It was a turbulent week for US equities as the S&P 500 dropped by 4.6% over the week. The selloff was partially driven by trade war and rising rate concerns. 10-year yields rose by over 15 bps to 3.15% and the curve is 30 bps from inversion. Meanwhile, core CPI rose by a lower-than-expected 2.2% YoY in September, but is still in line with the Fed’s expectations, and should keep the committee on track to raise rates again in December.
FinTech companies continue to forge partnerships with brick-and-mortar operators. PayPal is collaborating with WalMart to allow its users to deposit and withdraw cash from their PayPal accounts at WalMart locations.
Gary Cohn has joined Spring Labs as an advisor. Spring Labs is a blockchain technology firm building a decentralized network for identity and credit. The firm was founded by the co-founder of Avant John Sun and other Avant alumni. Spring Labs includes an all-star advisory board including Shelia Bair, Raj Date, Bobby Mehta, and Nigel Morris.
Bloomberg reports that Marcus has reduced its loan origination objectives for next year due to concerns about the late stage of the credit cycle. FinTechs including LendingClub and SoFi remain focused on meeting customer demand.
How is consumer credit performing? We’ll dig into recent bank earnings, loan loss provisions and comments on bank credit quality in this week’s newsletter.
Another Quarter of Strong Bank Earnings
Earnings’ season has started well with bulge-bracket banks reporting strong earnings growth. JP Morgan, Citigroup and Wells Fargo reported double-digit increase in earnings YoY, with earnings at Wells Fargo rising by 33% YoY as the bank begins to move past legacy issue. However, only JPM managed to grow top-line revenues this quarter (up 5% YoY).
Strong GDP growth and low unemployment have allowed banks to reduce loan loss provisions significantly this quarter, and their outlook on the US consumer in the short-term was overwhelmingly positive. Jamie Dimon noted that, “Most of the consumer credit written since the great recession has been pretty damn good, and our book is extremely good”, and JPM had the largest reduction in loan loss provisions by 35% YoY.
Stock price performance post earnings has been mixed with JPM down by ~1%, WFC up by ~1% and C up by ~2%.
JP Morgan Q3 Earnings
Revenues at JPM grew by 5% YoY to $27.8 Bn, and earnings grew by 24% YoY to $8.4 Bn. Earnings growth was driven by record NII of $14.1 Bn, up by 7% YoY, while fixed income trading revenues dropped by 10% YoY. JPM saw a small increase of 2% YoY in its consumer loan book. Net charge-offs declined by 11% YoY to $1.1 Bn and the provision for loan losses declined by 35% YoY to $0.9 Bn. The bank saw healthy growth of 11% YoY in its digital banking customers to 32.5 Mn. JPM’s ROE for this quarter was 14%, up by 3% points YoY.
Wells Fargo Q3 Earnings
WFC’s revenues were flat YoY at $21.9 Bn, but earnings grew by 33% YoY to $6 Bn. Earnings growth was driven by 1% YoY increase in NII to $12.6 Bn. The consumer loan book continues to decline with a drop of 3% YoY to $440 Bn driven by auto loans. Net charge-offs declined by 13% YoY to $0.5 Bn and the provision for loan losses declined by 19% YoY to $0.6 Bn. Digital banking customers grew by 4% YoY to 29 Mn. WFC’s ROE for this quarter was 12%, up by 3% points YoY.
Citigroup Q3 Earnings
Citi’s revenues were flat YoY at $18.4 Bn, but earnings grew by 12% YoY to $4.6 Bn. Earnings growth was driven by 9% YoY increase in fixed income trading revenue, the first increase since 2017. Citi’s outstanding consumer loans grew by 3% YoY to $309 Bn. Net charge-offs increased slightly by 1% YoY to $1.7 Bn but the provision for loan losses declined by 13% YoY to $1.9 Bn. Digital banking customers grew by 5% YoY to 18 Mn. Citi’s ROE for this quarter was 9.6%, up by 2% points YoY.
After bank earnings seasons concludes, PeerIQ will release our latest Lending Earnings Insights report which consolidates key metrics and scans bank earnings for any commentary on credit performance or where we are in the credit cycle.
Third Annual Online Lending Policy Summit
The Online Lending Policy Institute organized its third annual summit this week. Some of the main topics discussed revolved around the OCC’s proposed FinTech charter and the use of technology for financial inclusion of the underbanked population. The overall viewpoint was that large national FinTechs would likely apply for the charter as they would be best suited to comply with the associated capital and regulatory requirements, while smaller FinTechs would prefer bank partners or state-specific licenses. Although CRA does not apply to non-depository institutions, the OCC would take the impact on financial inclusion into account when approving charters. Participants also sought clarity on whether charter beneficiaries would have access to the Federal Reserve payments system.
PeerIQ has a suite of analytical tools that can help comply with the regulatory and risk management requirements of a FinTech charter. We highlight some of these below, and do reach out to learn more!
OCC FinTech Charter’s Risk Management Requirements
|Supervisory Standard||Description||PeerIQ View||Partner with PeerIQ|
|Risk Management and Compliance||· Top-down, enterprise-wide culture of compliance
· Systems (e.g. policies and procedures, practices, training, internal controls, and audit)
· Compliance programs to implement BSA, AML, OFAC, and other related obligations
|· Growth vs. Compliance culture trade-off||PeerIQ’s class-leading risk management platform can help measure and monitor risks, and stay in compliance with regulations|
|Financial Inclusion||· Must demonstrate a commitment to financial inclusion that supports fair access and fair treatment
· Explanation of how products would provide access to under-served consumers and small business
|· The Treasury report emphasizes financial inclusion from fintech lending and lenders must be able to demonstrate it effectively||Benchmark your under-served borrowers to those in the broader market using PeerIQ’s TransUnion dataset|
|Formal Plan for Failure||· Articulate specific financial or risk triggers to address best-case or worst-case scenarios
· Comprehensive framework for evaluating effects of severe stress
· Triggers alerting the entity to the risk of potential stress, and notification procedures
· Credible options to restore financial strength
· ‘May require’ a clear exit strategy
|· “Living Wills” have become the norm post-crisis for financial institutions.
