Trying times for banks Financials were the “main laggard in the S&P 500,” extending this week’s losses to 3.8% after falling 2% Wednesday. “Fresh rate cuts by major central banks and a sharp decline in bond yields [have] heaped new pressure on U.S. bank stocks, which have been swept up in a trade war-fueled bout of market volatility this week. Investors have grown increasingly wary that a weaker interest rate environment will knock earnings in the financial sector. If those losses hold, it would mark the sector’s third-biggest weekly drop of the year.”
Yet, it’s even worse in Europe. “Banks in Germany, Italy and the Netherlands warned Wednesday that making money and improving their operations are becoming more challenging as already-low interest rates look set to tick lower. Shares of Commerzbank, UniCredit ABN Amro Bank fell sharply as they struck a gloomy tone about their outlook in reporting second-quarter earnings.”
“A low-rate environment that has lasted longer than many expected has already taken a toll on the profitability of banks in the region. They are also grappling with a slowing economy, the impact of trade tensions between the U.S. and China and the possibility that the U.K. drops out of the European Union with no agreement.”
Sweetening the deal Fidelity Investments is raising the stakes in the market for investor cash. The $2.8 trillion asset fund company announced Wednesday “that it is automatically sweeping cash in new brokerage and retirement accounts into a money-market fund yielding 1.91% annually. That compares to the 0.2% national average yield on money funds and 0.09% on savings account balances.”
Pedestrians pass a Fidelity Investments office in Boston, Massachusetts Tuesday, May 8, 2007. Until recently, LBO dealmakers led by Henry Kravis, David Bonderman and Leon Black paid scant attention to the interests of shareholders as they gorged on a record $864 billion of publicly traded companies in the past three years. Even Boston- based Fidelity, the largest U.S. mutual-fund company, with $1.4 trillion of assets, and Baltimore's T. Rowe Price Group Inc., which manages $350 billion for clients, were told to take it or leave it when presented with takeover offers. Now, the balance of power is beginning to shift as investors, tired of watching LBO firms make as much as eight times their money buying and selling public companies, are demanding more. Photographer: JB Reed/ Bloomberg News
JB REED/BLOOMBERG NEWS
“Offering higher yields on cash has become a popular tactic to attract customers. Automated advisers Betterment and Wealthfront, for example, are offering more on cash by sweeping it to partner banks, and some banks including Goldman Sachs’s Marcus has been paying relatively high interest on savings.”
Handing it over Major Wall Street banks including Bank of America, Citigroup, Deutsche Bank, JPMorgan Chase, Morgan Stanley and Wells Fargo have turned over to congressional committees “thousands of pages of documents related to Russians who may have had dealings” with President Trump, his family or business. Separately, Deutsche Bank, “Mr. Trump’s primary bank, has turned over emails, loan agreements and other documents related to the Trump Organization to the office of New York Attorney General Letitia James.”
They’re ba-ack Inflated bond ratings, one of the causes of the global financial crisis 10 years ago, are making a comeback. “In the hottest parts of the booming bond market, S&P and its competitors are giving increasingly optimistic ratings as they fight for market share. The problem is particularly acute in the fast-growing market for ‘structured’ debt. The deals are carved into different slices, or ‘tranches,’ each with varying risks and returns, which means rating firms are crucial to their creation.”
But some investors aren’t buying. “Some bonds in markets where ratings criteria have been eased don’t trade at the high bond prices their ratings suggest they should. Investors have also shown skepticism about ratings on some corporate and government bonds.”
Fighting fraud with AI Visa is rolling out a new platform that uses artificial-intelligence to detect and prevent credit-card fraud. “The platform, built in house and slated to be launched later this year, is an example of the broader financial-services industry trend of using AI to detect patterns in transactions that could signal criminal behavior.”
“The banking industry is expected to be the second biggest spender on AI systems this year, behind retail. Banks are on track to spend $5.3 billion on AI in 2019, growing to $12.4 billion in 2023, on such initiatives as fraud analysis. Visa said it has spent about $500 million over the past five years on AI and data-infrastructure projects.”
Financial Times
Unicorn factory Klarna, which this week became Europe’s largest private fintech valued at $5.5 billion, is the latest unicorn to emerge from Sweden, which earlier produced Spotify, iZettle and several other billion-dollar companies. The question is: will the buy-now, pay-later start-up follow those companies and get swallowed up by “deep-pocketed U.S. companies?”
Staying put Despite falling short of its own expectations, HSBC is not giving up on its plan to build a strong franchise in the U.S., the outgoing head of the unit says. “We are facing headwinds from the interest rate environment and market conditions [but] we are committed to the strategy. We think it’s going in the right direction,” said Patrick Burke. Despite abandoning next year’s profit goal for the unit, the bank “has no plans to withdraw from any of its U.S. businesses or to reduce its investment in the country.”
Separately, HSBC has named Nicolas Moreau, the former head of DWS, Deutsche Bank’s asset management unit, to head its “underperforming” $500 billion asset management business “at a time of heightened uncertainty at one of the world’s biggest and most complex banks.” CEO John Flint left the bank earlier this week.
Quotable
“Banks will have to find ways to make money in a more challenging environment.” — Vincenzo Longo, a strategist at IG Group, discussing the plight of European banks in dealing with negative interest rates.
The Office of the Attorney General in New York says the bank violated the state's Exempt Income Protection Act, illegally transferring customers' money to debt collectors.
The Providence, Rhode Island, company is having discussions with private wealth management teams elsewhere as it seeks to expand its fledgling private bank. In just three months, private banking deposits doubled to $2.4 billion.
After the Minneapolis-based company reported stubbornly high commercial deposit costs, it reduced its full-year forecast for net interest income by $200 million-$500 million.
The CFPB has dissolved the Office of Supervision, Enforcement and Fair Lending and eliminated the job of associate director in a move that impacts how it designates nonbanks for supervision.
Rising deposit costs have plagued banks in general, and the Tennessee bank had to pay up to bolster liquidity after its failed merger with TD. But First Horizon retained customers in the first quarter while not paying them the special rates they got last year.
U.S. customers who have previously used Sweden-based Klarna's buy now/pay later financing — and paid off their loans in full — will be prequalified for interest-bearing loans through a new version of the Klarna Visa card rolling out later this year.
