In a day when the big banks reported generally stellar earnings (especially Bank of America and Morgan Stanley on the back of record advisory fees), easing the bitter aftertaste from yesterday's disappointing report from JPMorgan, even perennial Wall Street disappointment Wells Fargo managed to beat expectations with net Interest margin posting a much awaited bounce, although there was the usual "but" of higher expenses and failure to post an increase in loan growth..
Wells Fargo reported EPS of $1.17, beating expectations of $0.99, thanks to revenue of $18.83BN, also stronger than the $18.37Bn expected. This translated into income of $5.1 billion, which however was padded by a $1.7 billion reserve release "due to continued
improvements in the economic environment", resulting in an allowance coverage for total loans down 22 bps from 2Q21 and down 52 bps from 3Q20.
The firm also took a $250 million charge related to its latest regulatory order, which drove costs higher than analysts expected.
The company's earnings summarized:
There was some much awaited good news on the Net Interest front, where both net interest income and margin posted a modest sequential improvement, rising $109MM or 1% from Q1, due to rising yields in Q3. Still, on a Y/Y basis, net interest income decreased $470 million or 5%, "reflecting the impact of lower loan balances due to soft demand and elevated prepayments, and the impact of lower yields on earning assets, partially offset by a decline in long-term debt and lower mortgage-backed securities (MBS) premium amortization." In any case, since Wells Fargo is the most net interest income-reliant bank in the US, the reversal in NIM was certainly good news.
With NIM down Y/Y, expenses followed and the bank reported that noninterest expense (which consists mostly of personnel expenses) was flat sequentially and down 12.6% from a year ago, though analysts had expected a 14% drop. And even though headcount fell to 253,871, from 259,196 at the end of June, personnel expenses actually rose 1% from a year ago "as lower salaries expense driven by reduced headcount reflecting efficiency initiatives was more than offset by higher incentive and revenue-related compensation."
But perhaps the most important, and disappointing aspect of Wells' results was that total average loans shrank again, and while commercial loans posted a small increase sequentially of $1.2BN to $478.2BN, Consumer Loans dropped by almost $2BN from $377.7BN to $375.9BN in Q3, and down a whopping $58.1BN from a year ago.
The total average loan yield of 3.29%, was down 4 bps from 2Q21 and down 12 bps YoY reflecting the repricing impacts of lower interest rates, as well as lower consumer real estate loans.
Meanwhile, as we have been discussing for the past 5 quarters, average deposits - a proxy for the Fed's QE - were up $51.9 billion, or 4%, YoY "as growth across most businesses was partially offset by targeted actions to manage to the asset cap, primarily in Corporate Treasury and Corporate and Investment Banking." The good news it that this remains the cheapest funding possible for Wells - at an average deposit cost of 3 bps, it was stable with 2Q21 and down 6 bps YoY reflecting the lower interest rate environment.
The biggest U.S. banks have been struggling with weak loan growth as consumers and businesses, bolstered by massive government stimulus programs during the pandemic, refrained from borrowing. The rise of the delta variant has also delayed a return to normal and slowed economic activity. Average loans fell 8%, Wells Fargo said.
There was more bad news in the bank's consumer banking and lending group, where total revenue was down 4% YoY. Some more details:
- CSBB up 2% YoY primarily due to an increase in consumer activity, including higher debit card transactions, and lower COVID-19-related fee waivers; up 2% from 2Q21 primarily driven by higher deposit-related fees and higher net interest income on higher deposits
- Credit Card up 4% YoY on higher point-of-sale volume and lower customer accommodations and fee waivers provided in response to COVID-19
- Auto up 10% YoY and up 7% from 2Q21 on higher loan balances
What was most disappointing was that Home Lending - where Wells Fargo once dominated the market - was down 20% YoY primarily due to lower mortgage banking income on lower gain on sale margins, origination volumes, and servicing fees, as well as lower net interest income on lower loans outstanding. In short, it is the biggest housing bubble in US history - bigger even that 2007- and Wells still can't capitalize on it!
Finally, while for Wells, Banking and Sales and Trading are mostly an afterthought - after all, who would pick the trading desk at Wells over, well, anyone else - and the bank is not even close in the same ballpark as its bigger peers, it did post a modest, 2% increase in corporate and ibanking revenue to $3.385 billion, which was also up 1%, or $47MM, from last quarter.
