The Fed hikes again but signals a pause is possible. Job market data. Treasury announces buyback program. FDIC deposit insurance report recommends “targeted coverage” expansion. Apple users put nearly $1Bn in new savings accounts. Greenwood acquires Kinly. Smaller banks boost loan loss provisions. First Republic acquired by JPMorgan. TD and First Horizon terminate merger. A volatile week for regional banks. Earnings coverage.
Another Rate Hike; Job Market Data
Another Fed meeting, another rate hike. The central bank hiked rates by another 25 bps at its meeting last week, despite continuing turmoil in the U.S. banking sector. However, a change in language indicates a pause in further hikes is possible. The Fed now says it will monitor markets and determine if additional policy firming is appropriate.
Image: Wall Street Journal
Meanwhile, there are some signs the job market may be cooling. Layoffs rose to a seasonally adjusted 1.8Mn in March, up from a revised 1.6Mn in February. Job openings dropped below 10Mn, hitting the lowest level since April 2021. Additionally, initial jobless claims rose by 13,000 to 242,000 for the week ended April 29, exceeding estimates of 240,000 claims.
However, other data contradicts the assumption that the labor market is cooling. Job openings remain well above pre-pandemic levels. Private payrolls rose by the most in 9 months and continuing claims fell 38,000 to 1.81Mn for the week ended April 22, the largest drop since July. U.S. payroll gains accelerated, rising 253,000, well above estimates, and the jobless rate fell to 3.4% in April.
Treasury Announces 2024 Buyback Program
The U.S. Treasury kept its sales of longer-term debt steady, in line with dealers’ forecasts. It also unexpectedly announced a program to buy back older-dated securities beginning in 2024. The aim of the buyback program is to address areas of patchy liquidity in Treasury markets, and is “not intended to meaningfully change the overall maturity profile of marketable debt outstanding,” according to Treasury officials. The program would be the first regular buyback initiative since 2000.
FDIC Recommends “Targeted Coverage”
The FDIC laid out options for changes to deposit insurance in its report released in the wake of the collapses of SVB, Silvergate, and Signature Banks. SVB and Signature cost the deposit insurance fund about $22.5Bn, with First Republic’s recent failure adding another $13Bn in costs to the fund.
The report lays out three possible options: the status quo, with most accounts insured up to $250,000; expanding deposit insurance to cover all funds; or expanded “targeted coverage,” which would allow for higher coverage limits for certain types of transaction business accounts. Any move to increase deposit coverage will increase the assessments banks are required to pay into the fund.
The FDIC report expressed a preference for the “targeted coverage” approach, but acknowledged any significant changes to the deposit insurance scheme will need to come from Congress rather than the agency itself. With the fight over the ceiling consuming the majority of Congress’ attention, it seems unlikely that this will happen anytime soon.
The FDIC is planning to soon release a proposal to replenish the deposit insurance fund, but it sounds like many community banks may be spared from the special assessment. Per Bloomberg reporting, lenders with under $10Bn in assets would not have to pay, and some lenders with up to $50Bn (depending on the size of their deposits) would not have to pay either.
Apple Savings’ Big Haul
Goldman’s Marcus ambitions have dimmed, but its partnership with Apple is going strong. Within days of Apple launching its savings feature, users have put nearly $1Bn of funds in the accounts. Unclear is how much of the funds came from Apple Card cash back vs. funds transferred in from users.
Roughly 240,000 accounts were opened during the first week. For now, the savings accounts are only available to existing Apple Card holders, with a wider launch expected in the coming weeks. Interestingly, the Apple savings feature offers 4.15% APY, while Goldman’s own Marcus savings accounts offer a comparatively paltry 3.90%. Asked about the discrepancy on its recent earnings call, Goldman CEO David Solomon said the bank would monitor for potential ‘cannibalization’ of its target customers.
Greenwood Acquires Kinly
Greenwood, a neobank focused on the Black and Latino communities, announced it has acquired Kinly, which also provided banking services catering to Black Americans. According to the announcement, about 300,000 Kinly users would join approximately 1Mn existing Greenwood users. Prior to the sale, Kinly, previously known as First Boulevard, had been facing a trademark dispute and had pulled its app from Apple and Google’s app stores. While the acquisition may help boost Greenwood’s scale, it still substantially trails other neobanks and bank-like products targeting similar users, including Chime and Cash App.
Smaller Banks Boost Loan Loss Provisions
Despite mounting fears of a recession this year, so far, credit quality has held up. Still, small and mid-sized banks have boosted provisions for loan losses. Particular areas of concern include commercial real estate and small business loans. Smaller banks tend to be disproportionately exposed to these categories, both of which have continued to face headwinds even as the pandemic has entered the rearview mirror for many. With many preferring to continue to work from home if possible, downtown office occupancy and patronage of nearby businesses hasn’t rebounded to pre-pandemic levels in many cities. Continuing inflation hasn’t helped matters as business owners face cost pressures. Boosting prices risks alienating increasingly price-sensitive consumers.
Source: Apollo Academy
The impact is clear in the sentiment of small-business owners. A recent survey by the National Federation of Independent Business showed sentiment worsened in March to 90.1, making it the 15th month below the 49-year average of 98.
