Morgan Stanley’s profit; China deal raises optimism for U.S. banks

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Morgan Stanley beat expectations with fourth-quarter profit growth up 46%.

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Bank earnings, continued

The second day of fourth quarter big bank earnings wasn’t nearly as good as the first one, when JPMorgan Chase and Citigroup announced strong results. Bank of America’s profit fell 4% “as the bank struggled to adjust to falling interest rates,” the Wall Street Journal says. Revenue also fell modestly.

“The drop in profit and revenue reflect how banks must accommodate after enjoying a short-lived period of higher interest rates that boosted their lending margins,” the paper says.

However, the Financial Times notes, the bank’s earnings were better than expected, “as strong loan growth and a healthy U.S. consumer offset the impact of lower interest rates.”

“The results continue the trend seen in other bank results reporting this week: profitability holding up in the face of three Federal Reserve interest rate cuts in late 2019, supported by volume growth and strong trading activity.”

BofA is bracing for even more pressure from lower interest rates, American Banker reports.

At Goldman Sachs, the fallout from the 1MDB scandal “wiped out about 13% of the bank’s 2019 profits and darkened otherwise strong results,” the Journal says. The bank’s full-year profit dropped 19% as it took a charge to cover an expected settlement with U.S. regulators and prosecutors. The paper “previously reported that Goldman is negotiating to pay the U.S. Justice Department a fine of about $2 billion and plead guilty to violating antibribery laws.”

“The legal reserves pushed Goldman’s return on equity — a closely watched measure of shareholder value — to 10% for the year, the worst among big banks that have reported financial results so far. Costs also rose as Goldman spends heavily on new initiatives, such as consumer banking and wealth management.”

The “surge in litigation charges related to the 1MDB scandal led Goldman Sachs to miss earning expectations for the second consecutive quarter, underlining the challenges facing the U.S. bank as it prepares for its first investor day this month,” the FT says. “Overall the U.S. bank’s performance was starkly worse than rival JPMorgan Chase, which reported record profits for both the fourth quarter and 2019 year.”

As Goldman “preps for its first investor day in its two-decade history as a public company, [CEO David] Solomon is facing challenging conditions in the areas where Goldman still makes most of its money,” the paper says. One bank it’s seeking to emulate is JPMorgan Chase.

Goldman said it sharply curtailed its originations of personal loans last year amid the roll-out of its credit card partnership with Apple, American Banker reports.

Credit cards and trading, “the parts of the [banking] sector best suited to the current environment, stood out as big growth drivers” in the fourth quarter, the Journal says. “Consumers are healthy, enjoying rising wages and home values. And many trading clients were much more buoyant than a year earlier amid improving risk appetite and a renewed hunt for yield in fixed-income markets.”

“But is the latest quarter any kind of guide to longer-term performance for these institutions? Frustratingly, the right answers in banking are most evident in hindsight. Underlying returns are best measured over the course of a cycle, not quarter to quarter. With a long-running U.S. economic expansion and an election looming, longer-term investors should look past those lenders lifted by a temporarily rising tide and instead pick banks that they are confident will hold up best when benign trends end.”

While the “growing tide of consumer debt helped propel some of the country’s largest banks to major profits last year,” the Washington Post says, “consumers’ growing debt loads, expected to increase $80 billion last year, are a cause for concern among some economists but show no sign of slowing. Consumers have shifted away from cash and toward online shopping, making credit cards ubiquitous, industry analysts say. Meanwhile, the strong economy and low unemployment have kept delinquencies low.”

Wall Street Journal

China opening?

The trade deal between the U.S. and China signed Wednesday “has given U.S. banks and financial companies new hope that their decades-long attempts to crack the Chinese market may bear fruit. The deal clears some of the obstacles that have prevented U.S. banks, credit-card networks, insurance companies and distressed-debt investors from operating in China," the paper says. "While short on details, the deal broadly requires China to take action on those applications. In some cases, it sets parameters on what the Chinese government can consider in making licensing decisions.”

“Visa and Mastercard, in particular, stand to gain. Their applications to operate in the country have languished. The deal requires China to make a decision on their applications and to provide a reason if it rejects them.”

Financial Times

Big Blue to the rescue

TSB, the U.K. bank that was “rocked by a disastrous upgrade in 2018 that left nearly 2 million customers without access to their accounts for several days and made some basic services unavailable for months,” has hired IBM “to run many of its key technology systems in an effort to move on from an IT meltdown that it blamed on a previous provider owned by its parent company.” TSB, the U.K.’s seventh-largest bank, “said the partnership with IBM would increase its resilience to outages and security threats while allowing it to roll out new products more quickly.”

“The fiasco, which marked the most ambitious IT upgrade attempted in the country, cost TSB more than £350 million and led to the departure of a host of senior executives. The bank’s board and former executives placed much of the blame on Sabis, the in-house IT provider of its Spanish owner Banco Sabadell that previously managed most of TSB’s systems.”

You better not wait

“In a new warning to major banks and insurers,” the Bank of England and the Financial Conduct Authority want the firms to start showing “clear evidence of engagement” that they are moving away from Libor. “Banks have until September this year to stop issuing cash products linked to sterling-denominated Libor as part of a fresh assault on the notorious benchmark by U.K. watchdogs to meet a 2021 deadline.”

Quotable

“Even though consumers are confident, people are still carrying significant debt. From a bank’s perspective, that is a big moneymaker. From a consumer’s perspective, I would encourage everyone to pay that down.” — Ted Rossman, an analyst at CreditCards.com, about growing consumer debt, which was a main driver of bank earnings in 2019

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