- Banking revenue was up 12% YoY "on higher advisory and equity origination fees, and higher loan balances, partially offset by lower deposit balances predominantly due to actions taken to manage under the asset cap"
- Commercial Real Estate revenue up 10% YoY reflecting higher commercial servicing income, loan balances, and capital markets results on stronger commercial mortgage gain on sale volumes and margins and higher underwriting fees; down 7% from 2Q21 on lower capital markets volumes and commercial mortgage servicing income
Yet here too there was a disappointment, as markets revenue dropped 15% YoY to just $1.176BN on "lower trading activity across most asset classes primarily due to market conditions"
As Bloomberg notes, the mixed results were a reminder that challenges remain for Scharf, who took the helm of Wells Fargo in 2019. The bank has been cutting jobs and slashing costs as Scharf seeks to boost the firm’s profitability after years of scandals, which have continued this year as the bank has seen several settlements with regulators, a sordid legacy of its ugly past.
“The significant deficiencies that existed when I arrived must remain our top priority,” Scharf said in the statement. “We are a different company today and the operational and cultural changes we’ve made are enabling us to execute with significantly greater discipline than we have in the past.”
Or not: during the quarter, Wells Fargo was hit with a new regulatory action and a $250 million fine over its lack of progress addressing long-standing problems -- a topic that is sure to come up on the bank’s analyst call. The firm is also still under a Federal Reserve-imposed asset cap, which limits its balance sheet.
Bottom line: another swing and another miss, with Wells shares the worst performing of all banks this morning.
Peter Schiff: Transitory Permanence
Peter Schiff: Transitory Permanence
The inflation that we were emphatically told would be transitory and unmoored continues to persist and entrench. As the troubles gather momentum Washington is doing its best to ignore..
The inflation that we were emphatically told would be transitory and unmoored continues to persist and entrench. As the troubles gather momentum Washington is doing its best to ignore the problem or actively make it worse.
The latest batch of data shows that the Consumer Price Index rose 5.4% in September, the 5th consecutive month that year over year inflation came in at more than 5%. The figure rises to 6.5% if we project the inflation levels of the first 9 months of 2021 to the entire calendar year. The last time we had to contend with numbers like these, Jimmy Carter was telling us all to put on our sweaters.
Recent developments should be sounding the alarms. Whereas earlier in the year inflation was largely driven by supercharged price increases in narrow sectors, such as used cars and hotel rooms, it’s now occurring in a much wider spectrum of goods and services.
In September, the cost of used autos fell month over month (but are still up 24% year over year), but that didn’t help the overall CPI, which saw increases just about everywhere else. Over the past 12 months: beef prices are up 17.6%, seafood prices up 10.6%, home appliances up 10.5%, furniture and bedding up 11.2%, and new cars up 8.7%.
Even more alarming is that oil is up over $80 per barrel for the first time in almost 10 years and many analysts see $100 in the near future. That has translated to more than a $1 increase in per gallon gasoline prices, a 50% increase in a year. Home heating oil prices are already up 42% year over year and are expected to spike up again when winter demand peaks. For many low-income residents of the North and Upper Midwest, these types of increases could be very hard to bear, particularly if we have a cold winter.
As I have said many times before, the biggest flaw in the way we measure inflation (and there are many of them) is how the government deals with housing. While the Case Shiller Home Price Index is up more than 20% year over year, and national rents are up more than 12% over the same time frame, the CPI has largely ignored these increases in housing costs. Instead, the government relies on the dubious and amorphous concept of “Owners Equivalent Rent” which asks homeowners to guess how much they would have to pay to rent a house of similar quality to the one they to the one they own. Conveniently, that meaningless figure, which constitutes almost 30% of the total CPI, is only up 3% year over year. If actual rent increases were used instead, the CPI would be almost three full percentage points higher.
In fact, relying on the government to tell us the truth about inflation is a bit like asking high school students to grade their own report cards. There are countless incentives that exist institutionally for the government to underreport inflation. It allows them to make stealth cuts to Social Security, to create higher nominal incomes and capital “gains” to tax, and to minimize the interest rates it pays on over $28 trillion in debt as inflation. But since GDP is adjusted for inflation, it also makes economic growth appear higher than it really is. The methodology for computing the CPI index was specifically designed to minimize the impact of rising prices. But I don’t believe that this is a conspiracy. Once you understand how institutional bias works, how careers are made by finding new plausible ways to underreport inflation, and how they are ruined by claiming the opposite, you can see how the numbers get farther away from reality with each passing year.
