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Today's Top News1. Citigroup posts second quarter upside surprise
Citigroup become the third large bank to post a strong upside earnings surprise. Net income rose to $4.18 billion, or $1.34 per share, in the second quarter, from $2.94 billion, or $1 per share, a year earlier. (Profits excluding a DVA were $1.29 per share). Analysts were expecting net income of $1.17-$1.19 per share. The biggest surprise might have been revenue (excluding the DVA and other items), which leaped 12 percent from a year ago. The biggest boosts in profit came from its securities and banking unit, in which fixed income sales and trading revenue rose 18 percent, while stock revenue rose 68 percent and underwriting and advisory revenue rose 21 percent. Citigroup has worked hard to position itself as an international bank, with nearly 60 percent of its revenue emanating from outside of North America. Indeed, the strong capital markets results reflected strong activity in Europe, the Middle East and Africa in the second quarter. Revenue in general was strong from Asia and Latin America. "Still, storm clouds lie ahead for the third-largest U.S. bank by assets as rising bond yields in the United States are expected to cut into debt underwriting volume, and slowing growth in emerging markets may cut into profit from overseas," according to Reuters. All in all, the bank has fared well under relatively new CEO Michael Corbat, but the challenge from here will likely get more intense. For more:
Read more about: bank earnings 2. Interest rates put banks at risk
Both JPMorgan Chase and Wells Fargo released strong second quarter earnings, posting upside surprises that led many to applaud. But the good news isn't necessarily a harbinger of even better results to come. Interest rates remain a huge wildcard, and the ultimate effect on the top mortgage providers might prove somewhat counterintuitive. Consider NIMs. Given rising rates, you might think that NIMs would expand. But at JPMorgan, the NIM fell to 2.60 percent for the second quarter from 2.83 percent in the previous quarter. At Wells Fargo, the NIM fell to 3.46 percent from 3.48 percent. Most likely, the rise in interest rates "came too late in the second quarter to significantly affect the banks, but that the increase could cause deeper problems in the second half of the year," according to DealBook. A lot of course depends on the composition of securities held in portfolio and the loan activity at each bank. But it's not hard to see a scenario when reduced mortgage activity swamps any benefits from expanding NIMs. Indeed, the rise in rates more swiftly affected mortgage activity. Wells Fargo received $146 billion worth of home loan applications in the second quarter, down from $208 billion year over year. Mortgage originations were $112 billion, down from $131 billion. For JPMorgan anyway, one possibility is that the banks sales and trading operations will be able to provide some big offsets, if rate increases can be captured via more trading activity. In any case, rates will dominate the earnings process for the foreseeable future. For more:
Read more about: interest rates 3. Analysts hungry for leverage ratio info
Leverage ratios have suddenly eclipsed the common equity capital ratio as a regulatory issue. Just recently, regulators proposed leverage ratios for large U.S. banks that go beyond Basel III. For parent companies, banks would have to maintain a leverage ratio of 5 percent. At insured bank units, regulators have proposed a 6 percent ratio. The Basel III accord requires a 3 percent leverage ratio as of now. Banks have roughly two months to file comments, and their protest will be strong. If the rules as stated are implemented now, banks will have until the end of 2017 to comply. They will all get there in fine form, but the process could get messy. You can bet the bank lobby will be in fine form on this issue. As all this plays out, bank analysts will be seeking answers, and the information exchanges may not necessarily be smooth. Case in point: the JPMorgan earnings conference call last week. The bank released strong second-quarter earnings, a massive upside surprise, but the topic of the day was the leverage ratio and how it might affect the bank. "Naturally, analysts also wanted to know whether JPMorgan Chase's deposit-gathering subsidiaries, which are far larger than the holding company, were close to meeting the 6 percent requirement," according to DealBook. "Do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6 percent requirement?" John McDonald, a bank analyst at Bernstein Research, was quoted. CFO Marianne Lake did not offer a specific number, though she said the insured unit ratio was lower than the holding company ratio, which stands at about 4.7 percent. A few minutes later, a bank analyst at Morgan Stanley said, "I'm just wondering why no bank-sub disclosure. I realize that is different, but — and I heard your answer earlier — but I'm just wondering," she asked, why the number was not provided. Lake's response, "There's nothing sinister underlying it." Right now, the consensus seems to be that JPMorgan Chase would have to raise $40 billion or so at insured units. Some analysts have estimated a shortfall of as much as $47 billion, "which is a far higher theoretical dollar deficit than exists at other large banks' insured subsidiaries." For more: Read more about: Leverage Ratio, Capital Ratio 4. All eyes on Fabrice Tourre trial
