Commercial Banks
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NYCB $5
KRE $48 09 Feb 2024 |
Another regional bank plunges off a cliff
Over the course of five trading days, regional mid-cap lender New York Community Bancorp (NYCB $5) fell 62% in value. Intriguingly, we are coming up on the one-year anniversary of SVB, Silvergate, Signature, and First Republic. We were told the bank runs are over, and that the regionals now provide investors with a great value proposition. Hold that thought. Since the start of the year, the SPDR S&P Regional Banking ETF (KRE $48) has fallen double digits while the S&P 500 is up 5%. New York Regional was a top-ten holding of the fund. So what happened this time? It should be noted that New York Community Bank is heavily invested in commercial New York real estate. That is an area which continues to struggle since the pandemic shifted the paradigm in a major way, and we see those troubles continuing to mount. Rent-regulated multifamily loans (think Seinfeld's apartment building) account for nearly one-quarter of the bank's lending, and we view that segment of the real estate market to be highly volatile. Values have fallen and interest rates have risen since most of these borrowers last took out loans, and refinancing when they come due is going to be a challenge. A major reason for NYCB's 200% debt-to-equity ratio is a recent spending spree. Not only did it acquire Flagstar Bancorp in late 2022, it more recently picked up parts of defunct Signature Bank. Crossing over $100B in assets, it should be noted, brought with it increased scrutiny by regulators. In December, the bank swung to an unexpected loss and slashed its fat dividend—a major reason investors were in the name—from $0.17 to $0.05 per share. Add a management shakeup to the mix and both investors and depositors alike got very nervous, leading to the selloff. One major depositor who also had money in Signature commented that his "finger is on the trigger," ready to pull funds if needed. The bank says it is fully ready to offload assets to raise more cash if needed, but that doesn't change the makeup of the bank's loans. Just as trouble in the crypto industry helped bring down Silvergate, focusing on the owners of rent-controlled assets could be equally troubling. By its very name, owners of these properties are limited by law on how much they can increase rents on units, constricting their cash flow. To that end, the bank lost $252 million last quarter on the back of $185 million in charge-offs. For customers of Signature who suddenly found themselves with accounts at New York Community Bancorp, it must feel as though they are living in the movie Groundhog Day, especially considering the season during which this keeps happening. For investors thinking they can get in a regional at an incredible price, dig a little deeper. The bank's P/E ratio of one may seem too good to be true, and it probably is. While annual revenue is expected to grow by 11%, the estimated EPS growth rate is -66.2% per annum. Yet another reason we are underweighting the Financials sector right now. |
Goldman Sachs bucks the quarterly banking trend with a revenue miss
So far, it has been a pretty good quarter for the big banks. And that makes sense, considering how net interest income should increase as rates rise. That has held true for the likes of JP Morgan, Chase, Citi, Wells Fargo, and Bank of America. Not so much for Goldman Sachs (GS $334), however. The $112 billion global investment bank missed revenue expectations, raking in $12.22 billion as opposed to the $12.76 billion analysts were expecting. In addition to the 5% drop in revenue from the same quarter last year, net income also fell. The bank earned $3.23 billion for the quarter, or 18% less that last year. A major reason for the miss stems from Goldman’s decision to jettison its Marcus personal loan unit. The fatter margins at the other big banks have been due in good measure to their consumer loans (they have been able to charge higher rates to customers); meanwhile, Goldman has been reducing its exposure to this segment. In addition to ridding itself of Marcus, management announced it would begin the process of selling off its GreenSky unit, a specialty lender it bought just over a year ago. GreenSky was, ironically, designed to be a bolt-on acquisition to Marcus. Unlike the other big banks, Goldman generates most of its revenue from its Wall Street dealings; understandably, considering higher rates, recession concerns, and the market downturn, this activity has been muted. An area they should have done well in is fixed income, yet they also disappointed in that arena. Fixed income trading revenue dropped 17% from last year, while equity trading revenue fell 7%. If there was one positive nugget to point to in the quarterly results it was the company’s asset and wealth management division, which notched a 24% revenue increase—to $3.22 billion. But CEO David Solomon’s about face on consumer finance should send up red flags for investors. After all, just a few short years ago they were told that this would be a major catalyst for the company’s growth going forward. Full disclosure: Not only has Financials been one of our most underweighted sectors over the past two years, we haven’t owned Goldman Sachs for over a decade—and have no plans to add it to any strategy anytime soon. We see little for investors to get excited about here.
