Greetings,
US CPI rose by 2.9% YoY in June, the highest reading since March 2012 as inflation continues its march higher and above the Fed’s 2% target. The Fed chair was upbeat about the economy but noted that it would be “very challenging” for the Fed if inflation rose and the economy weakened at the same time.
Consumer credit increased by $26.4 Bn in May, the largest monthly jump in 6 months, to an all-time high of $3.9 Tn. Growth was driven by a $9.8 Bn increase in revolving credit card debt. Credit growth has been averaging 7.6% fueling consumer spend-driven GDP growth. The Fed’s latest G-19 report can be found here.
Source: Federal Reserve, PeerIQ
The climate for fintech financings has improved substantially over the past year. Funding for fintech startups rose by 40% in the 2nd quarter continuing a supportive capital markets environment for fintech companies. The increase in funding followed successful public markets debuts by companies like Ayden NV, GreenSky and the sale of Clarity Money to Goldman Sachs.
On the regulatory front, the NY Department of Financial Services released a report on Online Lending and made the following recommendations that, on balance, are a win for incumbent financial services firms and a potential regulatory risk for online lenders. Below is a summary of recommendations and our take.
- Equal Application of Consumer Protection Laws – New York has strong consumer protection laws and regulations that apply to financial institutions, including those relating to transparency in pricing, fair lending, fair debt collection practices, and data protection. These protections should apply equally to all consumer lending and small business lending activities.PeerIQ Take: Applying TILA and Reg Z-type consumer disclosure standards to small business lending is a standard small business lenders voluntary adhere to today (see the “Smart Box” disclosure initiative for instance). However, small business lenders are generally not subject to consumer lending usury caps. The recommendation would limit the ability of small business lenders to extend credit to higher risk-borrower segments.
- Usury Limits Must Apply to All Lending in New York – Easy access to credit at usurious rates has long been prohibited in New York and allowing institutions to bypass this sound regulatory structure is counterproductive to sound economic development and consumer protection. A loan is a loan from a borrower’s perspective, and the borrower deserves to get the benefit of New York’s protections, whether the borrower borrows from a bank or credit union or from an online lender.
PeerIQ Take: NYS is asserting its consumer protection authority and may be challenging federal pre-emption and rate exportation model that many national banks, credit card issuers, and online lenders rely on.
- Licensing and Supervision – New York State chartered banks, credit unions and licensed non-depositories are subject to regular examinations by the Department and, if applicable, federal agencies, that assess the overall condition of these regulated institutions from a safety and soundness perspective and proactively address concerns before an issue arises that could impact the institution, the broader market, or consumers. Currently, many online lenders remain unlicensed in New York with no direct supervisory oversight from a safety and soundness or consumer compliance perspective. Direct supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery, and that all lenders operate their businesses and conduct their activities in a safe and sound manner so that they may continue providing access to New Yorkers, and to prevent potential risk to our financial markets in New York.PeerIQ Take: “Safety and soundness” language is an explicit reference to the regulatory standard applied to FDIC-backed deposit taking institutions. Applying a similar standard to lightly capitalized lenders that do not have access to low-cost stable deposit funding would advantage traditional regulated banks over online technology firms.
Mixed Bank Earnings – JP and Citi beat, Wells Fargo on defense, yield curve concerns
Bank earnings season kicked off today with mixed earnings reports. JP Morgan and Citi beat earnings expectations, Wells Fargo’s earnings were disappointing as the bank continues to resolve its legal issues. Bank stocks were lower on the day despite strong earnings from JP and Citi as investors worry about the impact of a flattening yield curve on loan margins.
JPM reported revenue of $28.3 Bn, up by 6% YoY, and net income of $8.3 Bn. Trading revenue increased by 13% YoY to $5.4 Bn and ROE rose to an attractive 14%. JPM also reported loan growth of 7% YoY and growth in client investment assets of 12% YoY.
CEO Jamie Dimon noted that the bank sees healthy US economic growth and high business sentiment. Dimon noted the bank’s emphasis on technology investments by saying, “Our strong, diversified franchise generates significant capital to invest in technology, bankers, products and markets. This quarter alone we announced new card products, the national rollout of our all-mobile bank, Finn, new branches in the Washington D.C. area, and plans for a more significant investment in China.”
Citi’s revenue grew by 2% YoY to $18.5 Bn, also driven by growing loans. Net income grew by 16% YoY to $4.5 Bn. Citi saw a Net charge-off rate of 2.72%, up from 2.58% a year ago, on a loan portfolio of $192 Bn.