With the trial of former Goldman Sachs salesman Fabrice Tourre is scheduled to begin this week, the defense has every reason to portray him in the most sympathetic light. His lawyers certainly do not want to cede the battle for public mindshare. Reflecting that imperative, the New York Times offers up an interesting profile that paints him as someone who is anything but the stereotype of a hard-charging Goldman Sachs executive, one bent on selling risky products to widows and orphans. Instead, the profile plays up the fact that after he was charged, he devoted time to humanitarian efforts in Rwandi. "Rwandan coffee yields have significant room for improvements," he wrote in a March 2011 message to friends, describing his efforts to help farmers. "Plenty of ideas and projects to focus on, with the ultimate goal to improve coffee farmers' income and living conditions!" The article also notes that he was considered something of an "analytical nerd" during his stint at the bank. The point is to humanize him, to make him less convict-able in the court of public opinion, which matters a lot, especially to the client. Just as Steven Cohen of SAC Capital. So we're in for more interesting personal color. According to a friend who spoke to the Times, in Rwandi, Tourre would play in a local soccer game. "Other times, he would watch European soccer at a bar, kicking back with a Mützig beer, a favorite, and meat brochettes." The image war will be interesting subtext at the trial. It might not be wise for the SEC to paint him in stereotypical terms, but it may have no choice. For more: Read more about: Fabrice Tourre, Goldman Sachs 5. Interest rate risk hard to hedge
Back when the real estate market was on the verge of collapse, speculators and hedgers had a common problem: how to make massive wagers on the market. The speculators wanted to bet billions, and they eventually hit upon the right product via the CDO market. For banks and other holders of various structured products, proper hedges proved to be very difficult. An example of just how hard hedging can be comes from the JPMorgan London Whale fiasco, during which the supposed hedge blew up and moved against the bank. Are banks in a similar situation with their massive holdings of fixed income products, which look a bit shakier in a rising-rate environment? "Hedges can't cover everything and also have a way of going wrong. U.S. banks are heavily exposed to rate-sensitive securities, holding $1.85 trillion of Treasury and agency bonds plus another $141 billion of non-agency mortgage debt, according to the Federal Reserve. Real estate investment trusts, meanwhile, owned $450 billion of home loans at year-end, according to Capital IQ, funding most of them with short-term repos. Ultra-low interest rates also probably induced some banks and REITs to buy longer-dated paper for extra yield," Breakingviews notes. Even if a bank is heavy on Treasuries, which "are supposed to be the safest securities on the planet," it has "no shield against being destroyed by interest-rate risk. That's the refrain the whole industry should be humming to itself." Indeed, is there a way to hedge all a bank's rate exposure? It does not appear likely. As a cautionary tale, the publication trots out the collapse of First Pennsylvania in 1980 as an example of how a bank holding safe bonds can be cratered by rising rates. For more: Read more about: interest rate risks, interest rates Also Noted
SPOTLIGHT ON... CalPERS racks up strong first half gains The stock market has been kind to CalPERS this year. It has racked up a gain of 12.5 percent in the first half of 2013. As noted by Bloomberg, the bellwether pension passed a pre-recession high of $260.6 billion in May, five years after the global financial crisis wiped out more than a third of its value. We can only hope other public pensions have fared as well, as most face cringing future liabilities. At CalPERS, private equity investments were among the strong performers. Article Company News:
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Tuesday, July 16, 2013
| 07.16.13 | Analysts hungry for leverage ratio info
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