So far, it has been a pretty good quarter for the big banks. And that makes sense, considering how net interest income should increase as rates rise. That has held true for the likes of JP Morgan, Chase, Citi, Wells Fargo, and Bank of America. Not so much for Goldman Sachs (GS $334), however. The $112 billion global investment bank missed revenue expectations, raking in $12.22 billion as opposed to the $12.76 billion analysts were expecting. In addition to the 5% drop in revenue from the same quarter last year, net income also fell. The bank earned $3.23 billion for the quarter, or 18% less that last year. A major reason for the miss stems from Goldman’s decision to jettison its Marcus personal loan unit. The fatter margins at the other big banks have been due in good measure to their consumer loans (they have been able to charge higher rates to customers); meanwhile, Goldman has been reducing its exposure to this segment. In addition to ridding itself of Marcus, management announced it would begin the process of selling off its GreenSky unit, a specialty lender it bought just over a year ago. GreenSky was, ironically, designed to be a bolt-on acquisition to Marcus. Unlike the other big banks, Goldman generates most of its revenue from its Wall Street dealings; understandably, considering higher rates, recession concerns, and the market downturn, this activity has been muted. An area they should have done well in is fixed income, yet they also disappointed in that arena. Fixed income trading revenue dropped 17% from last year, while equity trading revenue fell 7%. If there was one positive nugget to point to in the quarterly results it was the company’s asset and wealth management division, which notched a 24% revenue increase—to $3.22 billion. But CEO David Solomon’s about face on consumer finance should send up red flags for investors. After all, just a few short years ago they were told that this would be a major catalyst for the company’s growth going forward. Full disclosure: Not only has Financials been one of our most underweighted sectors over the past two years, we haven’t owned Goldman Sachs for over a decade—and have no plans to add it to any strategy anytime soon. We see little for investors to get excited about here.
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SI $2
SBNY $70 13 Mar 2023 |
One week, three bank failures; shades of 2008?
We all recall the nightmarish string of bank failures back in 2008 stemming from toxic mortgage-backed securities poisoning the capital of these doomed giants. While we are certainly not at that level of concern right now, the failure of three banks over the course of a few days has the markets on edge. First came Silvergate Capital (SI $2), the premier lender to the cryptocurrency industry. The California state-chartered bank, which provided financial services such as commercial banking, business lending, and cash management to its customers, sent up red flags when it announced it was closing its Silvergate Exchange Network which served as a bridge between traditional banking services and the crypto world. Then the company said it would not be able to file its required 10-K to the SEC on time. That was all it took for a run on the bank: customers began pulling out some $8 billion worth of deposits, forcing Silvergate to secure a loan from the Home Bank Loan system. Furthermore, the bank was forced to sell the solid assets on its balance sheet such as Treasuries and securitized residential mortgage loans at discount prices to fund the customer withdrawals. These assets were discounted because of the Fed rate hikes—the bank simply didn’t have the luxury of waiting for the securities to mature at par. By late in the week, Silvergate announced it was winding down its operations. Sadly, the story did not end there. Silicon Valley Bank, the major arm of SVB Financial Group (SVB, trading halted), collapsed on Friday, becoming the second-largest bank failure in US history (Washington Mutual, which failed during the financial crisis, was the largest). The FDIC quickly moved in to take control, creating a new entity called the Deposit Insurance National Bank of Santa Clara. SVB was the 16th largest bank in the country, with around $210 billion in assets, and was the go-to bank for tech startup firms—many of whom wouldn’t have been able to access funding otherwise. As for cryptocurrency shops, the preferred lender behind Silvergate has been New York-based Signature bank (SBNY, trading halted). On Sunday, regulators closed the doors of this institution, which held nearly $100 billion on deposit. New York Governor Kathy Hochul said this did not amount to a taxpayer bailout, as the funds required to pay back depositors would come from "the fees assessed on all banks." She was referring to