· This is a potentially onerous regulatory requirement.
|PeerIQ’s stress-testing tools help develop worst-case loss estimates under various scenarios|
OCC FinTech Charter’s Capital and Liquidity Requirements
|Supervisory Standard||Description||PeerIQ View||Partner with PeerIQ|
|Capital||· Qualitative factors (e.g. quality of management, operating procedures and controls, asset quality, risk diversification, etc.)
· On and off-balance sheet composition
· Credit risk
· Concentration Risk
· Market Risk
· Capital should be commensurate with risk and complexity of products
|· Capital requirements not specified
· Off-balance sheet financing would include securitization programs
|PeerIQ’s Credit Facility Management Suite helps optimize capital required|
|Liquidity||· Access to funds, and cost of funding
· Projected funding sources, needs, and costs
· Net cashflow and liquid asset positions
· Projected borrowing capacity
· Highly liquid and collateral positions (including marketability of such assets)
· Various interest rates scenarios, time horizons, and market condition stress tests
|· Likely to be the most challenging area
· Securitization and other distribution mechanisms required for improving marketability of assets
· Data & analytics required for liability management, stress testing, and improving transparency on collateral pools
|PeerIQ’s stress-testing tools help develop worst-case loss estimates under various scenarios, and set aside the appropriate amount of capital|
- PeerIQ: Economic Growth is Solid, Lending Securitization Strong, but are Storm Clouds Gathering? (CrowdFund Insider, 10/10/18)
- PeerIQ’s Q3 2018 Marketplace Lending Securitization Tracker (LendIt Fintech, 10/10/18)
- PeerIQ’s CEO, Ram Ahluwalia, will speak on “Market Trends” at 1 pm on Tuesday, October 16th 2018 at the Risk Managers Round Table in Washington D.C.
- PeerIQ’s CEO, Ram Ahluwalia, will speak on The CEO’s Roundtable: Expanding Your Business Model panel at 10 am on Friday, November 2nd 2018 at the Investor’s Conference on Online Lending in New York.
- Stocks Rebound After Losing Earlier Gains (WSJ, 10/12/18) The S&P 500 dropped by 4.6% over the week and is now 5.6% lower from its high on September 20th.
- Consumer Prices Rose 0.1% in September (WSJ, 10/11/18) Core CPI rose by a lower-than-expected 2.2% YoY in September, but is still in line with the Fed’s expectations, and should keep the committee on track to raise rates again in December.
- JPMorgan Loan Business Notches Record in Back-to-Basics Quarter (Bloomberg, 10/12/18) Revenues at JPM grew by 5% YoY to $27.8 Bn, and earnings grew by 24% YoY to $8.4 Bn. Earnings growth was driven by record NII of $14.1 Bn, up by 7% YoY.
- Wells Fargo Profit Rises Amid Cost Cutting (WSJ, 10/12/18) WFC’s revenues were flat YoY at $21.9 Bn, but earnings grew by 33% YoY to $6 Bn. Earnings growth was driven by 1% YoY increase in NII to $12.6 Bn.
- Citigroup’s Profit Rises, Helped by Cost Cuts (WSJ, 10/12/18) C’s revenues were flat YoY at $18.4 Bn, but earnings grew by 12% YoY to $4.6 Bn. Earnings growth was driven by 9% YoY increase in fixed income trading revenue.
- Online Lending Summit Speakers Discuss SPNB Charters, CFPB Trial Disclosure Policy, Alternative Data (National Law Review, 10/11/18) The main topics discussed revolved around the OCC’s proposed FinTech charter and the use of technology for financial inclusion of the underbanked population.
- Walmart to act as PayPal ATM (FinExtra, 10/11/18) PayPal is collaborating with WalMart to allow its users to deposit and withdraw cash from their PayPal accounts at WalMart locations.
- Gary Cohn Has Joined a Blockchain Startup as an Adviser (Bloomberg, 10/12/18) Gary Cohn has joined Spring Labs as an advisor. Spring Labs is a blockchain technology firm that was started by the co-founders of Avant, and is working towards using blockchain technology in the consumer credit space.
- Goldman Is Looking to Reduce Marcus Lending Goal on Credit Caution (Bloomberg, 10/8/18) Marcus, which has originated $4 Bn in personal loans, is scaling back origination targets amid concern about the consumer credit cycle.
- Goldman’s Marcus May Rein In New Loans Next Year But Rivals Aren’t Worried (Forbes, 10/9/18) LC and SoFi are continuing to grow their personal loan books aggressively, even as Marcus retreats.
- Wells Fargo files for first private-label RMBS deal since crisis (Global Capital, 10/9/18) In a post-crisis first, Wells Fargo is issuing a private-label RMBS deal on its own shelf.
- Winning Bidder for Shredded Banksy Painting Says She’ll Keep It (NY Times, 10/11/18) Banksy’s prank on the global art scene may have double the value of his classic “Girl with a Balloon.: