Goldman eases dividend concerns; BNY Mellon warns on net interest income
Breaking News This Morning
Bank of America’s net income fell 52% in the second quarter to $3.53 billion but beat per share earnings forecasts. “The bank set aside $5.12 billion on top of the $4.76 billion it put away last quarter” for projected loan defaults.
Morgan Stanley profit jumps
Morgan Stanley said its quarterly net income jumped 45% to a record $3.2 billion as revenue also set a record at $13.4 billion, both well above forecasts.
Receiving Wide Coverage ...
The European Securities and Markets Authority “has launched a fast-track investigation into Germany’s supervision of the collapsed payments group Wirecard — and released a previously confidential report exposing shortcomings in the country’s regulatory system,” the Financial Times reported. The agency “said it would assess the supervisory response to events leading up to Wirecard’s insolvency by both BaFin, the German financial regulator, and FREP, the private-sector body that monitors German companies’ accounts.”
“Esma’s move comes after calls from Valdis Dombrovskis, a European Commission executive vice president, for a probe into how the one-time €13 billion listed fintech group was able to fail so suddenly last month.”
Before it failed, Wirecard “built up an image as a fast-growing financial technology company” by “spewing out news releases publicizing partnerships with blue-chip names such as SAP, Zurich Insurance Group and SoftBank.” But the Wall Street Journal found “that some of those partnership announcements were misleading or were promoted without the agreement of the companies involved. The prolific number of news releases gave investors the impression of a far-reaching business with many potential customers.”
SAP, for example, “was surprised to see a news release in February from Wirecard saying it had become an ‘official development partner.’” But SAP said such a partnership “was never signed by us nor was [it] approved from us to publish a press release.” Yet “SAP didn’t contact Wirecard about the discrepancy at the time.”
Meanwhile, Wirecard’s former CEO Markus Braun “borrowed €35 million from the payment company’s banking arm in January, triggering a clash with board members and an ongoing review from German financial watchdog Bafin,” the FT reported Thursday.
Wall Street Journal
Out from the cloud
Goldman Sachs “came into the earnings season under the cloud of a higher-than-expected minimum-capital requirement from the Fed’s recent stress test. The fear was that the bank might have to sacrifice revenue to preserve its capital. But its performance has put those concerns aside for now. Instead, in the second quarter, Goldman not only generated a huge amount of additional revenue via its trading desk, but it was able to do so while still improving capital measures.”
“The bank grew its global markets revenue nearly 40% from the first quarter, while it actually lowered the value of risky assets used to calculate its key capital ratio. The resulting 13.6% core equity capital ratio just about matches its estimated minimum requirement, leaving more than enough cushion for its dividend.”
The news wasn’t so cheery at Bank of New York Mellon, which “reported a drop in net interest revenue in the second quarter and warned that the trend may continue in the months to come,” which sent its shares down more than 5%. The company said “net revenue from interest decreased to $780 million, a 3% fall from last year’s level. Analysts’ consensus had forecast net interest revenue of $792.3 million.”
“The bank attributed the trend to lower interest rates on interest-earning assets. For banks and other financial firms that fund themselves with deposits and other short-term loans and put that money to work through loans and longer-term investments, falling rates can impair profitability.”
International banks and other firms that do business in Hong Kong face complications in trying to “obey conflicting rules of both Washington’s coming sanctions regime and the territory’s broad new national-security law. On Tuesday, President Trump signed into law a bill that requires sanctions against not only Chinese officials and entities materially contributing to the erosion of Hong Kong’s autonomy, but also financial institutions doing business with those who will appear on the eventual blacklist. At the same time Hong Kong’s security law outlaws receiving ‘instructions, control, funding or other kinds of support from a foreign country’ to impose sanctions against Hong Kong or China.”
“Sanctions have long been a minefield for international banks, and rising tensions between the U.S. and China have already created other difficulties for some global lenders.”
Out of favor
HSBC, Lloyds Banking Group and other bank stocks “have fallen out of favor in equity income funds after canceling or cutting their dividends. Traditionally among the U.K.’s largest dividend payers, the companies dropped out of the top 10 holdings of many equity income funds as portfolio managers shifted to defensive, short-term positions in groups with guaranteed payouts.”
“Half of funds that held HSBC and 95% of funds that held Lloyds in their top 10 cut their positions, meaning the lenders are no longer among their biggest holdings.”
New York Times
It ain’t over yet
Randal Quarles, the Fed’s vice chairman for supervision and the chair of the global Financial Stability Board, has “warned that markets could gyrate again and that it was possible investors were setting the stage for a sharp drop in asset prices.” “Volatility in markets has decreased but may well return,” he said in a letter to global finance ministers and central bankers. “We may be seeing significant pricing disconnects between the market and economic fundamentals, which could result in sudden and sharp repricing.”
Quarles, who “tends to favor light-touch regulations, also highlighted that the far-reaching market bailouts undertaken by the Fed and its counterparts abroad amid market ruptures in March should not be the default.” “While extraordinary central bank interventions calmed capital markets, which remained open and enabled firms to raise new and longer-term financing, such measures should not be required,” he said.