the Deposit Insurance Fund, which will guarantee money above and beyond the FDIC limit—or "uninsured" funds. These closures lead many to wonder why companies would not have better risk management with respect to their deposits, spreading around their money to a number of different financial institutions. For example, streaming device company Roku said it had some $500 million—or 26% of its cash reserves—in an account at SVB. A who’s who list of prominent companies have already announced they are in a similar situation. Per one seasoned venture capitalist, if a tech startup received loans from a bank, that institution pretty much demanded that the bulk of their cash be kept at the firm. Furthermore, tech companies overwhelmingly trusted SVB, Silvergate, and Signature. They simply couldn't believe there would ever be a run on these banks. In the wake of these meltdowns and with rates much higher rates than a year ago, these tech startups must now be wondering where they can possibly turn for new sources of funding. The troubles in Silicon Valley won't go away with the government's promised backstop. Two thoughts come to mind. As the interest rate hike cycle began, we were told how this would help the major financial institutions, as their net interest income—the difference between what they could make on loans and what they had to pay on investors’ deposits—would increase greatly. We didn’t buy that argument this time around, and Financial Services remains our most underweighted sector. Second thought: Many experts have been saying for the past several months that the Fed would continue to raise rates until they “broke things.” Mission accomplished. If the hot jobs numbers and the recent inflation reports were pointing to a 50 bps hike at the March meeting, the broken pieces laying on the floor around them should give the Fed pause. We still believe a 25-bps hike will be announced on the 20th, but odds for an immediate pause are growing. And 50 bps is now all but off the table. |
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CS $5
UBS $15 20 Oct 2022 |
Credit Suisse looks a lot like Lehman in 2008; could the global bank really fail?
Credit Suisse Group AG (CS $5), founded in 1856, is one of the two major Swiss banks and an important player in global finance; the Zurich-based firm maintains offices in all major financial centers around the world. Going into the 2008 global financial crisis, the bank had a market cap of $90 billion; today, it is a shell of its former self, boasting a market cap of just $12 billion. While it survived the global banking crisis, recent scandals have driven investors away and have some analysts handicapping a nightmare scenario: insolvency. The recent scandals began when British financial services firm Greensill Capital, in which Credit Suisse had some $10 billion invested, went belly up, causing CS clients to lose around $3 billion. Then came the Archegos Capital (Bill Hwang) debacle. While the privately held company primarily managed the assets of family office group trader Hwang, CS was a major lender to the firm. As Archegos was imploding and before Hwang was arrested for securities and wire fraud, the company lost $20 billion in a matter of days. Credit Suisse itself was out $4.7 billion, causing a half-dozen executives at the bank to lose their jobs. In February of this year, the bank was charged with money laundering (it was later found guilty by a Swiss court) in connection with a Bulgarian drug ring. Shortly after that, details of approximately 30,000 customer accounts at the bank—worth over 100 billion Swiss francs in aggregate—were leaked to a German newspaper. The leaks exposed customers involved in all types of lurid behavior, from human trafficking to torture. Finally, and most recently, it was discovered that executives at the bank urged certain investor-customers to destroy documents linked to Russian oligarchs who had been sanctioned following the invasion of Ukraine. This past summer, Credit Suisse Chairman Axel Lehmann replaced the bank’s CEO with its head of asset management, Ulrich Koerner, and announced a strategic review of its investment banking unit. The bank’s upcoming earnings release—slated for 27 October—is expected to show a reduction in the bleeding from Q2, but that will not be enough to quell investors. A comprehensive restructuring plan is needed, but we doubt the current management hierarchy is up for the job. That said, we don’t believe the bank faces any real threat of insolvency—it is “too big to fail.” There has been some intriguing speculation recently that the other major Swiss bank, UBS (UBS $15), with its $52 billion market cap, could swoop in and save Credit Suisse via a merger. While we don’t see that scenario playing out (Swiss regulators would not be keen on the idea), a positive upside surprise on the 27th could move the shares higher. Analysts run the spectrum of expectations, from CFRA’s $3.50 price target to Morningstar’s $10.60 fair value. While it may be fair to say the company is not going the way of Lehman, the risk of it languishing while management tries to clean up its mess is too great to justify an investment—even at $4.58 per share. |
