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Strong Bank Earnings; PeerIQ’s Consumer Credit Digest Webinar
By Vy Phan
January 20, 2019
Greetings,
Earnings season got underway with bulge-bracket banks reporting this week. The overall theme was that the volatility in Q4 negatively affected trading revenues, but revenues from loan operations continue to be strong and charge-offs remain low. 2018 was the first year when the top 6 banks reported over $100 Bn in profits. ROE for the banks remains mired in the 9% to 13% range due to higher capital requirements despite tax cuts (which led to favorable YoY comparisons). Capital requirements and P&L volatility are set to increase with the phase-in of CECL. We will look at bank earnings in detail below.
In regulatory news, Comptroller of the Currency Otting said that the Fed was not a roadblock for FinTech companies applying for a charter. Otting said that formal clarity is needed from the central bank on whether charter holders could offer payment services directly, but the lack of such clarity is not an impediment in applying for the charter. The Fed, though, is wary of allowing FinTech firms into the payments system as many Fed officials fear that these firms lack robust risk-management controls and consumer protections that banks have in place. Reach out to learn how PeerIQ’s risk analytics can help FinTechs satisfy risk management supervisory standards.
Bank-FinTech partnerships continue. Key Bank has agreed to buy Laurel Road’s digital lending platform for mortgages and student loans for an undisclosed sum. 140 Laurel Road employees will join Key Bank as part of the deal. Laurel Road will keep the three branches it has and its brand name. It is also unclear if Key Bank will acquire Laurel Road’s loan assets.
In this week’s newsletter, we look at the fourth quarter earnings of bulge-bracket banks.
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PeerIQ’s Webinar on Consumer Credit Digest for Unsecured Consumer Term Loans PeerIQ will be hosting a webinar on Webinar on Consumer Credit Digest for Unsecured Consumer Term Loans on Wednesday, the 30th of January at 2 pm EST. Join us for this 30-minute webinar where we will discuss: · A brief overview of consumer credit bureau data · How TransUnion’s data was ingested and transformed to power the Digest · Review and commentary on key charts contained in our first full issue Click here to register and to add the invitation to your calendar.
Source: PeerIQ |
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PeerIQ’s 4Q2018 Marketplace Lending Securitization Tracker We are pleased to release our 4Q2018 Marketplace Lending Securitization Tracker. Our quarterly Securitization Tracker analyzes securitizations of marketplace lending loans. We highlight several main themes below:
Source: PeerIQ |
Strong 4Q Bank Earnings
Banks had a rough quarter for trading revenues. FICC revenues at MS dropped by 30% YoY and by 18% YoY at GS. Bank of America’s 15% YoY drop in trading revenues was offset by a 10% increase in consumer banking revenues. Revenues at Wells Fargo dropped by 5% YoY driven by lower consumer loan balances. WFC faces a regulatory asset cap until the end of 2019 which is hampering loan growth. JPM was the only bank where the provision for credit losses increased, driven by a reserve build for credit cards due to loan growth.
Stock price performance post earnings has been strong except for WFC and MS. We look at bank earnings individually below.
Source: Bloomberg, PeerIQ
Bank of America beat earnings expectations with net income increasing by 208% YoY to $7.3 Bn. Revenue also increased by 11% YoY to $22.7 Bn.
- Earnings growth was driven by consumer banking which saw revenues grow by 10% YoY to $9.9 Bn.
- BAC delivered another quarter of record NII of $12.5 Bn, up by 6% YoY.
- Consumer loans grew by 5% YoY to $290 Bn.
- Provision for credit losses decreased by 10% YoY to $0.9 Bn, while total loss reserves decreased by 8% YoY to $9.6 Bn. Loss reserves as a percentage of loans decreased by 0.1% points YoY to 1.0%.
- Net charge-offs decreased by 25% YoY to $0.9 Bn. The net charge-off rate decreased by 0.1% points YoY to 0.4%.
- BAC’s digital program continues to show strong growth. BAC announced a $3 Bn technology investment to ramp up its digital capabilities last quarter.
- Digital banking customers grew by 4% YoY to 36.3 Mn. BAC noted that the bank generates 27% of its total sales online. P2P payments on its Zelle platform doubled to $14 Bn in 4Q2018.
