Wells striking out in search for new CEO; Big banks lower Q2 forecasts
Receiving Wide Coverage ...
Deutsche Bank is tightening its anti-money laundering procedures, warning nearly 1,000 corporate clients “that they will lose access to basic banking services” within the next few weeks unless they submit documents required to verify their identity. The move by the German bank “underscores how banks are scrambling to meet tougher anti-money laundering rules introduced by regulators around the world in recent years.” Wall Street Journal, Financial Times
But improving its AML controls is just one of the bank’s challenges. “There are now serious questions over whether Deutsche will need to raise billions of euros for a further restructuring and, if so, how it will raise the money, hemmed in by its shrunken market capitalization and increasingly frustrated investors. However, investors may have to wait until its second-quarter results in late July to hear what [CEO Christian] Sewing decides, and even then analysts are skeptical that the cutbacks will solve the core problems confronting the lender.”
Wall Street Journal
Wells Fargo “is having trouble getting top bankers interested in its open chief executive officer job. The bank’s board has approached a small group of top candidates, including JPMorgan Chase consumer banking chief Gordon Smith, PNC Financial CEO William Demchak and former U.S. Bancorp CEO Richard Davis.” The latter two have already passed on the offer while the bank “continues to pursue Mr. Smith, who is JPMorgan’s co-chief operating officer, but he has told confidants that he is reluctant to take the job.”
“Running the fourth-largest bank in the U.S. is one of the biggest jobs in the business, but it is not a universally appealing one,” the paper notes. “Wells Fargo’s new CEO will have to juggle fixing problems in Washington, reviving key businesses and rehabilitating a corporate reputation damaged by many problems that came to light following the bank’s 2016 fake-account scandal. Any professional glory to be earned turning around the bank is likely years away.”
The waiting game
JPMorgan Chase “is still years away” from deploying quantum computing to speed up financial calculations. The bank has been collaborating with IBM to experiment with quantum computing since 2017, and has seen “some minor successes, including one that proves, in theory, that quantum computing can radically speed up certain financial models. But Ning Shen, managing director in quantitative research at JPMorgan’s corporate and investment bank, said the technology will take several years to mature, in part because the hardware required is extremely complex and adapting and creating new quantum-based algorithms will take time.”
Woojae “Steve” Jung, a former investment banker at Goldman Sachs who traded on inside information regarding prospective business deals, was sentenced to three months in prison and ordered to pay back $130,000 in illegal gains. Jung, who pleaded guilty to one count of securities fraud, was also sentenced to two years of supervised release and fined $30,000.
Curb your enthusiasm
Several large Wall Street banks warned investors to expect disappointing results in some of their businesses in the second quarter. Citigroup CFO Mark Mason, for example, said revenue from trading and investment banking will be down from the year-ago quarter. “The slowdown we saw in the quarter coming out of December ... has persisted through most of the second quarter,” he said.
State Street CFO Eric Aboaf said the bank’s net interest income, which accounts for about 20% of its total revenue, would be down about 8% from the first quarter, the result of “significant turn in the interest-rate environment. Rates are down 50 basis points, FX volatility continues to come down, there’s been spread compression in a number of areas. So we’re going to have a challenging quarter,” he said. The bank previously forecast a 1-2% decline in net interest income.
Meanwhile, Morgan Stanley CEO James Gorman tried to talk down expectations of improved results in Q2. “A lot of the analyst models have us beating the first quarter. I’d be very surprised if that happened,” Gorman said.
European banks say they are unprepared to comply with new European Union rules that require online payments above €30 to go through an extra level of verification starting later this summer and that “more than a quarter of online payments will be impossible to complete” as a result. “The measures are designed to reduce fraud rates, but companies fear that they have not been given enough time to prepare. Banking and payments executives said some new systems had not been tested at scale, and many smaller businesses did not yet have access to the necessary software.”
New York Times
In the shadows
So-called shadow banks — “lenders that compete aggressively, operate with less of a cushion against losses and have fewer regulations to keep them from taking on too much risk — have eclipsed traditional banks” in mortgages, auto lending and some business loans, a development that has many people worried. Commercial banks, meanwhile, “have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble,” leaving the riskier lending business to nonbanks. Shadow banking “is a key source of the credit that drives the American economy. With almost $15 trillion in assets, the shadow-banking sector in the United States is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy.”
“We decided to regulate the banks, hoping for a more stable financial system, which doesn’t take as many risks. Where the banks retreated, shadow banks stepped in.” — Amit Seru, professor of finance at the Stanford Graduate School of Business, about the growth of shadow banking