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WFC
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The misery keeps growing at Wells Fargo
(14 Jul 2020) Considering what the bank did to clients, it is hard to have any sympathy for Wells Fargo (WFC $22-$24-$55); we'll reserve that emotion for investors who own the stock. The latest round of horrendous news on the $100 billion financial services firm came in the form of its Q2 earnings report. The company reported its first quarterly loss since 2008 as it set aside nearly ten billion dollars for credit losses—about 72% more than analysts were expecting and over one-third of the $28 billion written off by all banks in the quarter. That is money the bank expects to need for loans that went bad ("provisions for bad loans"). The company's 8.6% dividend—so high because the shares are so low—could obviously not be sustained by a company which is bleeding cash. Therefore, the bank announced it would be slashing that dividend by 80%—from $0.51 to $0.10 per share. The one saving grace for banks in an era of ultra-low interest rates has been their trading activity, which has been doing exceptionally well. Which bank doesn't have an institutional trading desk? Yep, Wells Fargo. Shares of WFC fell about 7% after the earnings report was released. Looking for a bank that 1. is still undervalued and 2. has a trading desk? Consider Citigroup (C $51), whose shares are off roughly 40% from their January highs. |
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JPM
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JP Morgan raises borrowing standards for home buyers and the middle class will be the group paying the price. (12 Apr 2020) There is no doubt that Congress' politically-motivated antics, combined with the political hacks at Fannie Mae and Freddie Mac at the time (who got rich in the process—remember Franklin Delano Raines?), directly led to the financial meltdown of 2008-2009. Of course, the big banks were willing accomplices, as Congress gave them cover to make loans they knew would probably never be repaid—they just repackaged them in giant hot potatoes and made sure they weren't the ones who got burnt. At first blush, and keeping the financial meltdown in mind, JP Morgan's (JPM $77-$103-$141) latest tightening of home loan standards—raise the credit score required and demand a 20% down payment to help assure the loans don't go south—might seem like a good idea. The bank argues they are simply using proper risk management techniques forced upon them by the economic fallout of the pandemic. But dig a little deeper, and something smells rotten. Let's turn the standard five economic quintiles into three to illustrate our point: the wealthy, the middle class, and low income households. The so-called "wealthy" will have no problem with the 20% down payment. Low income households can take advantage of the company's Chase DreaMaker Mortgage Program, which slashes the credit score requirement and just requires a 3% down payment (which can be borrowed!). That leaves the wide swath known collectively as the middle class. Assuming you pass the credit score requirement (JPM changed it to 18 points above the average American's score of 682), a $425,000 home would cost you $85,000 for the down payment alone—regardless of your ability to pay back the loan based on income levels. We imagine many will cheer this decision, but we don't: something tells us it won't reduce the number of loans going bad (DreaMaker will make sure of that), but it will reduce the number of middle class Americans who can buy a home, at least through JP Morgan. As if the home builders aren't going to be hit hard enough from the pandemic. Banks can be an effective tool for Americans wishing to get ahead in life—from providing home loans to funding a new or existing business. But a word of caution: Never consider the banks an ally. Their revenues are generated from customers paying interest on loans (probably confiscatory if the loans are on revolving credit) and service/account fees. On assets held, the banks make their money off the difference between what they pay savers and what they charge borrowers. None of this is necessarily bad, but the financial goal in life should be to have enough money to serve as your own bank! Chase's comical name for their credit card aside, that is the real meaning of "freedom."
