Citi beats estimate as earning season opens; Goldman eyes cash management

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Back in the black
Citigroup said it earned $4.3 billion in last year’s fourth quarter, versus a loss of $18.9 billion a year earlier, when it took a large tax-related write-down. Earnings per share beat analysts’ estimates, although revenue fell 2%.

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Bank earnings outlook
Despite — or perhaps rather because of — the fourth quarter’s financial markets volatility, trading revenue at the big Wall Street banks “is expected to be roughly flat, collectively,” compared to the year ago period. “The likely trading results underscore the tension between trading profits and safety at these firms in the years since the Dodd-Frank financial overhaul. Uncertainty and volatility can be a boon for Wall Street, but market action in recent months has been marked instead by big funds and other traders scaling back activity in a bid to reduce risk.”

Despite decent earnings, investors remain hesitant about large banks.

The earnings outlook for the current quarter will only “get dicier for big banks.” That’s because 2018 earnings got a big boost from the 2017 tax overhaul, which lowered the corporate tax rate to 21% from 35%. “Come April and first-quarter earnings, banks for the first time will be measuring growth against a period when the lower tax rate had taken effect. The result: banks’ 2019 earnings growth won’t likely be as robust as in 2018.”

Despite happy talk from CEO Tim Sloan, Wells Fargo remains held back by “a damaged brand, a workforce held back by fear of repeating past mistakes, and the immense difficulty of drawing a line under one of the ugliest banking scandals in an era full of them,” the Financial Times says.

Citi’s earnings report will be followed by JPMorgan Chase — the “only time in recent history that Jamie Dimon’s bank has not been the first of the Wall Street titans to report earnings” — and Wells Fargo on Tuesday, Bank of America and Goldman Sachs on Wednesday, and Morgan Stanley on Thursday.

On Friday, Citi said it agreed to give activist investor ValueAct Capital Partners “greater insight into its strategy, governance and operations” although it stopped short of giving it a board seat. The deal will give ValueAct, which owns about 32 million of the bank’s 2.4 billion shares, or about 1.31% stake, “access to confidential information and the ability to work directly with members of Citi’s management team and board.” In return, the hedge fund “is required to support the management and the board” through the end of this year, when the agreement ends.

Malaysia’s finance minister is dismissing Goldman Sachs’ claims that the 1MDB fraud was the work of a few rogue bankers at the firm. “We have suffered extremely large losses and you were the financial adviser,” Lim Guan Eng said in Hong Kong on Monday. “Goldman Sachs needs to come to terms with the facts.” The scandal is expected to be “the main focus” for CEO David M. Solomon when the bank releases fourth quarter results later this week.

Roadblock cleared
The Treasury Department’s agreement last week to allow the Internal Revenue Service’s income verification service to continue working during the partial government shutdown followed “an intense lobbying campaign by the mortgage industry. Because of the shutdown, the IRS was unable to process a key form that lenders use to confirm borrowers’ incomes before they can grant home loans — a roadblock that threatened to bring the mortgage industry to a halt. Critics, including many former IRS officials, described the move as an act of favoritism to ease the burden on a powerful industry.”

“We were advised by various parties that the shutdown of [the service] was creating significant issues for certain borrowers,” a Treasury spokeswoman said. “We are pleased to help taxpayers by ensuring this service continues despite the lapse.”

Wall Street Journal

Dress for ...
The traditional banker’s uniform for men — “a suit, slicked hair and shiny shoes” — is about to go the way of the leisure suit ... well, maybe that’s a slight exaggeration. Still, rather than adhering to Wall Street’s unwritten rules, “male bankers are increasingly taking their sartorial cues from clients. That strict sartorial code has given way to situational dressing.” As Citigroup CEO Michael Corbat says, “You dress for your client.”

Financial Times

Blind eye
The People’s Bank of China has refused to act on Visa and Mastercard’s applications to process renminbi payments, despite two-year-old rules that would have opened the door to the country to the two companies. “Although Visa and Mastercard submitted applications to the [central bank] more than a year ago, the PBoC has not formally acknowledged these submissions. China’s refusal to process the applications could cause trouble in trade negotiations between Washington and Beijing.”

Elsewhere

Paying to play
Goldman Sachs is looking to enter the global cash management business by paying more on corporate deposits than competing banks. “Long considered a low-margin, utility-like service, the wholesale payments and cash management business generated about $250 billion in global revenue in 2017 for big banks,” according to consultant Oliver Wyman.

Quotable

“There was a lot of volatility, but all to the downside. That is bad volatility for the banks.” — Brian Foran, a bank analyst at Autonomous, about expected fourth quarter trading results at the big Wall Street banks.

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