First Republic Enters Receivership, Acquired by JPMorgan
With everything that’s gone on this week, it’s crazy to think that it was just Monday the FDIC announced that First Republic would be placed into receivership and sold to JPMorgan. This announcement capped a weekend-long auction process, run by the FDIC. After reporting deposits well below analyst estimates from its April 24th earnings report, the bank’s stock fell (75)% over the course of the week. That Friday, it was reported that the bank was likely headed to receivership.
First Republic’s closure represents the U.S.’ second largest bank failure, only behind Washington Mutual, who was also acquired by JPMorgan. With the sale, the biggest bank in America gets even bigger. Pre-sale, JPMorgan commanded 16.1% of domestic consumer deposits. The deal represents an exception to rules restricting banks that hold over 10% of U.S. consumer deposits from buying competitors, as First Republic qualifies as “in default” or “in danger of default.”
The FDIC expects to take a $13Bn hit to its Deposit Insurance Fund and will provide JPMorgan with $50Bn in financing. JPMorgan expects to recognize a one-time gain of $2.6Bn tied to the transaction.
→ Our initial breakdown of the situation, and how First Republic got to this point (please note, as of Monday morning, before regional bank fears resurfaced).
TD and First Horizon Terminate Merger
As if there wasn’t enough turmoil in the banking sector, Thursday morning, TD and First Horizon put out a press release explaining the decision to terminate their proposed $13.4Bn merger. In terminating the merger, TD pointed to “uncertainty” over regulatory approvals. In January, TD CEO Masrani had said that the timetable on regulator approval was “unknown.” Under the termination agreement, TD will pay $200Mn cash to First Horizon, in addition to a $25Mn fee reimbursement.
A Volatile Week for Regional Banks
In the wake of First Republic’s collapse and sale to JPMorgan, Monday’s calm day of trading gave some hope that regional banking worries would be quelled. That was far from the case, with PacWest falling up to (70)%, Western Alliance falling up to (60)%, Comerica falling up to (30)% and Zions falling up to (28)% during the week, from Monday’s close. However, we saw banking stocks recover some of their losses Friday, with PacWest closing up 82%, Western Alliance closing up 49%, Zions closing up 19% and Comerica closing up 17%. The rally came after JPMorgan upgraded Western Alliance, Zions and Comerica to overweight, stating that sentiment is too negative for regional bank stocks.
As of writing, PacWest’s future looks increasingly uncertain. Its stock cratered as speculators made bets against the bank. PacWest said it is “weighing strategic options,” which could include a capital raise or a breakup of the bank. An outright sale of the whole bank seems unlikely. Any potential buyers could choose to wait until a potential failure to get a better deal after a potential seizure by regulators.
Following reporting that PacWest was weighing strategic options, its stock dove, prompting management to put out a press release. The press release noted that insured deposits had increased slightly, to 75% on May 2nd from 73% on April 24th. However, total deposits have fallen off, with the company reporting $28Bn of deposits, implying that half (or ~$900Mn) of its “rebound” in deposits (from the March 20 low) had been erased since April 24th. This news suggests that ~3% of total deposits were pulled from the bank in just over one week.
The Fed’s latest rate hike isn’t likely to help the situation. Rising rates continue to weigh on the market value of banks’ securities portfolios and may encourage customers to move funds from low-yielding deposits to higher-yielding money market funds.
Western Alliance’s stock faced pressure during the week, after a Financial Times article reported that it was also exploring strategic options and had hired a financial advisor. However, the bank has categorically denied such rumors.
Earnings Season Continues, with Fintechs Checking in
Catch up on last week’s earnings coverage here.
Regional banks weren’t the only volatile sector this week, as we saw a great deal of volatility from the fintechs that reported.
SoFi fell (12.2)% on the week, even after reporting a 20% sequential increase in originations. Markets likely reacted to the news that SoFi’s Galileo (its financial services and payments API platform) accounts fell (5)Mn from the fourth quarter, to 126Mn. This represents SoFi’s first quarter in which it reported a decline in Galileo accounts, since acquiring the platform in 2020.
Source: SoFi Earnings Presentation
Despite the decline in Galileo accounts, SoFi reported robust personal loan origination growth (+20%) on a QoQ basis. Personal loan originations growth outweighed the declines in student loan originations ((29)%) and home loan originations ((15)%), which declined on rising rates and the continued moratorium on student loan payments. The growth in originations, bucks the trend of many fintech consumer lenders, who have cut back on originations and tightened credit considerably. For example, as we reported last week, OneMain ((19)%), Enova – Consumer ((13)%), and LendingClub ((9)%) all reported declines in QoQ origination volumes.
SoFi reported that its deposits increased by 27% QoQ, to $10.1Bn, with “97% of deposits insured at quarter-end”, showing continued growth of deposits since launching its Checking and Savings offering in 1Q22.