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UBS
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As earnings soar at the big US banks, results from UBS highlight the economic challenges of developed Europe. (21 Jan 2020) We have to be careful not to play the mainstream media game of shaping the facts to fit our narrative, but recent reports coming from the big European banks certainly fit well with our rather dour economic outlook for developed Europe. Shares of the $46 billion Swiss bank UBS Group AG (UBS $10-$13-$14) were trading off around 4% at Tuesday's open following news that it had missed nearly all of its key 2019 targets. Net profit from the investment banking unit fell Y/Y from $1.67B to $1.06B, while net interest income fell from $5.05B in 2018 to $4.5B last year. This led to a series of management downgrades for the year ahead—on profit, assets under management, and dividend growth. The bank is trying to staunch the bleeding after losing nearly $5 billion in assets in Q4 alone. What's worse (for Europe) is the fact that UBS's downgrades come on the heels of both Credit Suisse (CS) and Deutsche Bank (DB) lowering their own expectations for the year ahead. The European banks' woes are juxtaposed by record profits rolling in for their major US counterparts. As we wrote in our 2020 Outlook issue of The Penn Wealth Report, we are underweighting developed Europe but see the emerging markets as one of the year's major success stories.
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BAC
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Bank of America's Q2 results show strong growth, solid consumer activity. (17 Jul 2019) Despite low interest rates, which are bound to head lower this year, Bank of America (BAC $23-$29-$32) reported strong revenues and profit for the quarter. Revenues rose from $22.55 billion last year to $23.08 billion in the most recent quarter, while the bank's net profit rose from $6.78 billion to $7.35 billion—a fat 32% profit margin. In the earnings conference call, CEO Brian Moynihan cited solid consumer activity across the board, and noted a 5% uptick in spending by bank customers over the same quarter last year. Now that these metrics are in, it will be interesting to see how the major and regional banks absorb a rate cut or two. We currently hold four financials (out of 40 positions) within the Penn Global Leaders Club: a global bank, a capital markets firm, and two credit services firms. We continue to underweight financials: 8% versus the 16% S&P 500 benchmark.
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DB
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Investors aren't biting on Deutsche Bank's restructuring effort. (08 Jul 2019) Deutsche Bank (DB $7-$7-$13), Germany's top private bank, announced a major restructuring effort on Monday (something like its third in five years), and investors were underwhelmed. So much so, in fact, that they drove shares of the iconic German lender down over 6%, to $7.54. As part of the restructuring, 18,000 DB workers will lose their situations by 2021. We will discuss this story in further detail in the upcoming Penn Wealth Report, or you can visit the Penn Wealth channel at Apple News.
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DB
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Deutsche Bank falls to a new all-time low as Fitch downgrades the German bank yet again. (10 Jun 2019) Deutsche Bank (DB $7-$7-$13) is to Germany what JP Morgan (JPM) and Bank of America (BAC) combined are to the United States. As the largest private financial institution in the country, DB is a symbol of German productivity...and pride. That pride took another hit this past week as ratings agency Fitch downgraded the bank's creditworthiness to BBB—just two notches above "junk" status. Fitch cited low profitability and a murky strategic plan as two reasons for the downgrade. The bank's woes serve as a microcosm for the EU's largest economy—Germany barely missed slipping back into recession earlier this year, and rates remain so low that the 10-year German bund still carries a negative interest rate. Making matters worse, the German banking system is a convoluted machine consisting of gears which seem to grind, constantly in conflict with one another. Furthermore, the bank must not only deal with regulation by the central bank (Bundesbank) and the Financial Regulatory Authority of Germany, it is also under the auspices of the EU's European Central Bank. It is no wonder that profitability continues to elude DB while the major American banks have seen their profit grow considerably since the 2007 global banking crisis. Not only have we been underweighting developed Europe, we consider the European banking system to be at the epicenter of the region's troubles. We would not hold any European financial institution right now.
