Retail sales rose by 0.6% MoM in March, driven mostly by a rise in auto sales. Retail sales only rose by 0.2% QoQ, after the 2.5% increase seen in the fourth quarter. Sluggish retail sales growth has the potential to derail US GDP growth which has been led by consumer spending.
Bank earnings’ season is underway, and Bank of America, Goldman Sachs and Morgan Stanley reported record quarterly earnings this week. Bank earnings growth was propelled by the corporate tax cut that brought down average tax rates by between 5-10% points, boosting ROE by 2-3% points. Banks also delivered strong growth in trading revenues in a volatile quarter, signaling relief for trading businesses that had been under pressure.
Bank of America’s total revenue grew by 3.7% to $23.3 Bn driven by its Consumer business which saw profits grow by $0.8 Bn to $2.7 Bn, and 32 straight quarters of loan growth. Average loans increased by $22 Bn to $280 Bn driven by growth in mortgages and credit cards. Provision for credit losses increased by $97 Mn to $935 Mn, driven by credit card seasoning and loan growth. The net charge-off ratio increased slightly to 1.27%. Bank of America is the leader in mobile banking and active mobile banking users increased 12% YoY to 24.8 Mn.
Morgan Stanley delivered record quarterly revenues driven by a boost in fixed income trading, traditionally a sore spot for the street the last several quarters. MS ROE of 14.9% beat the target it set out for 2018 of 10-13%, helped by a 8% YoY drop in its effective tax rate.
Net Income at American Express grew by 31% to $1.6 Bn. AmEx has been focusing on building out its lending portfolio and loans grew by 16% to $75.8 Bn while provisions grew by 35% to $775 Mn.
Synchrony Financial beat earnings expectations with net income of $640 Mn. Synchrony’s 1Q net charge-offs came in higher at 6.1% compared to 5.3% in 1Q2017, and higher than even Synchrony’s January 2018 estimate of 5.5%-5.8%. Loan receivables grew by 6% and provision for loan losses grew by 4% to $1.4 Bn driven by credit renormalization and growth in the loan portfolio.
Goldman Sachs delivered its highest revenue in 3 years, also driven by a boost from its fixed income trading business. The bank continues to invest in Marcus and has originated $2.3 Bn in loans life-to-date and has $17 Bn in deposits. Marcus is only one part of GS’s broader lending strategy. We note in the slide below from GS’s earnings call that Goldman has substantially increased its loan book from $64 Bn at the end of 2016 to $81 Bn at the end of 2017 by expanding collateralized lending to high net-worth clients and securities-based lending.
Special Topic: The Copernican Revolution in Banking
Frank Rotman, founding partner at QED Investors, presents a potential path for the evolution of banking services in the age of widespread information on financial products and services. The presentation certainly provides food for thought on how banking could change over the next 10 years.
Bank ROEs have dropped precipitously post-crisis and are only now recovering to their mid-teen targets. A combination of lackluster trading revenues and a clampdown on leverage has prevented banks from generating ROEs close to pre-crisis levels.
A new business model will involve “Transactional Banks” which provide white-label versions of basic financial products like accounts, cards, investing and lending, partnering with technology companies like Google, Facebook and Apple to distribute them. These agglomerations would exist in conjunction with large banks like JPM and Bank of America. PeerIQ believes that in the absence of a clear regulatory “swimlane” for tech companies to compete, that partnerships between technology and fintech companies partnering with financial institutions make a lot of sense. See our prior pieces on this topic here and here.
The chart below lays out a framework for thinking about how a lending or banking business is differentiated in this new world.
We encourage you to take a look at the Copernican Banking Revolution and let us know what you think!
PeerIQ’s 1Q18 Securitization Tracker
We are excited to announce our Marketplace Lending Securitization Tracker for 1Q2018. We highlight several themes below:
Seven marketplace lending securitizations priced this quarter totaling $4.3 Bn, the 2nd highest level of quarterly issuance, representing 34% growth YoY. To date, cumulative issuance equals $33.4 Bn across 114 deals.
We observed an unprecedented 21 months of non-stop issuance. Markets remain in a “risk-on” mode and MPL investor appetite continues to grow.
