the period. Analysts had expected a $393.4 million provision in the quarter.
The bank posted record revenue from investment banking and equities trading, similar to rival banks that have reported earlier.
The retrenching of retail banks outside of the US is a big move for Citi, which always strived to be the most international of the large banks. Shrinking bank branches is not limited to the United States.
Overall, the banks reported strong earnings this quarter, although a good portion of the beats was due to reserve releases. The test for banks will be to show meaningful loan growth this year, which will be especially challenging for banks that were most active in PPP as the run-off in PPP will be a tough headwind.
A recent bank note from Jefferies said the US was short 2.5 million homes, while Freddie Mac put that estimate higher at a shortage of 3.8 million. There are 40% fewer homes on the market than last year, a Black Knight report found.
It’s bad news for many aspiring homebuyers — but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.
Daryl Fairweather, the chief economist at Redfin, told Insider it was unfortunate the generation that suffered from the last housing crisis — entering the job force in the middle of a recession — was now facing a different kind of housing crisis.
“Now that they have economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”
The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic. It comes at a time when millennials have reached the peak age for first-time homeownership, according to CoreLogic, and led the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.
“We’ve been underbuilding for years,” Gay Cororaton, the director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US had been about 6.5 million homes short since 2000 and was facing a two-month supply of homes that should look more like a six-month supply.
There have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s, according to Fairweather. She added that was not enough homes for millennials, who are the biggest generation, to buy.
Another unmentioned cause is the moratoriums on foreclosures and evictions, which are effectively removing distressed inventory from the market. Fundamentally though, the roots of this problem go back to the Great Recession, as we essentially shifted from over-subsidizing home ownership to over-subsidizing rental buildings. Several years ago, I proposed a hypothetical project to a Houston bank. Two, identical high-rise buildings adjacent to each other in downtown Houston. One was a high-end apartment building. The other was a condo building. The CCO said “we don’t do condos.” I responded, “You proved my point!”
First, cheap borrowing costs help companies stay alive longer and more easily. That’s a big part of the reason Fitch Ratings just dropped its expected U.S. junk-bond default rate for 2021 to 2%, the lowest since 2017, and doesn’t see it rising much more from that in 2022. About $90 billion of distressed debt was trading as of April 16, down from almost $1 trillion in March 2020, according to data compiled by Bloomberg.
Second, government officials have flooded the global economy with cash at an unprecedented pace. Monetary and fiscal stimulus for just the U.S. could have amounted to $12.3 trillion from February 2020 through March 2021, according to Cornerstone Macro Research data posted on the Wall Street Journal’s Daily Shot.
That’s a lot of money, leaving a lot of cash sitting in savings accounts and looking for assets to buy. Perhaps some investors feel it’s better to invest it with a company that actually makes something or provides real services than, say, a cryptocurrency started as a joke.
The more important question perhaps isn’t whether this is a bubble that will pop soon but rather what are the consequences of this era of free-flowing cash. It prevents the dissolution of businesses that perhaps shouldn’t exist, creating so-called zombie companies. And it leaves corporations leveraged to old economies, paying back debt incurred in a past era when they perhaps would rather invest in new technologies amid a quickly changing world.
This debt buildup makes central bankers’ jobs both more difficult and easier in the years to come. It makes it harder because any withdrawal of stimulus, or raising of rates, would be exponentially more painful given the amount of corporate leverage. But it also makes it less likely that conditions will require Federal Reserve officials to raise rates all that much going forward. More debt will pressure longer-term growth and inflation. It reduces economic dynamism.
We are essentially skipping the clean-up phase during a down-cycle. A normal recession leads to the liquidation and closure of businesses, thus opening up opportunities for the healthy ones to benefit from their better business models and healthier balance sheets. It also is going to make higher rates even more painful, so we may have just delayed the inevitable in some cases.
Former employees said he threw things at walls, at windows, at the ground, and, occasionally, toward subordinates.
In 2018 he sent a glass bowl airborne, shattering it against a conference room wall, according to several people who were there; another time he smashed a computer on an employee’s hand, several ex-employees said. A former assistant, Jonathan Bogush, said he saw Mr. Rudin hurl a plateful of chicken salad into another assistant’s face when he worked there in 2003.