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BBT
STI |
BB&T to buy SunTrust, creating the sixth-largest bank in the US. (07 Feb 2019) BB&T Corp (BBT $41-$51-$56) is a $40 billion regional bank and a regular member of the Penn Strategic Income Portfolio. SunTrust Banks (STI $46-$65-$75) is a bit smaller ($30 billion) regional bank with operations in the same geographical area as BB&T—the Southeastern United States. In a move that makes a lot of sense, the two companies have announced plans to merge into one entity, creating the sixth-largest bank in the US. The primary driver of this deal has been the move by so many Americans to online banking. The days of walking into a bricks-and-mortar bank to transact business are rapidly going by the wayside. The synergy created by this merger should give the new entity—to be named before the deal closes—a much larger digital presence while helping the bottom line due to increased efficiencies. The all-stock deal will give BBT investors 57% of the new company, with STI shareholders controlling the remaining 43%. Regional banks have historically been a great place to dig for hidden gems—high dividend payers with clean balance sheets, under the radar of most investors. Technology (FinTech, online banking, etc.) may be changing that, however. The hurdle to get into the banking business, while still tall, is not near as difficult to clear as it once was. With online banking transforming the industry, regional players must adapt or face obscurity.
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JPM
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JP Morgan shares fall on revenue, profit miss. (15 Jan 2019) For fourteen straight months, $335 billion banking giant JP Morgan (JPM $91-$99-$119) beat Wall Street estimates. That string has ended, as the company missed on both revenue and income estimates for 2018Q4, driving the stock down about 2%, to $99 per share. But just because the bank didn't hit the Street's estimates doesn't mean they aren't still growing. Revenue for the quarter came in at $26.8 billion, which represents a 15% quarterly YoY jump, and net income came in at $7.07 billion, a whopping 67% spike from the same quarter in 2017. Breaking down the numbers: consumer, community, and commercial banking beat estimates, while the investment and wealth management side (think trading) missed. The drop on the trading side may seem odd, considering the whirlwind of trade activity in the ugly fourth quarter, but it actually stems from a big drop in fixed income trading as investors weigh the Fed's next move. JP Morgan is one of the most well-run banks in the world, thanks in good measure to CEO Jamie Dimon's skilled leadership. Below $100 per share, this bank provides a good entry point.
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DB
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More evidence that the German economy is floundering? Look no further than their prized bank. (29 Nov 2018) Back in January, we wrote a brief article on the $1.8 billion charge that Germany's leading private bank, Deutsche Bank (DB $9-$10-$20), would be taking thanks to tax reform in the US. At the time, DB was selling for $20 per share and had a market cap of $40 billion—down from its $60 billion market cap back in 2011. Apparently, a few "enterprising" bank officers tried to claw back some of those losses by helping some shady customers set up off-shore bank accounts to launder money. On Thursday morning, nearly 200 German police officers, prosecutors, and tax inspectors raided Deutsche Bank's offices in Frankfurt and other locations searching for evidence. Over 900 bank clients may have accounts at the DB subsidiary in the Virgin Islands at the center of the investigation. Shares of DB were trading down just over 3% on news of the raids. Is DB a bargain at $9.50 per share? We don't believe so. The bank had aspirations of competing against their American counterparts for big institutional deals, but this dark cloud hanging over the institution has repelled potential clients. Furthermore, the European Central Bank is not taking the proactive steps necessary (unlike the US Fed) to create a positive environment for the big European banks. Stick to North American financial institutions for now, i.e. US and Canadian commercial banks.
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JPM
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Bank earnings are finally rolling in, and so far so good. Perhaps more than any other industry, Wall Street always eagerly awaits the quarterly results of the big banks to gauge just how well the US economy is doing; after all, these financial institutions provide the lubricant which greases that economy. To that end, Jamie Dimon's JPMorgan Chase (JPM $88-$107-$119) just set the stage for a market rally. The $364 billion bank, and America's biggest lender, just notched record-setting second quarter profits. Revenue increased 6% from the same quarter last year, to $28 billion, and net income surged a whopping 18% year over year. The firm reported increased trading activity, both in equities and at the fixed income desk, and commercial lending was robust over the three-month period. We have been predicting a strong second half for the markets, and this is a good signpost along the way.