But the disconnect has become so obvious that top officials at the Federal Reserve and the Treasury Department have begun warning the public to prepare for higher prices. In her latest exercise of goal post moving, Treasury Secretary Janet Yellen said, “I believe that price increases are transitory, but that doesn’t mean they’ll go away over the next several months.” We can expect that months will soon turn into years, as the definition of “transitory,” gets ever more elastic.
This week the government announced that the inflation-adjusted cost of living increases for Social Security payments in 2022 will be 5.9%, the highest such increase since 1982. In addition to throwing yet another log on the government deficit fire, the increase is a direct admission that inflation is not going away.
Despite the marginal increase in wages that the Biden Administration likes to talk about, or the cost of living increases for our seniors, the average American makes less money. After adjusting for inflation real hourly earnings in the United States have dropped 1.9% so far this year. This is the stagflation that I have been warning about. Welcome back to the Carter Administration. We can expect Joe Biden to break out our sweaters if home heating bills get too high this winter.
Team Biden has been working overtime to suggest that the price increases and supply shortages are resulting from temporary bottlenecks at port facilities. Imports are particularly sensitive as our trade deficit has widened to record levels in recent months, making Americans ever more reliant on overseas goods. To combat the problem the Administration has ordered that some ports begin to operate 24 hours a day. (Left unsaid was the very fact that American ports – due to the strength of the Longshoreman’s Union – operate at very spare schedules versus foreign counterparts).
But the effect of this order will be far milder than the Administration hopes. Firstly, it is unclear how many port facilities will comply. Some have noted for instance that the Port of Los Angeles agreed to go 24 hours at only one of its six docks. (Currently, the wait time to enter that port is approaching three weeks). And secondly, most industry analysts note that the problem is not the hours of the dock facilities themselves but the shortfalls of the domestic trucking industry to move the goods once they arrive. Not only are we struggling with a lack of drivers, who struggle with government regulations that sharply limit the number of hours they are allowed to drive, but a lack of shipping containers to put back on the ships. Since many ships refuse to leave unloaded, which greatly reduces their profitability, America needs to first solve a host of problems to get the ports in better order.
But what we are seeing in a larger sense are the fruits of 15 years of bad investments in things that we don’t need and very little investment in the things we do. The ultra-low interest rates that have become the bedrock of our bubble economy have channeled investment capital into the wrong places. These low rates have encouraged corporations to borrow recklessly to buy back shares and inflate stock prices. Such moves have enriched shareholders but have done little to expand productive capacity.
Low rates have also led to runaway speculation in untested and unneeded industries. We have seen massive investments in social media, e-commerce, entertainment, cryptocurrencies, financial technology, and most recently Non-Fungible Tokens (NFT’s). As a result, we have really built out our capacity to post videos, buy things online, and pay for them in new ways. But we have invested comparatively little in boring industries like manufacturing, energy, transportation, and agriculture. As a result, we have all sorts of ways to buy stuff, and gimmicks for how to pay for it later, but we lack the capacity to produce and distribute all the goods we want to buy in the first place.
What’s worse is that given the current policies of the Biden Administration, none of that is going to change anytime soon. His expanded social safety net programs, overly generous unemployment benefits, higher taxes and regulation, and unneeded vaccine mandates are discouraging workers from working and employers from hiring. The American workforce is more than five million workers smaller than it was before the pandemic. That is not an accident. If the Democrats get their caucus together long enough to pass even a slimmed-down version of Biden’s Build Back Better plan look for all these problems to get worse.
With fewer workers working, supplies of goods and services have diminished. Government will look to replace the lost production with even more monetary and fiscal stimulus, which just leads to more inflation, financial speculation, and rising asset prices, largely benefiting the wealthy, and falling the hardest on the poor who have no appreciating assets to compensate for the rising cost of living.
But rather than fixing the problem, our current leaders are mostly worried about equity and diversity. The five leading candidates to replace Jerome Powell, if he is not renominated, all are either female or African American. Now I have no problems with hiring women or minorities in key positions. But if all your candidates come exclusively from those groups, then it’s clear that identity is more important than competency at this moment in time. But if there was ever a time that we needed competence, it’s now.