Sometimes frightened assistants hid in the kitchen or a closet to escape his wrath.
Some assistants kept spare phones to replace those that got destroyed when thrown by Mr. Rudin. There were also extra laptops — to replace those he broke — and his contact list was backed up to a master computer nicknamed the Dragon.
His behavior prompted outrage after it was described earlier this month in The Hollywood Reporter. It had also been described, to less effect, in multiple other accounts over the years.
Mr. Rudin offered both an apology and a bit of pushback to the stories being told about him as a boss. “While I believe some of the stories that have been made public recently are not accurate, I am aware of how inappropriate certain of my behaviors have been and the effects of those behaviors on other people,” he said. “I am not proud of these actions.”
“He’s had a bad temper,” said the billionaire David Geffen, who alongside his fellow mogul Barry Diller has been co-producing Mr. Rudin’s recent Broadway shows, “and he clearly needs to do anger management or something like that.”
Somehow this behavior went on for years, and no other executive, colleague, financier mandated anger-management training? Fortunately, Mr. Rudin is finally getting his long overdue comeuppance.
The BAN Report 3/11/21
The BAN Report: Stimulus Bill Passes / PPP Update / Cash-Out Refinance Boom / $4 Gas This Summer? / RIP GE Capital-3/11/21
Stimulus Bill Passes
President Biden is expected to sign into a law Friday another $1.9 trillion in stimulus. The final package is a boon for American businesses, who will benefit from stimulating the consumer while the economy is re-opening and will not be forced to raise wages.
The legislation, expected to be signed into law by President Biden on Friday, includes $1,400 checks to many Americans and an extension of a $300 weekly unemployment-aid supplement. It doesn’t include a proposed increase in the minimum wage to $15 over four years, meaning retailers, restaurants and others don’t have to worry about higher payrolls for now.
Executives and economists said that unlike the last round of stimulus payments, which came in the midst of lockdowns and heightened economic uncertainty, these checks are more likely to flow into the economy as families face fewer financial constraints, more people are vaccinated and restrictions on travel, dining and other activity are lifted.
The Business Roundtable, which counts the chief executive officers of dozens of the biggest U.S. companies as members, said Wednesday, “While we advocated for a more targeted approach, enactment of this package will help deliver urgent resources to strengthen the public health response and provide assistance for individuals and small businesses hardest hit by the pandemic.”
The U.S. Chamber of Commerce also said it would have preferred a narrower bill. Economic data already points to building strength, the Chamber said in a statement last week, while the current bill “means less money for other priorities, including infrastructure and education.”
The $1.9 trillion package includes $360 billion in aid to state and local governments, $410 billion for $1,400 stimulus checks, $123 billion for COVID-19 (mostly vaccine and testing), $246 billion in expanded unemployment with another $300 / week through September 6, $143 billion in expanded tax credits, $176 billion for education, and $59 billion for small businesses, including $25 billion in grants to restaurants and bars that lost revenue during the pandemic.
The $25 billion Restaurant Revitalization Fund, administered by the SBA, will be of high interest by banks and lenders. A presentation from the National Restaurant Association had some great details.
A restaurant may receive a grant equal to the amount of its Pandemic-Related Revenue Loss by subtracting its 2020 gross receipts from its 2019 gross receipts.
If not in operation for the entirety of 2019, the total would be the difference between 12 times the average monthly gross receipts for 2019 and average monthly gross receipts in 2020.
If not in operation until 2020, the entity can receive a grant equal to the amount of “eligible expenses” incurred by the entity minus any gross receipts received.
If not yet in operation as of application date, but the entity has incurred “eligible expenses,” the grant amount would be made to the entity equal to those expenses.
Any PPP loans will be deducted from the grants. So, a business that was down 50% in revenue from 2020 ($600K in revenue versus $1.2MM in 2019) would be eligible for $400K in grants, assuming they received $200K in PPP loans.
“It’s unprecedented,” Oxford Economics chief U.S. economist Gregory Daco said of the fiscal response to the pandemic. He expects the latest legislation to add 3 percentage points to U.S. GDP growth this year, and between 3 million and 3.5 million jobs.
At least in the short-run, the economy looks like its heading into a period of unprecedented growth.
