Auto lenders take on more risk; banks eschew muni bonds
Wall Street Journal
Pushing the envelope: Auto lenders are “tinkering with loan terms in an effort to gain more consumers,” including extending more loans past five years and giving more credit to riskier customers. “The latest underwriting efforts show that lenders, faced with conflicting signals about the health of the U.S. consumer, are engaged in a delicate balancing act to boost lending and profit without taking on overly risky customers.”
Not as attractive: On the investment side, municipal bonds held by banks fell by nearly $16 billion in the first quarter, the first decline in nine years, “a sign of how much new U.S. tax rules damped demand for debt from state and local governments.” Corporate tax rates paid by banks fell to 21% from 35%, “making tax-exempt bonds less appealing.” Munis would have to yield about 50 basis points more on average in order to maintain their attractiveness to banks, according to a Citigroup analysis.
Preying on the weak: “Don’t hold your breath” for any big bank mergers in Europe, “which are a distant prospect” even if the idea behind them is a good one, the Heard on the Street column says. But that’s good news for American banks, which “can just grow stronger” and help “conquer a divided industry.”
Rejected: Less than a quarter of Swiss voters supported a referendum Sunday that would have changed how lending works in that nation. The Vollgeld Initiative, also known as Sovereign Money, would have “upended the banking system” in Switzerland by giving the Swiss National Bank, not lenders, control over loans.
Not enough: Fresh off their recent legislative victory, small and midsize American banks want even more regulatory relief. Doug Kennedy, for example, president and CEO of Peapack-Gladstone Bank in New Jersey, calls the Economic Growth, Regulatory Relief, and Consumer Protection Act “a good first step” but is “hardly alone in arguing Congress should not stop there.”
Good times: The world’s biggest investment banks made more money last year than before the financial crisis, earning a combined $78.4 billion, compared to $75.4 billion in 2007. “The solid profitability shows investment banks have emerged from a decade of change in much better shape than many would have predicted, despite the impact of tougher regulation and new competitors offering online sales and trading at wafer thin margins.”
Fired: Blair Fleming, the head of Royal Bank of Canada’s U.S. investment banking and capital markets operations and “its most prominent executive in the U.S.,” was fired for having an affair with an employee and violating the bank’s disclosure and conflicts of interest policies.
Growth mode: Following “almost a decade of declining revenues,” the new CEO of HSBC said the bank will be investing $15 billion to $17 billion in “growth and technology” businesses even as it maintains its current dividend and share buybacks. “After a period of restructuring, it is now time for HSBC to get back into growth mode,” said John Flint, a 28-year bank veteran who took over in February. “In the next phase of our strategy we will accelerate growth in areas of strength, in particular in Asia and from our international network.”
Déjà vu: The growing debt burden among U.S. corporations is “adding a short-term sugar high to an already booming economy” that could eventually burst, causing another recession, the paper suggests. “Giant corporations [are] using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and sending it to shareholders in the form of increased dividends and, in particular, stock buybacks.” This diversion of “capital from productive long-term investment further inflates a financial bubble — this one in corporate stocks and bonds.”
"[If] you only took on the financing for the top echelon of the super prime ... [it’s] very, very hard to make money in and of itself.” — TD Bank CEO Greg Braca on the auto lending business.