Wells may be poised to settle; Dissecting Morgan Stanley, E-Trade deal

Receiving Wide Coverage ...

Merits of the deal

“There is a lot to like about Morgan Stanley’s most ambitious foray beyond Wall Street,” the Wall Street Journal says about the firm’s plan to buy E-Trade for $13 billion in stock, “but there isn’t yet a lot to bank on. E-Trade brings loads of customer cash: $39 billion of deposits in its own bank and $18 billion swept off-balance-sheet. By using those off-balance-sheet deposits to replace wholesale funding at Morgan Stanley, this can help reduce funding costs by $150 million by year two.”

In addition, revenue in the wealth management business “isn’t nearly as volatile as investment banking and trading, and it can grow steadily in a wider array of market conditions. That latter feature is especially important when Morgan Stanley is being put through the annual Federal Reserve stress tests. E-Trade and Morgan Stanley can also now jointly build out a digital retail-banking offering to compete with the likes of Goldman Sachs’s Marcus and fintech upstarts such as Betterment.”

“If it goes through, the deal will put Morgan Stanley, which does not have retail bank branches to draw in new asset-management customers, on firmer footing with competitors like Bank of America and Wells Fargo,” the New York Times says.

But the Washington Post offers a word of caution. “This is not going to be an easy deal to move through the Federal Reserve,” Jaret Seiberg, a policy analyst with Cowen Washington Research Group, said. “We would not be surprised if it spilled into 2021 simply because of the need to address the systemic risk aspects of the transaction.”

“While the deal is largely being billed as a wealth management play, it comes with roughly $56 billion of low-cost deposits that will not only help fund Morgan Stanley’s core businesses, but also fill some gaps in its lineup of banking products and services,” American Banker reports.

The deal “has given a boost to those who have long argued that a wave of banking takeovers is on its way,” the Financial Times says.

Bloomberg News

European CEO shuffle

HSBC “has identified” Jean Pierre Mustier, CEO of UniCredit, Italy’s largest bank, “as the leading external contender to become its next chief executive,” the FT reports. “The Asia-focused bank has been searching for a chief executive since it ousted John Flint last August. Noel Quinn was subsequently appointed as interim chief executive and the contest to lead the bank is now a two-horse race between him and Mr. Mustier. If Mr. Mustier does win the job it would be the latest in a series of changes at the top of European banks.”

HSBC “plans to invest heavily in its newly combined retail and private banking business as it targets internationally minded customers in markets such as China, the United States and Singapore,” the unit’s CEO, Charlie Nunn, told Reuters. “Nunn, a former McKinsey consultant who joined HSBC in 2011, was one of the biggest winners in the banking group’s latest management reshuffle, taking control of a division with $1.4 trillion in clients’ assets.”

“The plan is to grow in the three major markets where HSBC has scale, namely Britain, Hong Kong and Mexico, focusing on mortgages, wealth and insurance products, and unsecured lending respectively. HSBC will also target wealthier customers who travel or invest often overseas in more than 10 markets such as China where its share is smaller.”

Meanwhile, at UBS, Ralph Hamers, “who has never worked for a top-tier securities house or run a wealth manager, has moved into one of the most powerful — and challenging — positions in global finance,” the FT says. The former CEO of Dutch bank ING “speaks German, an essential qualification considering this is the first time in UBS’s history that it will have both a non-Swiss chairman and chief executive. When he joins the Swiss lender in September, he will be charged with galvanizing revenues and taking an axe to persistently high costs.”

Hamers got the UBS job “after building a reputation at ING for successfully moving more customers out of branches and onto their phones and computers,” the Journal says. “Under his leadership, the bank also increased revenue as it improved internal systems and the technology behind how it interacted with clients. The moves let it cut costs by shutting hundreds of branches and shedding thousands of jobs in Belgium and the Netherlands.”

“The hope that we have is that he will help us get to the next level in digitalizing our business,” UBS Chairman Axel Weber said. “The bank wants technology to drive higher profits from its client base and reduce costs,” the paper says.

Low-cost alternative

Goldman Sachs and JPMorgan Chase have “agreed to back a new low-cost stock exchange that plans to launch this summer to challenge the New York Stock Exchange and Nasdaq. The two banks, along with high-speed trading firm Jane Street Capital, led a new round of funding for Members Exchange, or MEMX.”

“MEMX was created after years of frustration among brokers and traders with the fees charged by the big U.S. exchange groups, particularly for market-data feeds that many financial firms regard as essential for their business,” the Journal says. “MEMX’s backers have expressed hope that by charging rock-bottom fees, the new exchange will pressure the incumbents to keep their own fees low.”

The two big Wall Street banks “join nine of the biggest participants in American markets, including Morgan Stanley, Fidelity, TD Ameritrade and E-Trade, which are already backing the new arrival,” the FT says. “MEMX aims to increase transparency in the industry with what it calls ‘simple and fair pricing’ on costs for connectivity and market data, while introducing new technology.”

Financial Times

Unprepared?

The financial services industry “is in danger of being caught flat-footed” by climate change, which is “creating substantial, unrecognized risk in the financial system as banks are failing to prepare for green regulation and carbon taxes that will have an impact on the companies they lend to,” a report from Oliver Wyman to be released Friday says. “We have yet to find a single bank that has developed a way to embed the outcomes of climate-risk scenario analysis  ...  across the loan book,” the report says.

Global slump

The 12 largest global investment banks had combined revenues of $147.5 billion in 2019, “down 4% year-on-year to the lowest level since 2008. They responded by cutting 6% of workers, the sharpest rate of lay-offs since 2012,” according to an industry consulting firm.

New York Times

Wells may settle

Wells Fargo in ready to “settle with federal prosecutors and the Securities and Exchange Commission [charges] over the widespread abuse of customers in its banking, auto lending and mortgage businesses," the paper says and an announcement could come Friday. "The size of the penalties could not immediately be determined, but Wells Fargo has set aside $3.1 billion to pay legal costs related to the sales practice matters.”

“Federal prosecutors have also been investigating people connected to the bank, but it was unclear if any criminal charges would be brought against any individuals,” the paper adds.

Quotable

“This continues the decade-long transition of our firm to a more balance-sheet-light business mix, emphasizing more durable sources of revenue.” — Morgan Stanley CEO James Gorman, on the firm’s proposed acquisition of E-Trade