President Biden announced an abrupt overhaul two weeks ago to funnel more money to very small companies, some of which qualified for loans as small as $1 under the old guidelines. But the Small Business Administration updated its systems only on Friday, and with just three weeks before the program is set to expire, some lenders say there just isn’t enough time to adapt to the changes.
The result has been gridlock and uncertainty that have left tens of thousands of self-employed people frantic to find lenders willing to issue the more generous loans before the program ends on March 31.
JPMorgan Chase, the program’s largest lender this year in terms of dollars disbursed, doesn’t plan to act on the new loan formula before it stops accepting applications on March 19. Bank of America, the second-biggest lender, opted against updating its loan application and said it would contact self-employed applicants to manually sort out their applications — but stopped accepting new ones on Tuesday.
“We have 30,000 applications in process and want to allow enough time to complete the work and get each client’s application through the S.B.A. process,” said Bill Halldin, a Bank of America spokesman.
The two-week exclusivity period for borrowers with less than 20 employees expired on Tuesday. The new rules make it easier for independent contractors to qualify for larger loans. Even though the SBA did increase the fees to make smaller loans, banks have difficulty originating and processing these smaller loans, especially under a short time window. Banks are pushing to extend the deadline.
Banks and other businesses are pressing the Biden administration and Congress to keep the government’s largest small business aid program running beyond its March 31 expiration date, warning that struggling employers need more time to obtain the economic lifeline.
“They don’t have any answers,” Consumer Bankers Association general counsel David Pommerehn said. “They’re preparing for the worst-case scenario, and that is the program shuts down completely on March 31 at 11:59.”
The uncertainty marks the latest drama around the massive Covid-19 relief program, which has provided nearly 7.6 million loans to employers since its creation in March 2020. The loans are popular because they can be forgiven if employers agree to keep paying employees. But since its inception, PPP has been a roller coaster for borrowers and lenders alike because of ever-changing rules and shifting deadlines.
Even though demand for PPP loans has been more muted, it does seem sensible to allow lenders to finish meeting the demand, especially after some new rules were established just a week ago.
U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant Freddie Mac. It was a blockbuster year for mortgage originations in general as well: Lenders churned out more mortgages than ever in 2020, fueled by about $2.8 trillion in refis, according to mortgage-data firm Black Knight Inc.
Some borrowers viewed cash-out refis as a way to cushion themselves against an uncertain economy last year. Others wanted to build and redecorate, and being stuck at home gave them the time to do the paperwork. Homeowners also had more equity available to tap: Though home prices tend to fall during economic downturns, they jumped during the Covid-19 recession.
“The support coming from home equity is unparalleled in helping smooth out the degradations from Covid,” said Susan Wachter, an economist and professor at the University of Pennsylvania. “For those who are in the position to refinance, it’s a major source of support.”
The median credit score of new refis last year approached 800, near the top of the scoring range, according to the Federal Reserve Bank of New York. That includes refis in which the borrower didn’t take cash out.
Todd Kennedy lowered the mortgage interest rate on his North Texas home by almost a percentage point when he refinanced late last year. Mr. Kennedy, who has a credit score around 780, also cashed out about $30,000 in equity to pay for home improvements including repairs to his home’s foundation and new flooring.
So, how worried should we be about this? We believe this is a modest risk. For one thing, most of these are cash-out long-term fixed rate loans, which are typically sold to one of the GSEs. HELOC volume has been modest, as most banks have not regained their appetite for HELOCs since the financial crisis.
As of the most recent Quarterly Banking Profile, total HELOCs on banks’ balance sheets stood at $300 billion. At the end of 2015, HELOC balances stood at $465 billion. At the end of 2018, they stood at $667 billion. So, rather than taking out HELOCs and using the loans when they need them, consumers are getting larger lump-sum payments. Perhaps, banks should be doing more HELOCs, so that consumers would only pay interest when they need the money.
The oil industry is predictably cyclical: When oil prices climb, producers race to drill — until the world is swimming in petroleum and prices fall. Then, energy companies that overextended themselves tumble into bankruptcy.
That wash-rinse-repeat cycle has played out repeatedly over the last century, three times in the last 14 years alone. But, at least for the moment, oil and gas companies are not following those old stage directions.