LendingTree fell (25.1)% on the day, despite an earnings beat, as the company slashed its FY 23 and 2Q23 revenue guidance. Overall, LendingTree lowered FY 23 revenue guidance by ~(19)% and EBITDA guidance by ~(6)%. During the quarter, the company re-focused operations, laying off 13% of its staff, exiting its Medicare agency operation, and beginning to wind down its Ovation Credit Services business (which it had acquired in 2018).
LendingTree reported an (8)% QoQ decline in consumer revenue due to “tightening credit conditions driven by higher interest rates.” Additionally, the company noted that “Close rates have declined at most issuers, leaving more of our customers who are looking for a loan without an offer. We are working to assist this growing pool of borrowers who are being turned down by pairing them with debt relief partners to help them improve their credit profile.”
On the brighter side, LendingTree said it was excited about early signs of demand on the Win Card (its first branded consumer credit offering, in partnership with Upgrade) and reported a 4% QoQ increase in MyLendingTree membership cumulative sign-ups, to 25.8M.
Rocket Companies reported that closed loan origination volume (purchase loan + refis) fell (11)% QoQ, as higher mortgage rates and lower inventory affected business. The company reported its second straight quarter with a net loss. Prior to last quarter, it had not reported a net loss since going public in August 2020.
Rocket Companies unveiled its Rocket Visa Signature Credit Card and introduced its BUY+ and SELL+ offerings. The Signature credit card will be issued by Celtic Bank, and offers users a 5% cash back equivalent when points are redeemed towards costs associated with a new mortgage with Rocket, 2% cash back equivalent when points are redeemed to pay the principal balance of an existing mortgage with Rocket, and a 1.25% cash back equivalent when points are redeemed for a statement credit. CFO Brian Brown specified that, ““I’d like to clarify that our intent with the Signature card is not to compete with large credit card companies at scale.”
Rocket’s BUY+ and SELL+ offerings help purchase clients save upfront costs and allow sellers to receive a rebate check for 1% of the sale price of their home after closing.
Block reported continued growth for its Cash App and BNPL business lines. It reported that monthly transacting actives grew to 53Mn in March, from 51Mn in December, and that inflows per transacting active rose to $1,136, up 8% QoQ.
Block’s BNPL platform generated $5.6Bn of GMV in Q1, up 18% YoY. Block had previously provided guidance that it expected BNPL GMV to grow 19% YoY for the months of January and February. The growth has not caused major credit issues either, with Block reporting an improvement in their losses on consumer receivables, to 0.7% of GMV. Management noted that 98% of BNPL purchases do not incur late fees, and that 95% of installments are paid on time. Looking ahead, execs expect YoY BNPL GMV growth of 20% in April.
Square Loans (Block’s small business loans) facilitated 113,000 loans, totaling $1.1Bn in originations, a 46% increase from the prior year period, but (5)% decline from the prior quarter.
Wrapping things up, Coinbase jumped 18.3% on earnings, after substantially exceeding revenue and earnings estimates. Notably, Coinbase’s subscription and services revenue has become a larger portion of its total revenue. The company reported that subscription and services revenue made up 49% of total revenue for the quarter, up from 47% a quarter prior and just 13% a year prior. Subscription and services revenue was up 28% QoQ, driven by an increase in interest income. The majority of the increase in interest income came from the USDC stablecoin. Looking ahead Coinbase expects lower subscription and services revenue in Q2 driven by lower USDC market capitalization. The average USDC market cap in April was $31.7 billion, 23% lower than the Q1 average of $41.3 billion.
Quarterly trading volume on that platform was flat from the fourth quarter, but more than doubled the prior year period. The company reported a slight uptick in Monthly Transacting Users (“MTUs”) to 8.4Mn from 8.3Mn a quarter prior. However, MTUs remained well below the 9.2Mn reported in the prior year period.
Despite talk that Coinbase was considering moving abroad, CEO Brian Armstrong stated, “So let me be clear, we’re 100% committed to the U.S.”
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In the News:
Treasury to Launch First Buyback Program Since 2000 (Wall Street Journal, 5/3/2023) Officials say the program will start small and not significantly change the overall portfolio of U.S. government securities on the market.
Why Washington Let JPMorgan Buy First Republic (Wall Street Journal, 5/2/2023) Regulators may have been hamstrung by legal requirements that the winning bank provide the lowest-cost bid.
A Hot Summer for FedNow? (American Banker, 4/30/2023) FedNow is slated to go live in July, with hope that it will allow RTPs to scale quickly.
TreviPay and Spryker Launches eInvoices for B2B Sellers (PYMNTS, 5/1/2023) With the partnership, TreviPay’s global B2B payments and invoicing network will be integrated into Spryker’s digital commerce and marketplace platform.
How a Fintech Called Save Offers Banks Cheap Deposits and Depositors Big Returns (The Financial Brand, 5/2/2023) Save offers a “market savings account” where depositors are guaranteed their initial deposits but can earn a range of APY based on investment performance.
Coming Out of Crypto’s Regulatory ‘Dark Age’ (Fintech Nexus, 5/3/2023) Most still feel that regulation is the most pressing issue facing crypto in the U.S.
Feline Fashion Rules Met Gala 2023 as Doja Cat and Jared Leto Honour Lagerfeld (The Guardian, 5/2/2023) The Met Gala got catty.