Wells Fargo’s earnings disappointed once again as revenue dropped by $381 Mn to $21.6 Bn. Net Income was also down from $5.9 Bn to $5.2 Bn YoY. The loan book was down by $13.1 Bn YoY on lower auto, legacy consumer real estate and commercial real estate loans. Net charge-offs on the credit card portfolio dropped slightly to 3.61% from 3.69% YoY, and dropped on the auto portfolio from 1.66% to 0.94%.
We will track all bank and fintech earnings in our Lending Earnings Insights Tracker. The previous tracker can be found here.
Rising US Inflation
US CPI rose by 2.9% YoY, its highest reading since March 2012. This week we look at various inflation measures and how they stack up against the Fed’s 2% inflation target.
Consumer Price Inflation (CPI) is measured using a basket of goods and services. We will focus on CPI-U which measures the change in the prices of this basket for urban consumers, and covers 93% of the US population.
Measured Inflation vs the Fed’s Inflation Target
The chart below shows that PCE core has only recently come close to the Fed’s 2% target. CPI ex-Food and Energy surpassed the Fed’s target a few months back and continues its upward march. The more volatile CPI reading has reached 2.9%, its highest level since March 2012.
Source: BLS, BEA, PeerIQ
Market Implied Inflation Measures
The treasury market indicates market participants’ expectations about future inflation. The difference between the yields on constant maturity treasury bonds and the corresponding yields on inflation-protected bonds is known as breakeven inflation. Breakeven inflation is the market’s expectation of inflation in the economy.
For example, the 10-yr treasury yield of 2.85% and the 10-yr Treasury Inflation Protected Security yield of 0.74% on 6/29/18, implies a breakeven inflation of 2.11%.
The chart below shows that market participants have a bifurcated view on inflation over the short-run and long-term. Over the next two years, market participants expect the inflation to run below the Fed’s target (likely due to GDP growth slowdown concerns). However, on a 5 to 10-year basis, participants expect inflation to run somewhat above the 2% inflation level.
Source: Bloomberg, PeerIQ
Rising inflation in an economy that is also slowing puts the Fed in a difficult bind. Chairman Powell is keeping an eye on this scenario and has called it “very challenging”.
Reach out to PeerIQ to learn more about our data & analytics, and where we see quality loan growth, credit risks and opportunities.
Industry Update:
- Funding for U.S. Fintech Startups Rose 40 Percent Last Quarter (Bloomberg, 7/12/18) Funding for fintech startups rose by 40% in the 2nd quarter continuing a supportive capital markets environment for fintech companies.
- Consumer Prices Below Forecast on Utilities, Hotels (Bloomberg, 7/12/18) US CPI rose by 2.9% YoY in June, the highest reading since March 2012 as inflation continues its march higher and above the Fed’s 2% target.
- Fed’s Powell Says the U.S. Economy in ‘Good Place’ But Trade Is a Risk (Bloomberg, 7/12/18) The Fed chair was upbeat about the economy but said that it could get “very challenging” for the Fed if inflation rose and the economy weakened at the same time from tariff battles.
- Consumer Credit in U.S. Jumps in May by Most in Six Months (Bloomberg, 7/9/18) Consumer credit increased by $26.4 Bn in May driven by a $9.8 Bn increase in revolving credit card debt. Credit growth has been averaging 7.6% fueling spending-driven GDP growth. The Fed’s report can be found here.
- NY DFS Report on Online Lending (NY DFS, 7/11/18) The NY DFS made recommendations on equal supervision, licensing and regulation for online and offline lenders.
- JPMorgan, Citigroup Report Higher Profit, Boosted by Stronger Economy (WSJ, 7/13/18) JPM reported revenue of $28.3 Bn, up by 6% YoY, with trading revenue increasing by 13% YoY and loan growth of 7% YoY.
- Citigroup Earnings Lifted by Growing Loans (WSJ, 7/13/18) Citi’s revenue grew by 2% YoY to $18.5 Bn, also driven by growing loans as net income grew by 16% YoY to $4.5 Bn.
- Wells Fargo shares fall after weak second quarter shows its fake account scandal still taking a toll (CNBC, 7/13/18) Wells Fargo’s revenue and earnings dropped as the bank continues to resolve its legal issues.
- PayPal is leading a payment company acquisition binge (Dun and Bradstreet, 7/9/18) PayPal is looking to spend up to $3 Bn a year on acquiring fintech payments platforms to keep up its growth in the payments space.
- Walmart in Talks to Move Credit-Card Partnership to Capital One (WSJ, 7/12/18) Walmart might be moving its store card business from retail card leader Synchrony to Capital One and might also launch a credit card specifically for its online platform Jet.com.
Lighter Fare:
- The Professor Who Helped Make Belgian Soccer a World Power (WSJ, 7/9/18) Werner Helsen studied the practice routines of German violinists to design Belgium’s youth coaching program, that produced this World Cup’s bronze medalists.