- Bank of America’s ROE improved by 3.3% points YoY to 11.6%.
Citibank’s revenues were slightly lower YoY at $17.1 Bn. The bank earned $4.3 Bn, up from a loss in 4Q2017.
- Revenues were lower across both the consumer and institutional banking
- Fixed income trading revenues dropped by 21% YoY to $1.9 Bn, the lowest in seven years.
- Citi’s outstanding consumer loans grew by 3% YoY to $315 Bn.
- Provision for credit losses decreased by 8% YoY to $1.9 Bn, while total loss reserves were unchanged at $12.3 Bn. Loss reserves as a percentage of loans decreased by 0.1% points YoY to 1.8%.
- Net charge-offs decreased by 5% YoY to $1.8 Bn. The net charge-off rate increased by 0.1% points YoY to 2.2%.
- NII increased by 5% YoY to $11.9 Bn.
- Digital banking customers grew by 9% YoY to 29 Mn. as the bank continues to roll-out its digital offerings nationally.
- Citi’s ROE for this quarter was 9.0%.
Goldman Sachs delivered net revenue of $8.1 Bn, down by 1% YoY and net income of $2.5 Bn, up from a loss in 4Q2017.
- Revenue growth was driven by a 56% YoY increase in merger-advisory revenues, offsetting a 18% YoY drop in fixed income trading revenues.
- NII increased by 10% YoY to $1 Bn.
- Consumer loans grew by 15% YoY to $113 Bn.
- Provision for credit losses decreased by 23% YoY to $0.2 Bn, while total loss reserves were unchanged at $1.0 Bn. Loss reserves as a percentage of loans decreased by 0.1% points YoY to 0.9%.
- Provisions for credit losses were primarily driven by consumer loans. GS had $5 Bn in consumer loans at the end of 2018, up from $2 Bn at the end of 2017.
- Goldman noted that it wanted Marcus to offer deposit rates among the top four in the industry.
- Marcus’s push into the UK has been quite successful with a lot of demand for the high-interest rate accounts.
- GS is developing Marcus into a digital storefront and will offer a multitude of financial products. The digital platform will be used to acquire new clients on a more cost-effective basis.
- GS will launch a “multi-tiered mass affluent strategy” that will offer wealth management services to customers outside its traditional high net-worth client base.
- Goldman’s ROE was 13.3%.
JP Morgan reported revenue growth of 7% YoY to $26.1 Bn, and earnings grew by 67% YoY to $7.1 Bn.
- Fixed income trading had its worst quarter in a decade as revenue dropped by 18% YoY to $1.9 Bn.
- Earnings growth was driven by a 13% YoY increase in consumer banking revenues to $13.7 Bn. The bank had another quarter of record NII of $14.5 Bn, up by 9% YoY.
- JPM saw an increase of 1% YoY in its consumer loan book to $487 Bn.
- JPM was the only bank where the provision for credit losses increased. Provisions increased by 18% YoY to $1.5 Bn. The increase was driven by a reserve build for credit cards due to loan growth.
- Total loss reserves decreased by 1% YoY to $13.4 Bn. Loss reserves as a percentage of loans decreased by 0.1% points YoY to 1.4%.
- Net charge-offs decreased by 1% YoY to $1.2 Bn. The net charge-off rate decreased by 0.1% points YoY to 1.0%.
- The bank saw 11% YoY growth in its digital banking customers, the highest among its peers, to 33.3 Mn. JPM is rolling out its digital bank Finn nationally.
- JPM’s ROE for this quarter was 12%, up by 5% points YoY.
Revenues at Morgan Stanley dropped by 10% YoY to $8.5 Bn, driven by a 30% drop in fixed income trading revenues. Net income increased by 188% YoY to $1.4 Bn.
- The consumer lending book grew by 6% YoY to $72 Bn. Morgan Stanley is looking for a mid-single digits growth rate going forward and will focus on mortgages and securities-based lending.
- NII decreased by 1% YoY to $1 Bn, the only bank to see a drop in NII.
- Morgan Stanley’s ROE improved by 5% YoY to 7.7%.
