During an unusual period of global synchronized growth, the IMF raised its Global Growth Forecast for 2017 and 2018 by 10 bps to 3.6% and 3.7%, respectively. The IMF also named nine banks that will struggle to achieve profitability. “About a third of banks by assets may struggle to achieve sustainable profitability, underscoring ongoing challenges and medium-term vulnerabilities,” the IMF said in its
Global Financial Stability Report published Wednesday. As seen in the chart below, the IMF is referring to any bank with a 2019 return-on-equity forecast below 8%.The Institute of International Finance published
a study showing that since 2010 banks across the US, Japan, and EU are, on average, earning less than their cost of capital.
Source: IMF
Since the post-crisis capital and liquidity rules, we continue to see a shift of origination and funding of loans from the banking sector to the non-bank sector. We recommend Lalita Clozel’s article
“Could Online Lending Become the Next Systemic Risk?” in American Banker to learn more.
Last weekend, The Wall Street Journal reported Fortress Investment Group is looking to sell
OneMain Financial. Although it is publicly traded, OneMain is 55% owned by Fortress. Fortress, currently in talks to be acquired by SoftBank, recently completed the sale of
Logan Circle to MetLife. We performed an in depth analysis of
OneMain’s most recent near-prime deal in early September.
In securitization news,
Marlette Funding Trust 2017-3 is expected to close at the end of October with $298 Mn in loans. MFT 2017-3 is the fifth ABS from this platform and the fourth on the MFT shelf (the first was on Citi’s CHAI shelf). Marlette typically lends ~$400 Mn per quarter and currently has nearly $100 Mn loans on its balance sheet.
In other securitization news, SoFi priced SOFI 2017-E last week. With a $777 Mn deal size, it’s SoFi’s largest student loan deal to date. Consistent with the last four deals on the shelf, SoFi accumulated approximately $10 Mn in loans per day. Additionally, this deal had a weighted-average seasoning of two months; the prior four deals on the shelf had seasoning of one or zero months at issuance. Also, the time since the previous deal was longer than typical indicating SoFi may be focused on stabilizing rather than ramping up lending. SoFi is pulling its
application to open a new bank chartered in Utah following the spate of recent executive departures.
In case you missed it, PeerIQ released its quarterly securitization tracker last week for Q3 2017. You can access the full report
here.
In this week’s newsletter, PeerIQ dives into the earnings and loan loss provisions for the major money center banks.
Bulge Bracket Banks
Source: PeerIQ, Company Information
The big money center banks released earnings this week to a mixed reception although YTD stock performance is strong. FICC trading revenues were down year-over-year across the board. ROE levels for the big banks remain mired in the low double-digit area or lower.
Highlights:
JP Morgan
- JP Morgan is currently the largest US Bank ranked by total US Deposits, which has grown 9% year over year.
- JP Morgan credit card costs were up about $200 Mn year-on-year driven by the successful Sapphire launch, and higher net charge-offs.
- Q3 2017 provision for credit losses was $1.5 Bn, up from $1.3 Bn in the prior year. Currently at 3.3%, credit card allowance to total loans rose every quarter this year.
Citigroup
- Citi built approximately $500 Mn in card loan loss reserves this quarter:
- $150 Mn from regular seasoning and volume growth.
- $50 Mn from hurricanes and other natural disasters.
- $300 Mn attributable to forward-looking NCL expectations.
- Citi expects NCL rate on branded cards to increase 10 bps in 2018 to 295 bps.
- Citi shifted away from rewards oriented products and more towards value products due to heavy competition in rewards products (see Chase Sapphire Reserve). These cards typically have non-yielding promotional balances in the near term.
Bank of America
- Quarterly profit rose 13% year over year.
- Provision for loan losses increased by nearly 15% quarter over quarter while allowance for loan losses decreased 1.7% over the same period.
- Allowance for loan losses as a percentage of total loans decreased to 1.15% from 1.19% last quarter and from 1.29% last year.
Wells Fargo
- Wells Fargo was the only reporting bank that had decreasing negative returns YTD and a ROE decline YOY.
- Revenue fell 2% year over year, and Wells is the only reporting bank to have falling revenues.
Loan Losses Allowances
All four reporting banks increased their provision for loan losses compared to the prior quarter. However, only Citibank and JP Morgan increased their reserve allowance for loan losses. Additionally, all banks except Bank of America increased their loss allowance as a percentage of loans for the quarter.
Source: PeerIQ, Company Information
Source: PeerIQ, Company Information
As earnings season continues, we look forward to reports from investment banks in the coming weeks. GS appears intent on bucking the pressures to ROE. Continuing the trend of consolidation in the lending industry,
Goldman Sachs purchased Genesis Capital from Oaktree Capital Management. Genesis offers loans to developers and fix-and-flip home buyers. In a prior newsletter, PeerIQ details how
Goldman has made a strong push into lending recently and expects lending to be the most significant driver of revenue growth (and ROE) in the coming years.
American Express is also making moves to take on processors Square and PayPal in Small Business lending. Like its FinTech rivals, Amex is utilizing the data generated from its credit card operations. Amex plans to offer short-term loans ranging from $3,000 to $50,000 over a 1, 2, or 3-year payment plan.
Conferences:
- Ram Ahluwalia will speak about “The Outlook for Securitization and Marketplace Lending” at the Alternative Lending Summit in Las Vegas on October 23 at 5:10PM.
PeerIQ in the News:
- The Grapevine (AB Alert, 10/13/17) PeerIQ has a new head of research. Ashish Dole started last week at the New York analytics firm. Dole previously was a trader at hedge fund operator Metacapital Management, and before that was at Morgan Stanley.
Industry Update:
- Navient to Boost Earnest’s Output (AB Alert, 10/13/17) Online education lender Earnest is expected to become a more active issuer of asset-backed bonds as a unit of Navient.
- Goldman Sachs to Lend to House-Flippers (WSJ, 10/12/17) As part of a push to diversify its businesses, Goldman Sachs is buying Genesis Capital, which provides real-estate loans to house flippers.
- Amex targets Square, PayPal in small-biz lending (American Banker, 10/12/17) American Express Open cardholders will be able to sign up for the Business Loans option online, choosing short-term loan amounts ranging from $3,500 to $50,000 over a one-, two- or three-year payback plan.
- Five Things to Watch for in Bank Earnings (WSJ, 10/11/17 ) Bank earnings season kicked off this week with JP Morgan and Citigroup reporting results Thursday—five things to keep an eye on as the numbers come in.
Lighter Fare:
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