Happy Sunday,

Overall inflation cooled, but core CPI remains elevated. Markets expect another 0.25 hike, but Fed officials are divided. IMF expects U.S. growth to slow. Chopra discusses deposit insurance in wake of bank crisis. Clear Street raises $270Mn. Auditors missed red flags before SVB collapse. Walmart sues Capital One. Union Credit partners with TransUnion on POS financing. Visa announces Visa+ to bridge P2P divides. Big banks kick off earnings.

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Market Expects Another 0.25 Point Hike

Last week’s inflation print came in at 5% year over year for March. While that’s the slowest increase we’ve seen since May 2021, core CPI has proven more stubborn, showing a 5.6% increase year over year. Overall inflation was a bit below analyst estimates; core CPI came in as forecast.

Image: Bloomberg

Though the inflation picture has improved somewhat, numbers are still a long way off from the Fed’s 2% target. Fed officials are divided over whether to continue hiking. NY Fed President Williams says one additional hike and then a “pause” is a “reasonable starting point,” whereas Chicago Fed President Goolsbee has called for “prudence and patience” in assessing the impact of tighter credit conditions. CME Group data indicates the market is expecting a 0.25% hike at the Fed’s next meeting. The collapses of SVB and Signature Bank are also expected to contribute to tighter conditions, even without additional rate hikes.

Meanwhile, the IMF expects reduced lending to be a drag on U.S. growth. The group expects U.S. lending capacity to decline by 1% this year. Analysts expect the reduction will shave 0.44 points off GDP growth in 2023, with the U.S. economy now expected to grow just 1.6% this year. Treasury Secretary Yellen has downplayed fears the banking crisis will impact growth, saying she doesn’t anticipate a downturn in the economy.

Chopra Discusses Deposit Insurance, “Automatic Triggers”

Speaking at an event last week, CFPB Director Chopra called for “automatic triggers” to help curb what he described as “excessive” risk taking by banks. In the wide-ranging conversation, Chopra called on regulators to create new tools for monitoring and mitigating risks across the banking system. He also suggested considering guardrails or caps on uninsured deposits, which are widely considered to have contributed to SVB’s abrupt failure last month. Chopra, who sits on the FDIC board, also expressed support for a deposit insurance framework where banks would pay a premium to cover deposits above $250,000 for accounts specifically designated for managing employee payroll.

Clear Street Raises $270Mn for Modern Cap Markets Infrastructure

Clear Street, which is building a “modern infrastructure” for capital markets, announced it has raised $270Mn at a $2Bn valuation. The company’s Series B round was led by growth equity firm Prysm Capital. Clear Street’s mission is to “replace the outdated infrastructure being used across capital markets,” beginning with a prime brokerage platform, according to company co-founder and CEO Chris Pento. Clear Street currently boasts roughly 200 institutional-sized investors as well as hundreds of smaller trading entities, according to the company.

Auditors Missed Red Flags Before Bank Crisis

Auditor KPMG gave SVB a clean bill of health just 14 days before the bank collapsed, raising questions about why the firm didn’t flag unrealized bond losses as a risk. KPMG did highlight potential losses on loans as a “critical audit matter”, however. “Critical audit matters” were introduced in 2017 with the intention of making audit opinions more useful to investors. Audit firms’ miss of interest-rate and liquidity risk wasn’t limited to SVB. Other audit firms failed to flag such risks for at least nine other banks facing similar risks.

Walmart Sues CapOne, Seeks to Quit Card Partnership Early

Walmart, which partners with Capital One on its private-label and co-brand credit cards, has sued the bank and is seeking to terminate the companies’ partnership. Walmart’s lawsuit alleges that Capital One didn’t meet certain terms of its agreement, including promptly posting payments and transactions to cardholders’ accounts and replacing lost cards in a timely manner. Capital One said these “immaterial” issues were cured within the terms of its agreement with Walmart and without harm to Walmart or its customers.

According to sources familiar with the discussions, Walmart expressed an interest in renegotiating terms of the agreement, including adjusting loss-sharing and a role for its fintech business, ONE. Capital One wasn’t willing to agree to Walmart’s request, potentially giving rise to the suit.

Union Credit Partners with TransUnion

Union Credit, a marketplace for credit unions, announced it has partnered with TransUnion. The tie up will help enable credit unions to provide consumers with “embedded ecommerce options” to meet their credit needs. Union Credit provides credit unions with the capability to provide point-of-sale financing offers.