UK Banks – Digital Dinosaurs
UK Banks – Digital Dinosaurs
Authored by Bill Blain via MorningPorridge.com,
“Tuppence wisely invested in the bank…”
As UK bank reporting season kicks off, the dull, boring, predictable UK banks should look good. But the reality…
“Tuppence wisely invested in the bank…”
As UK bank reporting season kicks off, the dull, boring, predictable UK banks should look good. But the reality is they are dinosaurs – their failure to digitise and evolve leaves them vulnerable to tech-savy FinTechs and Challenger filling their niche. If the future of modern finance is a Tech hypersonic missile… British Banks are still building steam trains.
Today see’s the start of the UK bank reporting season. Yawn….
I wrote a piece for the Evening Standard y’day – Another set of numbers to disguise the rot. (I’ve reused some of it this morning – lazy, eh?) Exactly as I predicted in that note, Barclays came in strong this morning with a decent lift from its investment banking businesses. Lloyds and HSBC will also produce acceptable numbers and limited losses on post pandemic recovery. The sector outlook looks positive, the regulator will allow them to increase dividends, and there is higher income potential from rising interest rates.
But… would you buy the UK banks?
They face substantial market and ongoing pandemic risk. The cost of economic reality falls heavy across them all. This morning the headlines are about Medical groups screaming out for a renewal of lockdown measures to protect the NHS – a move that will 100% nail-on recession and cause multiple small businesses to give up. The threat of recession in the UK is pronounced – exacerbated by global supply chain crisis and risks of policy mistakes. The worst outcome for banks would be stagflation resulting in exploding loan impairments.
Lloyds is the most vulnerable to the UK economy – hence it’s underperformed the others. Even without renewed Covid measures, potential policy mistakes by the Bank of England in raising interest rates too early, or by government by raising taxes and austerity spending, will hit business and consumer sentiment hardest, causing the stock prices to crumble back towards its low back in Sept 2020 when it hit £24.72. It’s got the largest mortgage exposure – but no one really expects a significant housing sell-off. (When no-one expects it – is when to worry!)
If you believe the UK’s economic potential is under-stated, then Lloyds has the best upside stock potential among the big three. If the economy recovers strongly, Lloyds goes up. If it stumbles, then so will Lloyds!
Barclays is a more difficult call. It’s a broader, more diversified name. It retains an element of “whoosh” from its markets businesses – which have delivered excellent returns from its capital markets businesses fuelled by low rates, but it also runs a higher-than-average reputational risk for generating embarrassing headlines. But, when the global economy normalises, higher interest rates will impact the fee income of all the investment banks, thus impacting Barclays to a greater extent than Lloyds. Barclay’s international business gives it some hedge against a UK economic slide.
HSBC is the most complex call. The UK banking operation is a rounding error compared to the Bank’s Hong Kong business. The bank is pivoting towards Asia, orbiting China and other high-growth Far East economies where it seeks to attract rising middle-class wealth. It’s underperformed due to a distaste among global investors for its China business, but also the perception it’s just too big a bank to manage effectively.
If its China strategy was to pay off, it will be a long-term winner. But that’s no means certain – Premier Xi’s crackdown on Chinese Tech threatens to morph into a China first policy, and the space for a strong foreign bank in China’s banking system looks questionable, even as the developing crisis in real-estate could pull it lower.
Ok – so good for UK banks…
Whatever the respective bank numbers show this week, the banks will remain core holdings for many investors. Generally, big banks are perceived to be “relatively” safe. Regulation has reduced their market risk profiles, and strengthened capital bases since the post-Lehman unpleasantness in 2008 which saw RBS rescued by government.
Conventional investment wisdom says the more “dull, boring and predictable” a bank is, the more valuable it will be perceived in terms of stable predictable dividends, sound risk management, and for not surprising investors. Strong banks are perceived to be less vulnerable to competition with deep moats around their business.
Since 2008 that’s changed – in ways the incumbent banks have completely missed. The costs of entry have tumbled as banking has evolved into a completely different service. New, more nimble Fin-Techs like Revolut, digital challenger banks such as Starling, and cheaper foreign competitors, including the Yanks, are not only eating their lunch, but dinner as well.
