Hard times Citing “one of the worst first quarter environments in recent history,” UBS CEO Sergio Ermotti warned investors of a weak start to 2019 for some of the bank’s key divisions, with investment banking revenues down about a third compared with the same period last year and wealth management down 9%. “The comments underscored the challenges facing Switzerland’s biggest bank as it also confronts legal entanglements in France and the U.S.,” the Wall Street Journal says. Last month, French judges ordered UBS to pay a record €3.7 billion ($4.2 billion) fine for helping wealthy clients in France evade taxes, while in the U.S. the bank is contesting Justice Department charges that it misled mortgage investors about the quality of loans it sold them before the global financial crisis. Wall Street Journal, Financial Times
Sergio Ermotti, chief executive officer of UBS AG, pauses during a Bloomberg Television interview on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 24, 2019. World leaders, influential executives, bankers and policy makers attend the 49th annual meeting of the World Economic Forum in Davos from Jan. 22 - 25. Photographer: Simon Dawson/Bloomberg
Simon Dawson/Bloomberg
Hanging in the balance Deutsche Bank’s 10,000 American workers are “on edge” as the bank holds talks with German rival Commerzbank about a merger, “with some concerned a deal could pressure Deutsche to further shrink or even dispose of its U.S. businesses. The future of the bank’s U.S. trading and investment banking presence had already been in question, and speculation has intensified following confirmation of the merger talks on Sunday.”
Deutsche Bank CEO Christian Sewing’s “zeal for parsimony, from cutting business travel to axing the office fruit bowl, has helped the bank regain some credibility by making its first net profit in four years. But some colleagues are frustrated at Sewing's fixation on costs. Opinion is split on whether this head down attitude will serve Deutsche Bank well as its future course hangs in the balance.”
Wall Street Journal
Not safe at home Jumbo mortgages, which have been a “bright spot” for banks, dropped 12% last year, “a blow to banks that refocused their mortgage businesses around wealthy borrowers in the years after the financial crisis.” Besides the benefit of collecting the interest on these large-dollar mortgages, "banks found that making and servicing the loans was a good entry point to sell more services to those customers."
Financial Times
Fintech regulation needs boost The growth of digital money and the fintech industry “reflects a natural expansion of a new dimension of the economy. But there may be causes for concern,” the paper’s editorial board warns. “The regulatory system that governs payments groups is disjointed and lacks heft. It does not match the supervision of banks, leaving doubts about how solidly financed companies are and how good their defenses might be against a serious cyber-attack. Policymakers did a good job on bank regulation. But they seem to be forgetting a secondary lesson of the 2008 crisis: that regulation must keep pace with financial innovation.”
Going south up north? Steve Eisman, the “fund manager made famous by the book The Big Short, has turned his sights on Canada, betting that a tottering housing market and a sluggish economy will bring trouble for the country’s biggest banks.” Now a portfolio manager at Neuberger Berman, he “is among a growing number of short-sellers taking positions in the likes of TD Bank and Royal Bank of Canada, in anticipation that the shares will fall. The moves come after property prices raced ahead of incomes for several years, boosted by loose lending, low interest rates and lax controls on foreign money.”
Next to zero European banks stocks dropped on Thursday as interest rates in the eurozone bond market drifted closer to negative territory. “Crossing into it would mean that banks are effectively paying to hold the paper. That hurts the financial institutions which must hold portions of their portfolios in safer assets, and encourage moves into higher yielding assets such as stocks and emerging market currencies.”
Preparing for disaster The Bank of England and the Financial Conduct Authority have reached a deal with the European Banking Authority “to share information and cooperate should the U.K. crash out” of the European Union without a deal in place, which now appears likely. The agreement “will then serve as a template for how regulators can interact with national regulators across the 27 member states of the EU should there be a cliff-edge Brexit.”
The prospect of a no-deal Brexit has “triggered contingency plans [by banks] that will move £1 trillion of assets, and 7,000 jobs, out of the U.K. to Europe,” according to the latest figures from EY. Another £200 billion was moved in the past few months, the consulting firm said.
Elsewhere
Power of gold Citigroup plans to sell several tons of gold that Venezuela's central bank put up as collateral on a $1.6 billion loan after the country failed to repay $1.1 billion of the loan that was due on March 11. The gold has a market value of about $1.358 billion and Citi plans to deposit the remaining $258 million in a New York bank account, according to sources.
Quotable
“We don’t know what’s going on. Everything is up in the air.” — A senior employee in Deutsche Bank’s U.S. equity sales unit, where workers are worried about the possibility of the bank pulling up stakes as it holds merger talks with rival Commerzbank.
The Arkansas Republican is currently the vice chairman of the House Financial Services Committee and has a deep background in the banking industry and policy.
The Buffalo, New York-based bank set a goal four years ago to limit its commercial real estate loan portfolio to 160% of its capital and reserves, and it's closing in on that target, says Chief Financial Officer Daryl Bible.
Democratic Sens. Elizabeth Warren, Mass., and Sheldon Whitehouse, R.I., decried the U.S. Chamber of Commerce's suit against the Consumer Financial Protection Bureau's credit card late fee rule, saying the suit is an example of the kinds of frivolous litigation it opposes elsewhere.
The New York megabank is working to deploy artificial intelligence as it seeks to make its own operations more efficient. Solomon also sees an "unprecedented" opportunity in financing clients' needs as they invest in AI.
In an ongoing case, Citi and the New York attorney general are disputing who is responsible for wire transfer fraud that drained a customer's retirement savings.