An accelerating rollout of vaccines in the United States is expected to turbocharge the American economy this spring and summer, encouraging people to travel, shop and commute. In addition, President Biden’s coronavirus relief package will put more money in the pockets of consumers, especially those who are still out of work.
Even before Congress approved that legislation, oil and gasoline prices were rebounding after last year’s collapse in fuel demand and prices. Gas prices have risen about 35 cents a gallon on average over the last month, according to the AAA motor club, and could reach $4 a gallon in some states by summer. While overall inflation remains subdued, some economists are worried that prices, especially for fuel, could rise faster this year than they have in some time. That would hurt working-class families more because they tend to drive older, less efficient vehicles and spend a higher share of their income on fuel.
In recent weeks oil prices have surged to over $65 a barrel, a level that would have seemed impossible only a year ago, when some traders were forced to pay buyers to take oil off their hands. Oil prices fell by more than $50 a barrel in a single day last April, to less than zero.
That bizarre day seems to have become seared into the memories of oil executives. The industry was forced to idle hundreds of rigs and throttle many wells shut, some for good. Roughly 120,000 American oil and gas workers lost their jobs over the last year or so, and companies are expected to lay off 10,000 workers this year, according to Rystad Energy, a consulting firm.
The events of last April were so extraordinary that it will take a while before oil producers regain their mojo. In the meantime, higher oil prices seem inevitable.
RIP GE Capital
At its peak GE Capital stood at 637 billion in assets, nearly $100 billion larger than say US Bank today and twice as large as Washington Mutual when it failed in 2008. With its latest deal, in which GE is ultimately divesting out of the aircraft leasing business, GE Capital will no longer be a stand-alone division within GE, as it will only have $21 billion in assets remaining, largely a headache legacy insurance unit with some toxic long-term-care policies.
On Wednesday, GE agreed to combine its jet-leasing unit, GE Capital Aviation Services, with rival AerCap Holdings NV in a deal worth more than $30 billion. It will create a leasing giant with more than 2,000 aircraft at a time when global travel has been hobbled by the Covid-19 pandemic. The Wall Street Journal reported Sunday that the two companies were near a deal.
GE will get about $24 billion in cash and 46% ownership in the new merged company, a stake it valued at about $6 billion. It will transfer about $34 billion in net assets to AerCap along with more than 400 workers. The deal is expected to close in nine to 12 months.
Mr. Culp will use the proceeds from the AerCap deal to pay down debts and fold the rest of GE Capital into the company’s corporate operations. GE will take a $3 billion charge in the first quarter and cease to report GE Capital as a stand-alone business segment. The company maintained its financial forecasts for 2021.
“This really does mark the transformation of GE into a more focused, simpler, stronger company,” Mr. Culp said in an interview. GE will essentially return to being a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.
The jet-leasing Gecas unit was the biggest remaining piece of GE Capital, accounting for more than half of the unit’s $7.25 billion of revenue in 2020. The remainder is a legacy insurance business that has plagued the company and a small equipment-leasing operation that helps finance purchases of GE power turbines and wind turbines.
The dismantling of GE Capital is one of the biggest casualties of the financial crisis. While other non-bank lenders like CIT pivoted successfully to become part of depository institutions, GE Capital was dismantled in parts, often by selling the best assets and keeping the toughest assets, including the long-term care policies, which have already required over $20 billion in additional reserves. No one should read former CEO Jeff Immelt’s book, who at least blamed mostly himself for GE’s demise.
Another misstep came in 2004, when GE spun off its Genworth insurance business but kept a large batch of money-losing policies, forcing GE in 2018 to take a $6.2 billion charge and set aside $15 billion in reserves.
Immelt said he saw “zero” fraud in the insurance business when he was there. “There’s a difference between being wrong and being wrong on purpose.” He added that GE “spent lots of time to make sure we got things right.”
To put it simply, Jack Welch chose the wrong CEO, hiring someone who didn’t understand GE Capital, which could have been successfully re-positioned and de-risked by the right leader. It’s ironic that Welch chose the tall marketing guy who crushed PowerPoint presentations, instead of the two other grittier candidates. Beware sometimes of the person that looks the part!