Revenues at Wells Fargo dropped by 5% YoY to $21 Bn driven by lower consumer loan balances. The bank faces a regulatory asset cap until the end of 2019 which is hampering loan growth. Net income fell by 1% YoY to $6.1 Bn, the only bank to see a drop in net income.
- The consumer loan book continues to decline with a drop of 3% YoY to $460 Bn driven by a decrease in auto loans.
- Provision for credit losses decreased by 20% YoY to $0.5 Bn, while total loss reserves decreased by 11% YoY to $10.7 Bn. Loss reserves as a percentage of loans decreased by 0.1% points YoY to 1.1%.
- Net charge-offs decreased by 4% YoY to $0.7 Bn. The net charge-off rate was unchanged YoY at 0.3%.
- NII increased by 3% YoY to $12.6 Bn.
- Digital banking customers grew by 4% YoY to 29.2 Mn.
- WFC’s ROE for this quarter decreased by 0.2% points YoY to 12.9%, the only bank to see a decline in ROE.
PeerIQ Mentions:
- Securitization in Marketplace Lending Slowed in Q4 2018 (Lend Academy, 1/15/19)
Industry Update:
- Fed not an impediment to fintechs' charter ambitions: OCC's Otting (American Banker, 1/16/19) Otting said that the Fed was not a roadblock for FinTech companies applying for a charter and that formal clarity is needed on whether charter holders could offer payment services directly.
- Fintech firms want to shake up banking, and that worries the Fed (Reuters, 1/14/19) The Fed is wary of allowing FinTech firms into the payments system as officials fear that these firms lack robust risk-management controls and consumer protections that banks have in place
- The Only Resolution Banks And Credit Unions Need To Make In 2019 (Forbes, 1/17/19) Banks and Credit Unions need to commit to growth in 2019 by driving change in their businesses.
- Fed Says Student Debt Has Hurt the U.S. Housing Market (WSJ, 1/16/19) Homeownership among people aged 24 to 32 fell by 9% points between 2005 and 2014. 2% points of the decline was tied directly to student debt.
- BofA’s retail bankers pick up slack for beleaguered bond traders (American Banker, 1/16/19) Earnings growth was driven by consumer banking which saw revenues grow by 10% YoY to $9.9 Bn.
- Citi Says Trading Environment Improved from 2018’s Rough End (Bloomberg, 1/14/19) Revenues were lower across both the consumer and institutional banking groups. Fixed income trading revenues dropped by 21% YoY to $1.9 Bn, the lowest in seven years.
- Goldman Sachs Dealmakers’ Surging Fees Help Offset Trading Misery (Bloomberg, 1/16/19) Revenue growth was driven by a 56% YoY increase in merger-advisory revenues, offsetting a 18% YoY drop in fixed income trading revenues.
- JPMorgan Debt-Trading Revenue Plunges to Lowest Since Crisis (Bloomberg, 1/15/19) Fixed income trading had its worst quarter in a decade as revenue dropped by 18% YoY to $1.9 Bn.
- Morgan Stanley Suffers Worst Bond-Trading Slump on Street (Bloomberg, 1/17/19) Revenues at Morgan Stanley dropped by 10% YoY to $8.5 Bn, driven by a 30% drop in fixed income trading revenues.
- Wells Fargo's revenue declines as loan balances shrink again (American Banker, 1/15/19) Revenues at Wells Fargo dropped by 5% YoY to $21 Bn driven by lower consumer loan balances.
- KeyCorp to buy digital platform from Conn. community bank (American Banker, 1/17/19) Key Bank will buy Laurel Road’s digital lending platform for mortgages and student loans.
- Fiserv to Acquire First Data in $22 Billion All-Stock Deal (WSJ, 1/16/19) Fiserv will buy First Data for $22 Bn to fend off challenges from payment processing startups.
- Square's new debit card poses big threat to banks (American Banker, 1/17/19) Square will allow merchants instant access to their sales proceeds and a 2.75% discount on their purchases.
- SOFI 2019-A Presale (DBRS, 1/15/19) DBRS has rated the senior classes on SoFi’s latest student loan deal AAA.
Lighter Fare:
- The Hot New Asset Class Is Lego Sets (Science Daily, 1/14/19) Limited-edition Lego sets have a large resale market and usually sell for many times the original price.