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Investment Banking Income Plunges: Ahead of first quarter earnings, Citigroup has warned of declines in revenues for investment banking. Citigroup chief financial officer John Gerspach said at an investor conference that the bank’s investment banking income would be down roughly 25% from last year, while fixed income and equities trading revenues would drop about 15%. Citi is not the only bank prepping for less-than-thrilling quarterly results: the head of JPMorgan Chase’s corporate and investment bank Daniel Pinto has similarly predicted a 25% decline in investment banking revenues. Such predictions cause concern – particularly because the start of the year is a historically strong period for securities divisions at banks, as investors typically place orders to jumpstart the year’s investment strategy. Moreover, these lackluster results point to a broader truth: trading is declining at big banks, and it’s not a cyclical problem. For more analysis on the likely state of affairs in the upcoming earnings season for big banks, check out American Banker’s first quarter preview.
Wall Street Journal
Square Wednesday will release its first quarterly earnings report since its IPO, but investors may want to temper their excitement. The fintech firm is expected to post a 13-cent loss per share in the fourth quarter, with just $343 million in revenue. Part of the problem for the company is that its main business in payments occupies an already very crowded field. On one side you have PayPal and its subsidiary Venmo looking to enter this space for small businesses and compete with Square, and on the other side you have the likes of the constantly evolving Apple Pay and Samsung Pay. Overall, the quarterly earnings are certain to create a new and interesting chapter for the company, which has seen volatile trading since going public in November. Currently, Square’s stock is riding on a high, trading at 40% above its low.
Online lender SoFi is forming a hedge fund and hoping this new business line will help alleviate some of the online lending sector’s growth problems. The new fund, called SoFi Credit Opportunities Fund, aims to tap into an investor base that is not so interested in buying the company’s whole loans or asset-backed securities directly. As a result, the hedge fund will boost the market for SoFi’s loans. Some observers have thrown up a yellow caution flag, expressing concerns about conflicts between the new hedge fund and SoFi’s main consumer business. SoFi chief Mike Cagney, aware of such concerns, noted the fund will have an independent trustee who will approve loan purchases to stave off conflicts of interest, but declined to specify precisely who will be that trustee.
When it comes to the topic of geography, online lenders and investors in consumer loans find themselves at odds. The expansion of online lending has created some headaches, as companies must avoid discrimination based on age, race and other features. As such, these companies must be careful when it comes to the geographic nature of their lending, with many companies now opting to reduce the amount of information they provide on the geographic location of the loans they make. Some, for instance, will simply provide the first few digits of the loan’s ZIP code, which refers to a broad region. Investors, though, want to know more about the loans’ area of origination, in part to avoid potentially bad investments. Many investors remain wary of purchasing loans in states like Florida or Nevada – and to them, geography shouldn’t be included in the same field as race and age where discrimination is concerned. That has left investors to come up with their own ways of assessing a loan’s geographic information – while overall the industry looks to regulators to adapt fair lending rules to the online age.
Barclays is hoping that 3D printers and tech incubators will draw in businesses and entrepreneurs. The British bank has launched its first “Eagle lab” in one of its old branches, with plans to bring similar labs to 20 branches across the U.K. this year. The lab provides resources to start-ups and entrepreneurs looking to grow their business and gain access to new technologies. The labs feature high-tech equipment, such as 3D printers and laser cutters, in its so-called “maker spaces,” with mentoring available. But the lab is also a space for more traditional business needs, such as meeting rooms, and for community-oriented opportunities, such as coding classes and cyber fraud awareness events, the paper said. In the first example of such a lab, the bank closed down the branch that previously inhabited the space, but in other cases Barclays will co-locate the lab with a functioning branch.
America’s financial stability watchdog has sounded the warning call bank stress tests may overlook potentially large systemic risks. The Office of Financial Research made the warning after analyzing the regulatory tests for banks’ potential losses due to exposure to credit derivatives. The watchdog argues that the choice to focus the tests on a specific bank’s losses overlooks “the potentially larger, indirect impact of a counterparty default on the bank’s other counterparties,” the paper wrote. Altogether, these indirect effects could have a nine times bigger impact overall than the effects on a single bank holding company. The OFR’s report also noted the choice to test for a bank’s largest counterparty may be based on flawed logic, since in some cases smaller counterparties could have an outsized impact. Overall, the group has called for collection of data regarding the entire market, and not just individual institutions, to understand better the potential impact.
American investment banks have pulled further away from their European counterparts, according to an analysis by the paper. The research found that the top five American investment banks posted investment banking and securities revenue of $138.5 billion last year, versus the $60.1 billion recorded by their European rivals. The paper also found that U.S. banks are now topping the tables for investment banking fees in Europe, the Middle East and Africa, regions traditionally dominated by European banks. One reason behind U.S. banks’ recent success is they have adapted more quickly to changes in the industry. For instance, U.S. banks drew down their bond trading operations unlike Deutsche Bank, NYU Stern professor Brad Hintz said. Additionally, the improvement in fee income in the U.S. benefited those banks, while in Europe it remained stagnant. Overall though, revenue for investment banking and securities divisions of all of the banks in question dropped 0.8%.