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Today's Top News1. Third-quarter bank earnings loom
Are you ready for third quarter earnings releases? Wells Fargo and JPMorgan Chase will get things rolling and are set to release third-quarter earnings reports on October 12. Bank of America, Citigroup, Goldman, and Morgan Stanley will follow the next week. The consumer-oriented banks, especially those that have stayed active in the consumer mortgage market, will likely be rewarded for their steadfastness in the round. Wells Fargo and JPMorgan are both expected to report more than $4.5 billion in profits for the third quarter, an increase of more than 15 percent from last year, according to Reuters. Banks are still struggling with their backlog of foreclosure cases, but there's an unmistakable boom-let underway in many U.S. cities, and banks are busier than they've been in some times in terms of new purchases and refis. All that is creating some down market business as well. "Other businesses at big banks will likely benefit from the mini-mortgage boom. Fixed-income trading revenue will likely rise at Goldman Sachs and other investment banks, thanks in part to more trading in mortgage-backed securities." There's a lot of opinions about the upcoming quarter. Deal Journal notes that, "There are certainly signs of hope, and some are hedging any gloom by seeing the bright spots. But the gloom seems to be edging out the sunshine, judging by several reports out today." Lower loan loss reserves looms as one concern. All in all, the consumer banks may have an advantage in this round. For more: Related articles: Read more about: earnings
2. Barron's: Goldman Sachs might be best long-term bet
So who is best positioned of all the big banks? Barron's weighs in with a strong case that Goldman Sachs still rules the roost, emerging as the most focused, best capitalized and best risk-managed firm on the street. The bank has remained true to its roots as a trading powerhouse and investment banking leader, despite a lot of enforcement travails. The bank has not meaningfully diversified its business, even in the face of the Volcker Rule. So the bottom line is that it would appear cheap at 90 percent of tangible book value. In the boom years, it traded at about 2.5 times tangible book value. It strikes me as something of a pure play on the institutional securities and investment banking business. As business in these areas pick up, it would be hard for Goldman Sachs not to benefit. As for the Volcker Rule, the article notes, "the Volcker Rule prohibiting proprietary trading has mostly been implemented at the firm level. And, contrary to the popular view, pure "prop" trading was never a major source of profit at Goldman and other firms. Goldman has been resolute in assuming it still will be able to post its own capital in the service of client needs for liquidity, hedging, and market positioning, which in truth has been the basis for its dominant fixed-income, currencies, and commodities business for decades." Some huge uncertainties remain, but you would have to think that the bank's IR folks have been investing in relationships all along. At some point, perhaps soon, institutions will again feel comfortable holdings banks at prices above book value. I'm just not sure when that will be. For more:
Read more about: Goldman Sachs, earnings
Concerns about rogue trade orders are reaching new heights. Most of the discussion centers on faulty risk management systems and the possibility of system errors. Rogue traders have also been in the news, as have fat fingered trading mistakes and other human errors. A new risk has emerged recently: Drunken traders who make trades in the middle of night in stupor. CNBC notes the case of Steve Perkins, "a long standing, senior broker at PVM Oil Futures, had managed to spend $520 million on oil futures contracts throughout the night, the FSA said. On the morning of the 30th, an admin clerk called Perkins to ask why he had bought 7 million barrels of crude during the night. Perkins had no recollection of the transactions, and it turned out that he had made the trades during a 'drunken blackout,' according to the FSA. By the time PVM realized the transactions had not been authorized by a client, they had incurred losses of $9,763,252. Between the hours of 1:22 a.m. and 3:41 a.m., Perkins gradually bought 69 percent of the global market, while driving prices up from $71.40 to $73.05, by bidding higher each time. At 6:30 a.m., presumably sobering up and realizing what he'd done, he sent a message to his managing director claiming an unwell relative meant he would not be able to make it into work." Perkins later confessed. His trading license was promptly revoked for a minimum of five years. For more: Read more about: Rogue Traders, trading 4. The true cost of heightened regulation
The conventional wisdom in the industry -- and perhaps even among regulators -- is that the global push for additional regulations aimed at safety and transparency imposes some significant costs. Many would agree that these efforts collectively will provide upward pressure on interest rates charged by banks. However, a recent study by the International Monetary Fund has found that the new regulations, specifically Basel III, will not have a significant impact on rates or the global economy. The study says that "in the long term average bank lending rates are likely to increase by 28 basis points in the U.S., by 17 basis points in Europe and by 8 basis points in Japan." Banks appear to have "the ability to adapt to the regulatory changes without actions that would harm the wider economy." There are other studies of course that have come to opposite conclusions, but at least one of these others studies "hadn't taken into account the market pressure on banks to raise their levels of capital, regardless of regulation, following the financial crisis and that there remains more scope for cost-cutting measures by banks." Overall, "the costs — estimated by examining funding costs, the cost of allocated capital, credit losses, administrative costs and other factors — 'cannot possibly exceed the benefits.' The report can only encourage regulators, whose patience is wearing thin following revelations of Libor fixing, money laundering and sanctions busting, to take more-radical action." Regulators will certainly note the study as they ponder more action on a range of issues, including Libor. For more: Read more about: Capital Ratio, Basel III 5. Bank of America's class action settlement in perspective
Putting the Merrill Lynch saga behind it has proven to be a long and expensive sage for Bank of America, but it is an essential component of the overall woes the bank has suffered as a result of the financial crisis. The $2.43 billion settlement is not the biggest the bank has agreed to, but it is anything but a pittance (certainly the plaintiffs are happy) and the bank will take a $1.6 billion hit to the income statement. Recall that the bank agreed to pay nearly $12 billion to settle charges with state attorneys general, which included $7.6 billion in payments for borrowers, $1 billion for refinancings, $2.25 billion paid to state and federal governments, and $1 billion to the Federal Housing Authority, as noted by a list in Deal Journal. In June 2011, Bank of America agreed to pay $8.5 billion to settle various putback claims with private bond holders. In January of 2011, Bank of America agreed to pay $3 billion to Fannie Mae and Freddie Mac to settle putback claims. But to help put this in perspective recall that the bank agreed to pay just $150 million to settle SEC charges that it mislead shareholders over the Merrill Lynch deal. It was only reluctantly approved by a judge. All told, the amount it has agreed to pay out has been a stunning $29 billion. It's no wonder the stock is mired below tangible book value. Can you imagine if the losses were only half this amount? But Bank of America really had no choice but to make a massive payment, to put this issue to bed once and for all. Not insignificantly, it has also agreed to some corporate governance changes. It has agreed to go forward with a "say on pay" shareholder vote, an independent compensation committee among other changes. Perhaps that will help it avoid other settlements in the future. For more: Related articles: Read more about: Bank of America, settlement Also Noted
SPOTLIGHT ON... Irene Tse to step aside at JPMorgan Irene Tse was hired by JPMorgan's chief investment office to be part of the new, more exciting unit. She served for almost two years ago as chief investment officer for North America, but the London Whale fiasco may have clipped her wings just a bit, as aggressive of trading on behalf of the CIO unit is no longer an option. She has tendered her resignation, according to Bloomberg, and will launch a macro hedge fund soon. Article Company News:
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Tuesday, October 2, 2012
| 10.02.12 | Third-quarter bank earnings loom
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