Banks challenged by low rates; Fidelity raises theirs
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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.”
“The warnings from some of Europe’s largest lenders underscored how global banks are scrambling to position their businesses for a ‘lower for longer’ interest rate environment.”
Wall Street Journal
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.”
“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.”
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.”
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?”
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.
“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.