Spreads tightened this quarter, amidst rising rates and increased volatility, and we saw deals price at record tights. Average spreads at issuance are tighter in the consumer and student spaces across credit tranches. New issue spreads in the Consumer MPL space on As were tighter by 27 bps and those on Cs were tighter by 107 bps on average. New issue spreads in the Student MPL space were also tighter across the stack, with the Cs seeing a nearly 100bp tightening on average.
All deals this quarter were rated. DBRS continues to lead the rating agency league table, while Kroll dominates the unsecured consumer sub-segment and we continue to see increased engagement from the top 3 ratings agencies.
Tranches continue to get upgraded. Ratings’ Agencies have upgraded 33 consumer MPL tranches and 51 student MPL tranches so far.
Goldman Sachs, Deutsche Bank, and Morgan Stanley continue to top the issuance league tables with over 55% of MPL ABS transaction volume.
SoFi issued the largest consumer and student deals ever seen in the MPL space. SoFi continues to increase deal sizes every quarter with a billion-dollar student deal in 1Q18.
With the potential for policy error on interest rates, regulation and trade expect a volatile credit environment in 2018. We should also see emerging ABS issuers like Upgrade.
“What is Happening with Personal Loan Losses” on Wednesday May 2nd at 2 p.m EDT. Click here to register and to add the event to your calendar.
- Mosaic Prices Solar Securitization (GlobalCapital, 4/12/18) Mosaic priced its first deal of 2018, a $235 Mn securitization led by DB. The As priced at 130 bp over swaps, continuing the trend in spreads tightening on primary issuance. ABS investors to login to the PeerIQ platform to analyze this deal further. “Our use of the PeerIQ platform to provide investors with loan level asset data increased transparency and contributed to strong pricing and continued development of the solar loan ABS market.” – Wendy Zorick, Vice President, Capital Markets
- Online Lending in Risk On Mode: Unprecedented 21 Months of Non Stop Securitization Issuance (CrowdFund Insider, 4/19/18)
- PeerIQ Releases Their Marketplace Lending Securitization Tracker For Q1 2018 (Lend Academy, 4/19/18)
- Consumers Shy From Spending, Despite Tax Cuts (WSJ, 4/16/18) Retail sales rose 0.6% MoM in March, but only 0.2% QoQ, potentially spelling trouble for GDP growth ahead.
- Bank of America’s Cost-Cutting Drive Pushes Profit to Record (Bloomberg, 4/16/18) BofA delivered record profits driven by its consumer division, which also saw 32 straight quarters of loan growth.
- Goldman Bond-Trading Bounce Not Enough to Get Investors on Board (Bloomberg, 4/16/18) GS delivered its highest revenue in 3 years driven by growth in fixed income trading revenues.
- Goldman Sachs Has Big Plans for Marcus and the Future of Retail Banking (CrowdFund Insider, 4/18/18) GS is focusing on Marcus by building technology in-house and believe that their lack of legacy technology is a competitive advantage.
- Morgan Stanley First-Quarter Profit Rises to Record High (Bloomberg, 4/18/18) MS reported record revenues boosted by growth in fixed income trading revenues.
- American Express Push to Bolster Lending Is Starting to Pay Off (Bloomberg, 4/18/18) AmEx loans grew by 16% to $75.8 Bn but the growth in provisions of 35% to $775 Mn outpaced loan growth.
- Synchrony Financial Results (Synchrony, 4/20/18) Synchrony beat earnings expectations but charge-offs continue to increase in an environment of credit renormalization.
- Fintech lender raises $65M to expand in developing nations (American Banker, 4/17/18) Tala, a startup that makes small loans to borrowers with short credit histories, has raised $65 Mn to expand their offerings.
- Point Initiates Forward Flow Purchase Program with Atalaya: Unlocking Home Equity Wealth (CrowdFund Insider, 4/18/18) Atalaya capital will purchase up to $150 Mn of Point’s home equity investments, injecting liquidity in an emerging sector.
The Amazing Tech in ‘Black Panther’ Is More Realistic Than You Think (LiveScience, 4/17/18) Levitating trains and suits that harness kinetic energy are closer to reality than we think.