We dig into consumer bank results from several majors this week, new product launches, and regulatory updates.
But first, hiccups in the repo market have prompted firefighting from the Fed. The Fed is purchasing Treasury Bills at a rate of $60 Bn a month and will continue thru the second quarter of this year.
The Fed action is designed to creating liquidity for sellers of short-dated securities. However, the result will also lead to a significant expansion of the central bank balance sheet.
Unlike QE, the purchases are focused on T-Bills rather than longer-dated mortgages and treasury bonds (which are already probing historic lows on an inverted yield curve). The $720 Bn increase is significant and can be interpreted as a sign of easing. The fire drill and apparent surprise from Fed officials indicates a crack in the armor for financial markets.
CRA Reform Remains a Priority
Federal bank regulators want to collaborate on a joint plan to reform the Community Reinvestment Act – a focus area for Secretary Mnuchin and OCC Head Joe Otting. When asked about the joint plan, FDIC Chair McWilliams stated that she is willing to move forward together or take action in tandem with only one or two agencies.
(Much need) reform of the 70s-era CRA act could enable banks to originate loans digitally from underserved areas on a national basis.
Bank Earnings Season Underway
The major consumer banks – those with large cheap deposit bases and robust consumer bank franchises – turned in the strongest performance. JPM led the ROE race with 18% return on tangible equity, outpacing rivals by several points. The greatest driver for JPM’s result was the strong performance of its Consumer Bank led by CEO Gordon Smith.
GS ROE clocked in at 12% (and will need to remain low for several years) as GS investing billions in a long-term plan to grow its own consumer bank.
- Industry leading ROE of 18% driven by consumer banking ROE 30%+ [!!]
- Double digit growth in card spend, assets managed, digital mobiles, payments/merchant volume
Source: PeerIQ, JPMorgan Chase & Co
- Strongest 35% YTD share price gain in KBW index (stock trading below book value)
- Citi continues to execute a Digital First banking strategy
- 66% of new deposits coming from areas where they do not have branches
- ROE in the 12% range, profit drops 26%. ROE will be low for the foreseeable future while GS pours billions in investing in building a consumer franchise
- Investing in long-term projects (e.g., Marcus, electronic trading platform, etc.)
- CEO David Solomon: “In three short years, we have raised $55 billion in deposits on the Marcus platform, generated $5 billion in loans, and built a new credit-card platform and launched Apple Card,” adding “which we believe is the most successful credit card launch ever.”
Bank of America
- Profits up 8% YOY; NIM robust at 244 bps just shy of recent peak of 251 bps
- #1 in mobile banking and online banking. Digital banking users have increased by 5% over the past year and number of active mobile users has increased by almost 11%. – Number of branches has decreased by 1.9
In Industry news, PayPal is launching a Venmo credit card (expected 2H 2020). Venmo’s credit card launch follows a flurry of launches from Avant, Upgrade, Ollo, Brex and others in recent years. PayPal has a unique edge – the breadth of customers on its payment network. Relatedly, PayPal and Synchrony extending their overall 15-year consumer credit relationship.
FinTech Galileo Processing, led by CEO Clay Wilkes, raises$77 million in financing from Accel Partners. Galileo is a “picks and shovels” infrastructure player that enables FinTechs including Robinhood, Monzo Bank, Chime Banking, and TransferWise with their API infrastructure.
The Empire Strikes Back:
American Express Co. is rolling out a new corporate-card program for startups to compete with newcomers Brex Inc and Ramp which are going after the startup market.
The card offers full corporate liability without requiring founders to provide a security deposit or personal guarantee. Borrowing from the startup rivals, the new technology allows AmEx to see a startup’s bank balance to let fledgling firms qualify for cards.
- On Oct 23rd, we will be at The Online Lending Policy Institute. Discuss policy trends and the voice of FinTech in DC. Friends of PeerIQ can book a 33% discounted ticket by using code “PeerIQ33”.
- PeerIQ will be at Money 2020 Oct 27th to Oct 29th. Reach out if you’d like to connect!
- That Superlow Mortgage Rate? It Could Be Even Lower (Wall Street Journal, 10/10/2019) Interest rates are falling, but home buyers aren’t getting the full benefit.
- House Approves SEC investor testing bill with no GOP backing (Bloomberg, 10/17/2019) SEC investor testing legislation gets approved by the House.
- Joint CRA plan is no sure thing, FDIC’s McWilliams says (American Banker, 10/16/2019) FDIC Chairman, Jelena McWilliams, says she hopes to “move together,” when asked about the joint CRA plan.
- Citigroup hits return target, profit Rises (Wall Street Journal, 10/18/2019) Citigroup exceeds expectations with a 6% increase in third quarter earnings.
- Consumers lift profit at Bank of America (Wall Street Journal, 10/17/2019) U.S. consumers help drive Bank of America’s third quarter earnings with an 8% increase.
- Bank of America’s Future Is Digital, and It’s Now (Bloomberg, 10/16/2019) Bank of America claims to be number 1 in mobile banking.
- Goldman Profit Drops 26% as deals slow, tech-stocks struggle (Wall Street Journal, 10/15/2019) Goldman Sachs’ experiences 26% decline in third quarter earnings.
- Goldman Sachs CEO says Apple Card is the most successful credit card launch ever (CNBC, 10/15/2019) Goldman Sachs CEO, David Solomon, is pleased with the high demand for the Apple Card product.
- Rebroadcast of Goldman Sachs conference call on 2019 third quarter results (Goldman Sachs, October 15, 2019) Audio rebroadcast of Goldman Sachs’ conference call regarding 2019 third quarter results.
- PayPal’s Synchrony pact gives rise to a Venmo credit card (American Banker, 10/17/2019) PayPal and Synchrony extend their 15-year relationship to launch a credit card for Venmo users.
- American Express takes aim at rival Brex with new card offerings for startups (PaymentsSource, 10/17/2019) American Express to launch a new corporate-card program for startups to compete with Brex.
- Funding Circle seeks to ease fears over withdrawal delays (Financial Times, 10/11/2019) Funding Circle addresses withdrawal issue with investors.
- Galileo Financial raises $77 million for its fintech services that were 19 years in the making (TechCrunch, 10/17/2019) FinTech startup that creates APIs for Robinhood and Revolut raises $77 million to expand beyond North America.