Citi, JPMorgan open Q3 earnings season; fraud surges at instant payment apps

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JPMorgan beats

JPMorgan Chase easily beat third quarter earnings estimates as profit doubled from the second quarter. “The bank set aside just $611 million for potential future loan losses, far less than expected and the $10.47 billion it booked in the second quarter,” the Wall Street Journal said. Wall Street Journal, Financial Times

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Earnings season begins

The nation’s biggest banks are expected to report “a bad quarter, but not as bad as before,” when they report third quarter earnings this week, starting with Citigroup and JPMorgan Chase (see above) on Tuesday.

“The four largest lenders more than doubled their war chests for defaulted loans over the first six months of the year and now believe they largely have enough set aside to handle a potential spate of distress among consumers and businesses,” the Wall Street Journal reported. “Without that hit to the bottom line, profits should be higher in the third quarter than the second. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are all expected to show a rebound in per-share earnings from the prior three months.”

The Financial Times offers its own earnings preview. “The question now is whether the big U.S. banks’ earnings reports will build on the market momentum, or kill it,” it says.

One of those banks, Goldman Sachs, “is considering whether to scale back financial targets set earlier this year, as the coronavirus pandemic has hindered the bank’s business model revamp,” according to Reuters. “Since then, the pandemic has slammed into the economy, crippling loan demand and causing widespread unemployment. It has also prevented Goldman bankers from drumming up business with new customers the way they could before coronavirus lockdowns.”

“Goldman Sachs executives have stood by their targets, stressing that the path to achieving them in the coming years would not be ‘linear.’ They are not expected to move the goalposts on Wednesday when the bank reports third-quarter results. Instead, the bank may change targets in January, a year after they were set.”

Testing the waters

The Bank of England Monday “asked British lenders to assess their readiness for subzero interest rates, a sign that officials are weighing the merits of a policy that bankers say would heap problems on a sector already weighed down by Covid-19 and Brexit,” the Journal reported. “In a letter to bank chiefs, the BOE said it is seeking information on banks’ ‘operational readiness and challenges with potential implementation, particularly in terms of technology capabilities.’”

BoE governor Andrew Bailey “made it clear last month the BoE was not about to push interest rates below zero in the near future, seeking to damp market speculation that the Bank was about to act,” the FT said. “But with its main interest rate at 0.1%, the Bank said it would begin a ‘structured engagement’ with commercial banks about the implications of going even lower.” The bank said it is “not asking firms to begin taking steps” to deal with negative rates, but wants to “prevent any unintended operational disruption” should it come to that.

Wall Street Journal

Betting on bad news

“This is one of the weirdest things I’ve ever seen in markets. Usually, a bond price will fall if a bank is perceived to have issues with paying. But in this case, it rose,” said Jerôme Legras, managing partner of Axiom Alternative Investments.

He’s talking about certain bonds issued by Banco Santander which, “in a strange twist of events,” have risen in price recently on speculation that the Spanish bank won’t make coupon payments on the bonds. “It isn’t that the bank can’t afford to pay the interest. It is that the securities don’t allow Santander to pay the coupon if it doesn’t turn a profit this year, which it isn’t expected to do. Investors are speculating that Santander will save its reputation by redeeming the securities instead of missing the coupon payments.”

Avoid the noise

“Central bankers should avoid getting too drawn into the bitcoin buzz,” the Journal says. While several of them, including the Federal Reserve, have looked into issuing digital currencies to the public, it “remains unclear why this pitfall-ridden shift is necessary.”

“If a digital currency offered the advantages of both cash—anonymity and security—and a current account—the ability to transfer large sums with ease—nobody would choose to hold money in a bank deposit. This could leave banks without retail depositors, their most stable source of funding. Far from increasing financial stability, as reformers claim, this would make banks more vulnerable. Lending to the real economy could be affected.”

Financial Times

Carrots and sticks

U.S regulators “should prod lenders to help minority communities,” Eugene Ludwig, the former comptroller of the currency, argues in an FT op-ed.

“Financial institutions will only embrace less lucrative lending opportunities — including many loans to minority communities — if regulators are willing to use the right carrots and sticks,” he writes. “Regulators can empower lenders to deal with the higher risks of lending to lower-income people by allowing lenders to value the properties used as collateral over longer periods of time, reflecting their inherent value, and to tap rainy day funds designed to cushion cyclical blows. Much of America is desperate for the credit that the Fed is trying to make more available. Policymakers need to drive lenders to serve the small businesses and working and middle-class families who will fuel a broad-based economic recovery.”

New York Times

Simple to steal

Fraud is surging at instant payment apps like Square’s Cash App and PayPal’s Venmo as “people have flocked to them to avoid retail bank branches and online commerce has become more ingrained,” the Times says. “To encourage that shift, the payment apps have added services like debit cards and routing numbers so that they work more like traditional banks. But that simplicity has made it seamless for thieves to set up accounts and to send requests for money to other users, something that was not possible with traditional bank payments.”

“Zelle, which was founded by a coalition of banks, appears to have experienced less fraud because it has more robust authentication for new users and more legal protections in case of loss, security experts said.”

Quotable

“Banks have good fundamental health. This is a transient hit whose low was likely in the second quarter.” — Mike Mayo, Wells Fargo banking analyst, anticipating improved third quarter earnings at the largest banks this week.