Mortgage underwriting tightens as rates fall; HSBC mulls sale of U.S. unit

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Well positioned

The European Banking Authority expects banks in the eurozone “to suffer a hit of up to €380 billion to their capital due to the economic disruption from coronavirus, but most should be able to absorb the losses, ” the Financial Times reported.

“The starting position of the banks [was] very good at the end of last year [and] the measures put in place since the last crisis have held up,” EBA chairman José Manuel Campa said. “As a result of all that, the buffers are large and should be sufficient in the short term so we are not worried about [the banks’] short-term ability to lend to the economy and in the long term to have sufficient buffers to absorb the eventual losses.”

Nevertheless, “they are also more exposed to small and medium-size companies and consumer credit, two areas that provide higher margins in a low-interest-rate environment but that are now hard-hit by the virus outbreak,” the Wall Street Journal said. “Not all will be able to weather a sharp fall in profitability as loans turn sour and the cost of raising funds rises.”

“There could be weaker banks, including those that entered the crisis with existing idiosyncratic problems or those heavily exposed to the sectors more affected by the crisis, and whose capital ratios might not suffice to weather the upcoming challenges,” the EBA said.

Wall Street Journal

Credit crunch

Interest rates may have fallen “to the lowest level on record,” but that’s not prompting a corresponding increase in mortgage lending, the Journal says. Rather, “mortgage availability has tightened sharply as lenders impose tougher income, credit-score and down-payment conditions and drop some loan types altogether, such as home-equity lines of credit.”

“The economic shock from the coronavirus pandemic explains some of this credit crunch. But the economic factors have been exacerbated by policy decisions in Washington, industry officials say. As part of its March relief bill, Congress let homeowners suspend mortgage payments for up to a year but provided no way to pay for this, potentially saddling lenders with the burden. Meanwhile, federal regulators make it hard for loans where borrowers might seek forbearance to get the backing of Fannie Mae and Freddie Mac, which guarantee nearly half of residential mortgages.”

Financial Times

Don’t break the banks

Ordering U.S. banks to stop paying dividends “would produce little to no benefits and substantial costs. In fact, a ban could strain banks’ ability to support lending and economic growth, both now and over the long term,” Greg Baer, president and CEO of the Bank Policy Institute argues in an FT op-ed.

“Thus far, U.S. banks have been able to meet much of the unexpected demand for capital and liquidity created by this abrupt decline in economic activity,” he wrote. “U.S. banks dramatically expanded their lending at the onset of the health and economic crisis. The banks have further capacity to lend. U.S. banks also remain highly capitalized. In short, those advocating for government-mandated halts to dividends appear to have adopted an ‘if it ain’t broke, let’s break it’ approach. While perhaps politically expedient, such an approach is bad policy and a repudiation of the good work that both banks and their regulators have done since the last financial crisis.”

In the crosshairs

HSBC’s board “is set to deepen the biggest restructuring in the bank’s 155-year history after deciding that the coronavirus crisis requires more drastic measures. The bank’s U.S. business is under particular scrutiny, where HSBC has a small east-coast retail network alongside trading and transaction banking operations. These were shrunk by almost a third in February, but management is now debating whether the U.S. operation is viable at all.”

A U.S. sale “is possible, but it’s very early in terms of making that decision,” an FT source said. “U.S. profits fell 39% last year and it made a return on tangible equity — a measure of profitability — of just 1.5%. That compares with a 15.8% return in Asia and 12% in the Middle East.”

Full speed ahead

Goldman Sachs “is planning to launch its fledgling cash management operations in the U.K. by September and across Europe by the end of the year, as the bank presses ahead with investment in the division in spite of the coronavirus crisis. The timetable is detailed in a presentation shown to prospective clients in recent weeks.”

In addition to paying “up to 200 basis points more than rivals on some deposits,” Goldman “believes it can woo clients with a new technology platform that is more customer-friendly than the legacy players’ efforts.”

Delayed again

Wirecard, the German payments company, “has postponed the publication of its 2019 annual results for the third time this year as its auditor EY needs additional time to finish its work.” The company “is facing accusations of accounting manipulation raised by whistleblowers and reported by the FT.”

New York Times

Penance or profit?

Goldman Sachs’s promise to provide $1.8 billion in mortgage debt relief as part of a settlement for its role in the 2008 housing market collapse was not just “penance” but ‘“also a business opportunity,” the Times says. “Four years after agreeing to help homeowners in a civil settlement with federal prosecutors, the Wall Street firm has become one of the biggest buyers of distressed mortgages, an area of investing that deals in loan modifications and foreclosures for borrowers who can’t make their payments. And while Goldman has reworked loans to make it possible for thousands of homeowners to avoid foreclosure, it has also taken back more than 10,000 homes — properties it has started to sell to help offset the cost of the assistance it provides, a review of data shows.”

“Our overarching goal is to do modifications and get the nonperforming mortgages we purchase performing,” Goldman spokeswoman Maeve DuVally told the Times.

Quotable

“I am very cautious about this. At some point, you would see depreciation of that capital and then you would start seeing problems. Some of the feeling that we have about how well this thing works, I think will erode with time.” — Citigroup’s investment banking chief Paco Ybarra, expressing skepticism about the long-term benefits of bank employees working from home.

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