Category: Banks & Interest Rates

Posted on

Bank heavyweight earnings slip

Thursday was a big day for earnings releases, with two bank heavyweights reporting first-quarter (Q1) 2016 earnings.

Bank of America (BAC)

Bank of America reported a 19 percent fall in earnings per share ($0.21) compared to the first quarter of last year ($0.26). The fall was largely attributable to a drop in investment banking and trading profits. Provision for credit losses increased 30% for the quarter, to $997 million.

Tier 1 Capital (CET1) improved to 11.6% (Q1 2015: 11.1%) of risk-weighted assets, while Leverage (SLR) improved to 6.8% (Q1 2015: 6.4%).

The dividend was held at 5 cents (Q1 2015: 5 cents), increasing the payout ratio to a modest 24%, from 19% in Q1 2015.

BAC is in a primary down-trend, having broken primary support at $15. Long-term Momentum below zero confirms. Expect a rally to test resistance at $15 but this is likely to hold and respect would warn of another decline, with a target of $9*.

Bank of America (BAC)

* Target calculation: 12 – ( 15 – 12 ) = 9

Wells Fargo (WFC)

Wells Fargo reported a 5 percent fall in (diluted) earnings per share ($0.99) compared to the first quarter of last year ($1.04). Provision for credit losses increased 78% for the quarter, to $1.09 billion, primarily due to exposure to the Oil & Gas sector.

Tier 1 Capital (CET1) improved to 10.6% (Q1 2015: 10.5%) of risk-weighted assets. No leverage ratio was provided..

The dividend of 37.5 cents is up on Q1 2015 dividend of 35 cents, increasing the payout ratio to 38% from 34% in Q1 2015.

WFC is in a primary down-trend, having broken primary support at $48. Long-term Momentum below zero confirms. Expect a rally to the descending trendline but respect is likely and reversal below $48 would warn of another decline, with a target of $40*.

Wells Fargo (WFC)

* Target calculation: 48 – ( 56 – 48 ) = 40

So far we have had three heavyweights, JPM, BAC and WFC all report similar performance: declining earnings per share despite deep cuts in non-interest expenses, partly attributable to rising provisions for credit losses.

Citigroup (C) is due to report Friday 11:00 am EST.

Posted on

JP Morgan earnings dip but stock rallies

First of the financial heavyweights to report first-quarter (Q1) earnings this week, JP Morgan (JPM) reported a 7 percent fall in earnings per share ($1.36) compared to the first quarter of last year ($1.46). The fall was largely attributable to a 90 percent increase in provision for credit losses for the quarter, to $1.8 billion, primarily from a sharp increase in net charge-offs in the Consumer division but also exposure to Oil & Gas and Metals & Mining in Investment Banking.

Tier 1 Capital (CET1) improved to 11.8% (Q1 2015: 10.7%) of risk-weighted assets, while Leverage (SLR) improved to 6.6% (Q1 2015: 5.7%).

The dividend was held at 44 cents (Q1 2015: 40 cents), increasing the payout ratio to a modest 32% from 27% in Q1 2015.

The monthly chart shows long-term Momentum is slowing, with JPM forming a broad top above $54. Declining peaks since August 2015 warn of a primary down-trend and breach of $54 would confirm, offering a target of $40*.

JP Morgan Chase

* Target calculation: 55 – ( 70 – 55 ) = 40

The market responded well to ‘positive’ news that JPM beat its earnings estimate, boosting the stock by 4.6%. This is a game we will see a lot more of this year: give really low guidance if you expect a bad quarter. When the result comes out, the gullible will focus on the fact that you beat your estimate rather than that your earnings are falling. This chart from Zero Hedge shows the rising percentage of companies guiding next quarter earnings below consensus:
Earnings Guidance

Don’t be mis-led by the latest ‘froth’. The reality for the banking sector is net interest margins are near record lows and credit losses are rising.

Major US Banks Net Interest Margins

Posted on

Low interest rates and secular stagnation

Interesting observation by Pierre-Olivier Gourinchas, a research associate at the NBER:

In recent theoretical work, Caballero, Farhi, and I show that the safe-asset scarcity mutates at the ZLB [Zero Lower Bound], from a benign phenomenon that depresses risk-free rates to a malign one where interest rates cannot equilibrate asset markets any longer, leading to a global recession. The reason is that the decline in output reduces net-asset demand more than asset supply. Hence our analysis predicts the emergence of potentially persistent global-liquidity traps, a situation that actually exists in most of the advanced economies today.

…..our results point to a modern — and more sinister — version of the Triffin dilemma. As the world economy grows faster than that of the U.S., so does the global demand for safe assets relative to their supply. This depresses global interest rates and could push the global economy into a persistent ZLB environment, a form of secular stagnation.

Source: The Structure of the International Monetary System | NBER

Posted on

APRA waves wet lettuce at bank offshore funding | MacroBusiness

From Leith van Onselen at Macrobusiness:

…..the banks’ reliance on offshore funding hit an unprecedented 54% of GDP in the December quarter:

As always, the key risk is that the banks’ ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending them credit. This willingness will be tested in the event that Australia’s sovereign credit rating is downgraded (automatically downgrading the banks’ credit ratings), there is another global shock, or a sharp deterioration in the Australian economy (raising Australia’s risk premia).

The Federal Budget, too, is now hostage to the banks’ offshore borrowing binge as it cannot borrow to spend on infrastructure or other initiatives for fear that Australia will lose its AAA credit rating, potentially leading to an unraveling of the private debt bubble created by Australia’s banks.

That APRA could stand by and allow the banks’ to borrow externally like drunken sailors is a hallmark of regulatory failure.

One in four dollars of bank assets is funded by offshore borrowing. A precarious position even for a stable economy (like Ireland?), let alone one hitched to the boom and bust commodity cycle. Smacks of moral hazard by the banks.

Source: APRA waves wet lettuce at bank offshore funding – MacroBusiness

Posted on

Headmaster Turnbull takes cane to banks

Elizabeth Knight quotes prime minister Malcolm Turnbull speaking at Westpac’s 199th birthday lunch:

Meanwhile Turnbull – himself a former head of the Australian chapter of Goldman Sachs – told those attending the Westpac lunch that bank culture must shift from one that traditionally had been all about profit to one that took into account broader social responsibility.

Remuneration and promotion cannot any longer be based solely on direct financial contribution to the bottom line.

While bank bosses have been talking the same kind of talk for a while now, the growing number of instances where the behaviour of the banks had fallen short as a result of the drive to increase profit (and personal bonuses derived from making returns) are becoming harder to explain away using the excuse of a few bad apples.

“We expect our bankers to have higher standards, we expect them always, rigorously, to put their customers’ interests first – to deal with their depositors and their borrowers, with those they advise and those with whom they transact in precisely the same way they would have them deal with them,” he said.

Turnbull has hit on a key risk area for banks: remuneration structures that reward short-term profit objectives promote a risk-taking culture. Bank deals often look impressive at the start only to sour later. Incentives that encourage employee share purchases align staff interests with those of shareholders — a prudent, long-term outlook — while share options and bonus schemes encourage a short-term focus, aggressive risk-taking and divisional rivalry that can damage long-term value.

APRA may consider remuneration structures as outside their risk management ambit but it is time for a re-think. Toxic management culture is the biggest risk of all.

“Only when the tide goes out do you discover who’s been swimming naked.” ~ Warren Buffett

Source: Headmaster Malcolm Turnbull takes cane to banks leaving Westpac management ginger

Posted on

RBA leaves official cash rate at 2pc

Jens Meyer quotes RBA governor Glenn Stevens:

While the decision to keep rates unchanged was widely expected, analysts were speculating that the governor would show some concern about the recent steep rise in the Australian dollar’s exchange rate, which gained nearly 12 per cent from its January lows to a peak of US77.23¢ last week.

Mr Stevens duly added a paragraph to this month’s statement, noting that the currency had appreciated “somewhat”.

“In part, this [the recent rise] reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” he said, referring to recent monetary easing by other central banks including the Bank of Japan and the European Central Bank, as well as the decision by the US Federal Reserve to reduce the pace of interest rate hikes.

“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” he added.

But anyone hoping for a stronger “jawbone” was disappointed and the Australian dollar shot up by about half a cent to the day’s high of US76.32¢, before falling back in late trade to around US76¢.

Central banks around the globe are destabilizing financial markets and the RBA responds with a polite acknowledgement at the end of its statement. Someone please tell the governor: If you want to run with the big dogs, you’ve got to learn to pee high.

Source: RBA leaves official cash rate at 2pc

Posted on

APRA gives the RBA some wiggle room | Business Spectator

Robert Gottliebsen predicts further rate cuts from the RBA:

Given that Australian interest rates are higher than other countries of similar standing, money is now flowing Down Under which works to boost the currency and some are forecasting that the exchange rate could rise as high as US80c.

Thanks to APRA, the Reserve Bank can now attack the currency with lower rates without the risk of putting a rocket under house prices.

Source: APRA gives the RBA some wiggle room | Business Spectator

Hat tip to David Llewellyn-Smith at Macrobusiness

Posted on

China’s problems

China’s problems in a nutshell, From Niels C. Jensen’s Absolute Return newsletter:

China’s problems….. It is faced with a decapitated banking industry, which has been far too willing to lend to all kinds of investment projects – good and bad. At the same time, the Chinese growth model has been driven by investments and exports, whereas the growth in consumer spending has been relatively modest. A few numbers to support that statement: As recently as 10 years ago, exports and investments constituted 34% and 42% respectively of Chinese GDP, i.e. less than a ¼ of Chinese GDP came from the combination of consumer spending and government spending. By comparison, consumer spending accounts for over 70% of U.S. GDP.