Visa Announces Visa+ P2P Infrastructure

Payments behemoth Visa announced Visa+ last week, an infrastructure layer facilitating money movement between P2P payment services and wallets like Venmo, PayPal and others. The service will enable users to send and receive money across services by using a newly setup Visa+ handle, without exchanging information like email addresses or phone numbers. Users will not need a Visa card to use the service. Other participants that have committed to enabling Visa+ functionality include Western Union, TabaPay, i2C, and EWA provider DailyPay. However, major players in the mobile wallet space, like Cash App, Apple, and Google were notably absent from the news.

Big Banks Kickoff Earnings Season

Source: PeerIQ

Big banks kicked off earnings season with JPMorgan, Citi, PNC and Wells Fargo all reporting earnings beats. Deposits were a big focus of analysts, following the collapses of Silicon Valley Bank and Signature Bank.

Looking at average consumer deposits, JPMorgan ((3)%), Wells Fargo ((3)%) and Citi (unchanged) saw declines or stagnant balances from the prior quarter. However, bank failures in late Q1 appear to have caused a “flight to safety” among depositors. Examining period-end consumer deposits, Citi saw a +2% increase, JPMorgan saw a +1% increase, and Wells Fargo reported a smaller decline (1)% on a QoQ basis.

With regulators stepping in to ensure investors that deposits would be protected, the “flight to safety” has largely been curbed, with Wells Fargo reporting that inflows have abated and JPMorgan providing guidance that it does not expect to retain all of the past quarter’s inflows.

PNC deposits were up 3% QoQ, with management reporting that they continue to see a shift from noninterest-bearing to interest-bearing deposits. PNC also does not expect the inflows from the SVB/Signature collapses to stick around, stating, “We saw some inflows during that week at the height of the disruption, but a lot of that’s settled out. So we don’t expect to see that be a factor for us positively or negatively as we move into the second quarter.”

Consumer loan book growth grew on a YoY basis (PNC +6%, JPMorgan +5%, Wells Fargo +4%), but was more muted on a QoQ basis (PNC +1%, JPMorgan flat, Wells Fargo flat). Card loans led much of the YoY growth, with JPMorgan and Wells Fargo reporting +21% increases, and Citi’s Branded Card loans reporting a more modest 1% increase.

At the same time, consumer NCOs continued to tick up for Citi +78bps, JPMorgan +21bps and Wells Fargo +9bps, while PNC had a decline in NCOs of (5)bps on a QoQ basis. Wells Fargo CFO Mike Santomassimo reported that, “While most consumers remain resilient, we’ve seen some consumer financial health trends gradually weakening from a year ago, and we’ve continued to take credit [tightening] actions to position the portfolio for a slowing economy.”

Wells Fargo (55)% and JPMorgan (15)% saw home lending originations fall from the quarter prior. Wells Fargo saw a significant decline, as it continued to follow its strategic plan of stepping back from the housing market to focus predominantly on bank customers and underserved communities. On the flip side, Citi reported a 6% increase QoQ in mortgage originations, perhaps capitalizing on the slight decline in average mortgage rates from their November peak.

To wrap things up, Citi’s installment lending business continues to grow, up 7% QoQ. While the growth is positive, it continues the trend of slowing growth in its installment lending business (4Q22 +18%, 3Q22 +18%, 2Q22 +21%, 1Q22 +13%).

Source: Citi Earnings Presentation

In the News:

In Wake of Failures, Bank Economists Expect Weaker Credit Quality, Lighter Lending (American Banker, 4/11/2023) Bank economists surveyed think fallout from recent bank failures will lead banks to tighten lending.

Advocates Urge Agencies to Finish — Not Start Over — Pay-Clawback Rule (American Banker, 4/11/2023) Congress required the agencies to finalize the rule by May 2011 and while there was a rule proposed in 2016, it remains incomplete.

Banks Are Closing Customer Accounts, With Little Explanation (New York Times, 4/8/2023) Financial institutions filed 70% more SARs in 2021 than in 2014.

FTX Failure Rooted in ‘Hubris,’ ‘Greed,’ Debtors Report Says (Bloomberg, 4/9/2023) Perhaps unsurprisingly, FTX was very disorganized, and did not even have a complete list of its employees.

Digital River Debuts Pay Later Options from Afterpay and Clearpay (Finextra, 4/9/2023) The global commerce enabler is now offering BNPL options.

Fintech Funding Dropped Faster than any other Sector in Q1. Are VCs Falling out of Love? (Sifted, 4/11/2023) European fintechs raised $2Bn in 1Q23, down 83% from a year ago.

Lighter Fare:

Museum Offering $25K to Whoever Finds Meteorite that Fell to Earth over Maine (New York Post, 4/11/2023) Road trip anyone?

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