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BAC
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Bank of America reports better-than-expected revenue growth, earnings
(16 Apr 2018) It was a good way to start the trading week: Bank of America (BAC $22-$30-$33) beat expectations on both the top and bottom lines with its first-quarter earnings report, released Monday morning. Revenues came in at $23.1 billion for the first three months; a beat of $40 million and 3.8% better than the same quarter last year. Income for the quarter was an even brighter story, with the company earning 30% more ($6.9B) than the first quarter of 2017 ($5.3B). Consumer banking accounted for nearly 40% of the income figure, providing further evidence that Americans are feeling better about their economic situation—and are willing to spend. |
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WFC
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On Yellen's last day, the Fed slams Wells Fargo with much more than just a fine
(06 Feb 2018) What Wells Fargo (WFC $49-$56-$66) did to their clients, from mom-and-pop account holders to institutional investors, is quite disgusting. More specifically, what Wells Fargo did to pressure their brokers into screwing over their clients is appalling. The insult to that injury came when a cheshire cat-grinning CEO, John Stumpf, announced on the business networks that none of this was his fault, and that he was the best person to lead the company going forward. He was fired within weeks. Last Friday, on Janet Yellen's last day on the job, the Federal Reserve issued an unusually-tough penalty on the $273 billion bank: it capped its growth potential. The order, which calls for certain board members to leave and capped the banks total assets, helped precipitate a 12% drop in the share price. We had no desire to be in the stock before this decree was issued; now, any current investors should reevaluate exactly why they are holding the tainted bank in their portfolio. |
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DB
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Tax reform loser: Deutsche Bank will take $1.8 billion charge thanks to tax reform across the pond
(05 Jan 2018) There have already been a lot of corporate winners in the US thanks to the new tax laws, but what about overseas corporations? As could be expected, what is good for US-centric companies with respect to tax policy is bad for European banks. Case in point? Deutsche Bank (DB $16-$19-$20) was off roughly 6% following the German company's announcement that it would have to take a 1.5 billion euros ($1.8 billion) hit in its fourth-quarter thanks to the decreased value of its "deferred tax" assets in the US—a direct result of the lower US corporate tax rate. As money comes flooding back into the US (which was parked abroad to avoid the 35% tax hit), look for European banks to get pounded down even further, despite the increase in economic activity on the continent. We are increasingly looking for overseas investments to diversify after the 2017 run-up in the US, but we are avoiding the European financials. |
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WFC
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Another day, yet another story of how Wells Fargo screwed its clients
(29 Nov 2017) Two days ago it was reported that Wells Fargo (WFC $49-$56-$60) bankers, in an attempt to secure greater bonuses and avoid management's wrath, had been illegally ignoring fee arrangements with clients, overcharging them for currency trades. This forced the firing of four FOREX bankers at the firm and the launching of a federal probe. Today, news has surfaced that a federal probe into the bank's auto insurance and mortgage business may be launched, and the firm has been labelled a "repeat offender" by regulators. Earlier this year, Wells admitted that it had forced over 600,000 customers who financed their auto purchase with the bank to buy coverage they didn't need. The bank also admitted that about 20,000 customer vehicles were repossessed from those refusing to pay. How is all of this corruption affecting the stock's price? WFC is flat for the year while the Financial Select Sector SPDR is up 16%. |
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HSBC
RY |
Europe's largest bank reports an enormous surge in profit
(30 Oct 2017) London-based HSBC (HSBC $37-$49-$51), Europe's largest bank, swung to a third-quarter profit on the back of aggressive cost-cutting measures and an increased push into Asia (HSBC actually stands for "Hongkong and Shanghai Banking Corporation"). On revenues of $13 billion, the $200 billion banking giant posted a net profit of $3.24 billion versus a loss of $204 million in the same quarter of 2016. Don't be too quick to shore up your financial sector or international holdings with this company, however; HSBC still has a P/E ratio of over 100. Our favorite global bank remains the Royal Bank of Canada (RY $61-$79-$81), which we own in the Penn Global Leaders Club. |
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WFC
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Another million+ fraudulent accounts uncovered by Wells Fargo
