This week, we dig into bank earnings season and the Plaid acquisition news, but first, we recommend a market research report from FT Partners on the rise of digital challenger banks.
Bank Earnings Season
Overall, the banks, particularly the biggest banks across the land, delivered strong returns.
Two standouts – rivals Morgan Stanley and Goldman Sachs. GS revenues were flat and earnings were down due to continued investments in Marcus and a reserve for the 1MBD case.
Morgan Stanley’s stock price jumped double digits and led the group. The comparison is forcing investors to take sides on the future value of the Marcus franchise. Ironically, Morgan Stanley’s market cap is $91 Bn — ahead of GS by $4 Bn — roughly the same delta that GS has plowed into Marcus.
GS is making the case that long-term, a larger deposit base will enable GS to close the ROE gap (which lags JPM about 7%) and has placed GS’s stock in a 10-year trading range. GS executives are expected to provide greater transparency on the performance of Marcus to tell a better story.
Meanwhile, JPM is delivering a whopping 30% ROE from its consumer – strong performance given that it also had the largest deposit franchise at $1.3 Tn.
The Marcus Debate
Markets that were excited about FinTech mania in 2016 do not appear to be crediting GS for Marcus – for now. Morgan Stanley sidestepped the “Marcus envy” that bit a number of large banks and focused on its core business.
Banks are taking sides. The debate also turns on identity: “We are a technology firm” (the view of GS and now Wells Fargo) vs. “we are a technology-enabled bank” (Bank of America and many of the rest). The pendulum appears to be shifting to the latter – see for instance the Ally & Better Mortgage deal or the rise of infrastructure firms such as nCino.
However, GS is still early in its build-out of a consumer franchise and has made a number of bite-sized acquisitions that accelerate it towards its target customer experience. Also, we note GS is an investor of Better Mortgage, Plaid, and many FinTechs. Heads we win, tails you lose?
Bank Earnings Highlights
JPMorgan Profit Jumps on Strong Trading Quarter (WSJ, 01/14/2020)
- The New York-based bank’s revenue increased 9% YOY and profits jumped.
- Continued 30% ROE for the consumer banking unit — despite falling rates.
- Consumer Bank revenue increased 3% YOY to $14.04 Bn, and profit rose 5% to $4.23 Bn.
- Link to JPM Investor Deck
Wells Fargo CEO: A Wonderful Bank That Made ‘Some Terrible Mistakes’ (WSJ, 01/14/2020) Wells Fargo experienced a 53% profit drop in Q4 2019 earnings.
- Wells Fargo took a $1.5 billion charge for costs stemming from the scandal that has dogged it since 2016, fueling a 53% profit drop.
- New CEO says Wells Fargo needs to be a technology company.
Investment Banking Propels Citigroup’s Fourth-Quarter Profit (WSJ, 01/14/2020)
- Citi reported that profit rose 15% YOY on a surge in investment-banking operations.
- Return on tangible equity improved to 12.1%. 2020 ROTE target lowered from 13.5% to 12%-13%.
Goldman Profit Falls as Bank Braces for 1MDB Fine (WSJ, 01/15/2020)
- GS profit fell 24% in the fourth quarter due to 1MDB reserve and capex. Revenue flat.
- Stock price up 20% since October, but lags peer group on a price/book basis.
- GS to provide segment reporting breakout for consumer lending business.
Bank of America Earnings Slip (WSJ, 01/15/2020)
- Bank of America Corp. said Wednesday that fourth-quarter profit fell 4%.
- The second-largest U.S. bank by assets said it earned $6.99 billion in the quarter, down from $7.28 billion a year earlier.
- Per-share earnings were 74 cents, more than the 68 cents predicted by analysts polled by FactSet.
Morgan Stanley Clears Bar in 2019, Then Raises It (WSJ, 01/16/2020)
- Q4 2019 profit increased 46% to $2.24 billion, vastly exceeding analyst revenue and earnings expectations.
- ROE at 12.9%. New targets 13%-15% over the next few years, with the ultimate aim of 17%.