The old established UK banks don’t seem to have a clue it’s happening. These incumbent banks look like dinosaurs wondering what that bright shiny light getting bigger in the sky might be. Despite proudly boasting of hundreds years of history, they are constrained by old tech ledger systems and never built centralised data-lakes from their information on individuals or the financial behaviours of crowds to improve and develop their services and income streams.
The future of banking is going to be about Tech and how effectively banks compete in a marketplace of online digital facilities and services. Banks that you use tech smartly will see their costs tumble, freeing up resources to do more, better! (When I ran a major bank’s FIG (Financial Institutions Group) about 100 years ago – the best banks were those with lowest cost-to-income ratio!)
There is an excellent article outlining FinTechs and Challengers from Chris Skinner this morning: Europe’s Challenger Banks are Challenging (and worth more than the old names). Let me pluck a bite from his piece: “Revolut is the most valuable UK tech start-up in history and the eighth biggest private company in the world, worth an estimated US$33 billion, according to CB Insights. Revolut has more than 16 million customers worldwide and sees over 150 million transactions per month.”
The new generation of nimbler Fin Techs and Challengers can innovate product offerings with sophisticated new systems and software. In contrast, UK bank IT departments are engaged in digital archaeology. I understand only 17% of Senior Tech positions are held by women. Within the banks, I’m told its still a boys club, where the best paid IT jobs are for ancient bearded D&D playing coders brought into to patch 50 year-old archaic systems. Legacy systems leave the big banks with impossible catch up costs.
It’s probably unfair to say the big UK banks don’t know what’s happening – their management can’t be that unaware? Surely not…. But…. Maybe..
Although the banks brag how well diversified they are with over 37% of UK board members female – how much have they really changed? Hiring on the basis of diversity is a fad. At the risk of lighting the blue-touch paper and this comment exploding in my face, I would hazard to suggest the appointment of senior ladies who’ve worked their way up the existing financial system simply risks confirmation-bias on how things are conventionally done in banking.
They might do better hiring outside movers and shakers – rather than listening to themselves.
The bottom line is its not just their failure to innovate tech that’s a crisis. Over the years the UK banks have become increasingly sclerotic – slow to shift and adapt. The middle to senior levels of banking are hamstrung by bureaucracy, a satisficing culture, stifled innovation, a compliance fearful mindset, and senior management fixated on impressing the regulators first and foremost.
If the future of modern finance is a Tech hypersonic missile… British Banks are still building steam trains.
Pound yawns after mixed UK data
The British pound continues to have an uneventful week and the lack of activity has continued in the Friday session. GBP/USD has been trading close to the 1.38 level for most of the week and is currently at 1.3804, up 0.09% on the day. UK Retail Sales…
The British pound continues to have an uneventful week and the lack of activity has continued in the Friday session. GBP/USD has been trading close to the 1.38 level for most of the week and is currently at 1.3804, up 0.09% on the day.
UK Retail Sales dip
UK Retail Sales declined by 0.2% in September. This is a cause for concern, given that retail sales have now declined for three straight months, pointing to ongoing weakness in consumer spending. Retail sales remain subdued despite the relaxation of Covid restrictions in July, which has not resulted in consumers increasing their spending. On a positive note, retail sales remain above the pre-pandemic levels (February 2020).
There was better news from the September PMIs. Both the manufacturing and services PMIs accelerated and beat expectations, with readings of 57.7 and 58.0, respectively. This points to strong expansion in both sectors.
The markets have priced in a November rate hike, likely by 15 basis points. Although this would be a relatively small increase, it would mark the first rate hike by a major central bank since the Covid pandemic began. BoE Governor Andrew Bailey is poised to raise rates in order to curb inflation, which is running above 3%, well above the bank’s target of 2%. A majority of MPC members are expected to follow suit, but a vocal minority of members are warning that the move is unwarranted and could dampen the recovery and hurt growth and jobs.
In the US, positive data on Thursday gave the dollar a boost, although the pound has recovered much of these losses on Friday. The dollar index continues to trade in a range between 93.50 and 94.00 and is at 93.67 in Europe. A drop below 93.50 could see the index fall to the 0.93 line.
GBP/USD Technical Analysis
- On the upside, there is a triple top at 1.3830. A close above this line would leave the pair room to climb until resistance at the round number of 1.3900
- There are support levels at 1.368 and 1.3492
pound pandemic governor recovery consumer spending europe uk
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