(31 Aug 2017) After yet another review into its illegal practices, Wells Fargo (WFC $44-$51-$60) now admits that up to 3.5 million fake accounts for real customers were created between 2011 and 2016. This number far exceeds the 2.1 million fake accounts previously reported. This condition was completely created by senior management’s sales practices and pay structure (and lack of proper supervision), which fostered the illegal practice of opening accounts without clients’ permission. Another $2.8 million in punitive charges will be paid by the bank, on top of the $3.5 million or so already shelled out. At least CEO John Stumpf was ultimately canned for the criminal behavior of the bank. |
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BAC
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(18 Jul 2017) Bank of America beats on virtually every metric in Q2, but shares fall
Financial powerhouse Bank of America (BAC) beat virtually every metric over the course of the second quarter, as divulged in its earnings report released Tuesday, but the stock was off about 1% at the open. Revenue hit $23 billion for the quarter, up from $20.4 billion in Q2 of '16; profit rose from $4.23 billion last year to $5.27 billion this year. Increased activity due to business and consumer confidence, increases in interest rates, and a less onerous regulatory environment all added to the outperformance. |
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WFC
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(10 Apr 2017) Wells Fargo board claws back $75 million from two fallen executives. Wells Fargo's (WFC $44-$55-$60) board of directors just initiated two of the biggest clawbacks in the financial services industry for the bank's phony account scandal. Former CEO John Stumpf, who always seemed a little too slick for us, had another $28 million of pay clawed back, on top of the $41 million he gave up when he was forced to resign last October. The real culprit (at least the one at the center of the storm), former community bank director Carrie Tolstedt, had $47.3 million clawed back, on top of the $19 million she had already given up. Tolstedt, who was known for her taskmaster's approach to squeezing new accounts out of her reps, was also retroactively fired back to 2015. Don't feel too bad for either of them. Stumpf, who once proclaimed Tolstedt the "best banker in America," earned $286 million in the five years before he was forced to resign. (Photo: Carrie Tolstedt, former executive VP of community banking)
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WFC
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(20 Mar 2017) Wells Fargo sees enormous drop in new accounts since scandal. Global banking giant Wells Fargo (WFC $44-$58-$60) reported a stunning 43% year-over-year drop in new checking accounts being opened, while new credit card applications fell even more, down 55% in the same time period. The company is doing alright with existing customers, however, with a jump in existing credit card purchase volume. Quite frankly, we count the latter as a win for the bank and a loss for the American consumer.
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DB
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(06 Mar 2017) Deutsche Bank tanks after announcing another infusion of cash. German banking giant Deutsche Bank (DB $11-$19-$21) announced that it will seek another $8.5 billion in fresh capital to shore up its ailing balance sheet, driving shares downward. This is the third time since 2013 that the regional European bank has been forced to tap the market for cash, and the bank is in its second major reorganization effort within the past eighteen months.
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JPM
BAC WFC |
(13 Jan 2017) Big banks release quarterly earnings, one dud stands out. Several big banks announced earnings today. Jamie Dimon's JP Morgan (JPM $53-$88-$88) said his firm saw double-digit growth in deposits and record credit card sales, pushing quarterly earnings above and beyond analysts' expectations. Ditto Bank of America (BAC $11-$23-$23), which reported earnings of 40 cents per share versus an expected 38 cents per share. The dud? Wells Fargo (WFC $44-$56-$58), which announced both revenue and profit that fell short of what the street was looking for. A million fake accounts don't help generate much income, do they?
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BMDPD
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(27 Dec 2016) World's oldest bank in dire financial straits. The oldest surviving bank in the world, Italy's Monte dei Paschi (pronounced monty de PASS key) (BMDPD $5-$7-$140), has a much bigger capital shortfall than previously reported. The third-largest bank in Italy needs an infusion of over $9 billion, and it must come up with €5 billion or so to meet the ECB's end-of-year deadline. Last week the Italian government set up a €20 billion backstop fund to help the troubled banks. Unfortunately, this one bank's woes might just about drain the fund.
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