By 2014, investments had grown to 46% of GDP, whilst exports had fallen to 23%. The further growth in investments has been funded by rapid credit expansion in China’s banking industry, which has grown from $3 trillion in 2006 to $34 trillion in 2015. That is a shocking amount of credit in a $10 trillion economy. Now, the Chinese leadership face a big challenge. They must restructure the banking industry whilst at the same time seek to change the growth model. I can think of quite a few things that can go wrong in that process…..

The outcome is likely to be similar to Japan in the 1990s: zombie banks.
From FT lexicon:

Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow America’s tough recommendation – and close or recapitalise these banks – Japan kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting “zombie banks” – neither alive nor dead – could not support economic growth.

A period of weak economic performance called Japan’s “lost decade” resulted. Scores of companies were cast into an “undead” state – in the sense of being too weak to flourish, but too complex and costly for their lenders to shut down. Hence they remained half-alive, poisoning the corporate world by silently spreading a sense of stagnation and fear.

Posted on

Risk of a global down-turn remains high

Stock markets in Asia and Europe have clearly tipped into a primary down-trend but the US remains tentative. The weight of the market is on the sell side and the risk of a global down-turn remains high.

Dow Jones Global Index found support at 270 and is rallying to test resistance at the former primary support levels of 290/300. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend. Respect of 300 is likely and reversal below 290 warn of another decline. Breach of 270 would confirm.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Willem Buiter of Citigroup warns that further monetary easing faces “strongly diminishing returns”, while “hurdles for a major fiscal stimulus remain high”. To me, major infrastructure spending is the only way to avoid prolonged stagnation but resistance to further increases in public debt is high. The only answer is to focus on productive infrastructure assets that generate returns above the cost of servicing debt, improving the overall debt position rather than aggravating it.

North America

Dow Jones Industrial Average recovered above primary support at 16000 and is headed for a test of 17000. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of 17000 is likely and would warn of continuation of the primary down-trend. Reversal below 16000 would confirm the signal, offering a target of 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The most bearish sign on the Dow chart is the lower peak, at 18000, in late 2015. Only recovery above this level would indicate that long-term selling pressure has eased.

The S&P 500 is similarly testing resistance at 1950. Breakout is quite possible but only a higher peak (above 2100) would indicate that selling pressure has eased. Declining 13-week Twiggs Momentum, below zero, continues to warn of a primary down-trend. Reversal below 1870 would confirm the primary down-trend, offering a target of 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) is testing ‘support’ at 20. Respect is likely and would confirm that market risk remains elevated.

S&P 500 VIX

Canada’s TSX 60 respected the descending trendline after breaking resistance at 750. Reversal below 750 would warn of another test of 680/700. Rising 13-week Twiggs Momentum is so far indicative of a bear rally rather than reversal of the primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

Europe

Dow Jones Euro Stoxx 50 is rallying to test resistance at the former primary support level of 3000. The large 13-week Twiggs Momentum peak below zero confirms a strong primary down-trend. Respect of resistance is not that important, but another lower peak, followed by reversal below 3000, would signal a decline to 2400*.

DJ Euro Stoxx 50

* Target calculation: 2700 – ( 3000 – 2700 ) = 2400

Germany’s DAX recovered above resistance at 9300/9500. Expect a test of 10000 but buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 9300 would signal another decline, with a (long-term) target of 7500*.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie recovered above 6000, and the declining trendline, but the primary trend is down. Buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 6000 would signal another decline, with a target of 5500*. The long-term target remains 5000*.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index rallied off support at 2700 but respected resistance at 3000. Reversal below support would offer a target of 2400*. The primary trend is clearly down and likely to remain so for some time.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is in a clear primary down-trend. Expect a test of 17000/18000 but respect of 18000 would warn of another test of 15000. Decline of 13-week Twiggs Money Flow below zero would flag more selling pressure.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17000 ) = 14000

India’s Sensex primary down-trend is accelerating, with failed swings to the upper trend channel. Breach of 23000 would offer a short-term target of 22000*. Reversal of 13-week Twiggs Money Flow below zero would warn of more selling pressure.

SENSEX

* Target calculation: 23000 – ( 24000 – 23000 ) = 22000

Australia

The ASX 200 rally from 4700 respected resistance at 5000. Reversal below 4900 warns of another decline. Breach of support at 4700 would confirm. Divergence on 13-week Twiggs Money Flow indicates medium-term (secondary) buying pressure and reversal below zero would flag another decline. The primary trend is down and breach of 4700 would offer a target of 4400*. The long-term target remains 4000*.

ASX 200

* Target calculation: 4700 – ( 5000 – 4700 ) = 4400; 5000 – ( 6000 – 5000 ) = 4000

Banks are taking a hammering, with the Banks index (XBAK) in a clear down-trend. Retracement to test resistance at 78 is weak and another strong decline likely. Declining 13-week Twiggs Money Flow, below zero, reflects long-term selling pressure.

ASX 200 Financials

Powered by WordPress / WordPress Maintenance Service By Website Helper