After Money2020, we noted “payments” and “infrastructure” are hot. We have to level that up from “hot” to “it’s so hot the floor is lava.” Revenues were not disclosed, we are guessing a multiple of 30x current revenues.
The deal price is 2x the startup’s prior private valuation. In 2018, Plaid raised $250 million in a round of Series C funding, which brought the company to a $2.7 Bn valuation. Plaid’s API software allows startups to connect to consumer’s bank accounts and integrates with apps like Venmo, Robinhood, and cryptocurrency exchanges like Coinbase and Gemini.
The acquisition also reinforces the “functions as service” and FinTech 2.0 concepts that Matt Harris (Bain), Angela Strange (A16Z), and Frank Rotman (QED) are debating.
The FinTech company states that about 25% of people in the United States with bank accounts have connected to Plaid through an app. In our view, what makes Plaid valuable is not so much the technology or customer experience (strong, but can be replicated), but rather, the network land-grab and standards play.
PeerIQ Is Hiring
We are excited to report that PeerIQ reported its first year of profitability in 2019. Products were launched, babies were made, mountains were conquered. We are re-investing for growth in the areas of sales and engineering. Please send us your best talent recommendations!
Thank you for your support and let’s make it a great 2020!
- Fed’s Mission to Control Benchmark Rate May Spur Another Tweak (Bloomberg, 01/13/2020) The benchmark interest rate has shifted closer to the lower bound of the Fed’s target range.
- The Debate Over Whether to Call It QE Is Over, and the Fed Lost (Yahoo Finance, 01/17/2020) Per Deutsche Bank and Bloomberg’s observations, the Fed’s balance-sheet expansions are correlated with stock market gains.
- Jumbo Mortgages are Haunting the Housing Market, and Things Could Get Really Scary (MarketWatch, 01/16/2020) The majority of delinquent jumbo mortgage loans have not been foreclosed and are still outstanding.
- U.S. and China Sign Phase One of Trade Deal (Bloomberg, 01/15/2020) President Trump and Chinese Vice Premier, Liu He, have signed the first phase of the trade deal.
- Will Regulators Ever Find Common Ground on CRA Reform? (American Banker, 01/09/2020) The FSB has some objections to the OCC and FDIC proposal for CRA reform.
- Big Banks Post Big Profits Thanks to Strong U.S. Economy (WSJ, 01/14/2020) A healthy U.S. economy propelled revenues for both JPMorgan Chase and Citigroup, Inc.
- The Rise of Challenger Banks (Financial Technology Partners, 01/01/2020) As challenger banks gain traction worldwide, traditional banks are responding by creating their own FinTech brands.
- Visa to Acquire Plaid, the FinTech Powering Venmo and Other Banking Apps, in $5.3 Billion Deal (CNBC, 01/13/2020) Visa will buyout Plaid, the engine behind many FinTech payment operations.
- Visa’s Plaid Takeover Signals Wave of Fintech Dealmaking (01/15/2020) Visa’s acquisition of Plaid could trigger other deals in the FinTech industry.
- Visa Invests In Another Fintech Company, Days After Acquiring Plaid (Crunchbase, 01/15/2020) Visa invests in Very Good Security (VGS), which is a startup that helps FinTechs better protect their data.
- Goldman Curtailed Personal Lending After Launching Apple Card (American Banker, 01/15/2020) Goldman Sachs reduced personal loan originations after the release of the Apple card.
- Quicken Launches Simplifi Money Management App for Millennials, Gen Z (American Banker, 01/14/2020) Quicken released their money management app, Simplifi.
- Shopify Capital Launches Starter Loans for United States Merchants (Betakit, 01/15/2020) E-commerce giant, Shopify, to offer starter loans for U.S. merchants.
- Fintech October Reflects on Past 12 Months Performance as Loan Originations Accelerate (Crowdfund Insider, 01/15/2020) FinTech lender, October, published a blog where they review their performance in 2019.
- NASA’s Planet-Hunting Satellite Found Another Potentially Habitable Earth-Sized Planet (TechCrunch, 01/06/2020) NASA found another Earth-sized planet that has the potential of carrying liquid water on the planet’s surface.