Q2 earnings week begins; Fed-Treasury spat delayed Main Street Lending Program

Receiving Wide Coverage ...

Earnings week preview

The largest U.S. banks report second quarter earnings starting Tuesday, and the results, “won’t be pretty,” the Wall Street Journal says. “The novel coronavirus has wreaked havoc on the economy—and the banks’ operations. Lending money has become a much riskier proposal, forcing banks to put aside billions of additional dollars in case consumers and businesses stop paying. And early this year, the Federal Reserve cut interest rates, which was meant to shore up the economy but also lowered the margin banks can make on any lending they do.”

Wells Fargo “is the only big bank expected to swing to a loss in the latest quarter,” while the others “are expected to remain profitable but see big declines. JPMorgan Chase and Citigroup, which will both report Tuesday alongside Wells Fargo, are forecast to post at least 60% drops in income from a year ago.”

“The stakes this quarter are unusually high because their dividends are potentially at stake,” the Journal adds. “New Federal Reserve rules will limit third-quarter payouts to the average level of profits a bank made over the prior four quarters. Wells Fargo has already said it expects to cut its payout. For some banks whose earnings are expected to be on the cusp according to analyst forecasts, such as Capital One Financial, second-quarter results could put pressure on payouts, particularly if the Fed extends its test into additional quarters.”

Goldman Sachs and Morgan Stanley “are set to triumph over their Main Street rivals in the second quarter as the pair of investment banking powerhouses benefited from surging trading revenues and advisory fees,” the Financial Times says. “Frenzied trading around the coronavirus crisis has boosted markets revenues, while Goldman and Morgan Stanley have also profited from their limited exposure to the widespread loan losses stemming from the pandemic that are sweeping through the global banking sector.”

Wall Street Journal

Not in synch

“Disagreements between the Federal Reserve and Treasury Department in recent months on how to craft the loan terms slowed the start” of the $600 billion Main Street Lending Program for small and midsize businesses. “Fed officials generally favored easier terms that would increase the risk of the government losing money, while Treasury officials preferred a more conservative approach. Treasury, which has put up $75 billion to cover losses, resisted recent changes to relax loan terms.”

“The disagreements over relatively narrow design issues reflect broader philosophical differences over what the program is trying to accomplish and how much risk the government should take as a result. The upshot is that the program, announced in March, went through multiple revisions and opened for business this past week. As of [last] Wednesday, it hadn’t purchased any loans.”

Buy now, pay later

Afterpay, “Australia’s largest tech company by market capitalization—about $13.5 billion—is expanding across the U.S. through deals with retailers including Anthropologie and Free People.” Last week “it raised $452.6 million from institutional investors to expand into more countries. Since the Australian market bottomed on March 23, its stock has risen more than ninefold, while 1.6 million new U.S. users started spending through its technology over the past four months.”

“Afterpay’s technology allows users to pay for goods in four, interest-free installments, while receiving the goods immediately. Customers only pay a fee if they miss an automated payment, a transgression that also locks their account until the balance is repaid. Afterpay says this limits bad debts, particularly in a downturn when job security is shaky and household finances are stretched. Most of Afterpay’s revenue comes from retail merchants, which pay a percentage of the value of each order placed by customers, plus a fixed fee.”

Take two

Social Finance filed an application last week to create SoFi Bank, a Utah-based bank that “would offer student loan refinancings, mortgages, credit cards and checking accounts to consumers nationwide through its website and mobile apps. The effort comes nearly three years after SoFi abandoned a similar attempt to start a bank following the departure of its founding chief executive, Mike Cagney. Since then, regulators have warmed to the idea of Silicon Valley startups and tech companies starting their own banks.”

“SoFi said in its application that it was seeking a banking license to reduce complexity in its business model and bring down its funding costs. The company has extended more than $50 billion in student loans, mortgages and personal loans since 2012, but because it isn’t a bank, it has to navigate a patchwork of lending rules that vary state to state. It also lacks a base of deposits it could use to fund loans and instead has to sell them off to outside money managers at attractive yields.”

Financial Times

Classified

“Germany’s government is under pressure to disclose the details of conversations between deputy finance minister Jörg Kukies and former Wirecard chief executive Markus Braun, as the fraudulent collapse of the payment processing company ripples through the country’s establishment.”

The government says the content of those conversations can’t be disclosed because of “secrecy protection interests,” meaning they could be “detrimental for the interests of the Federal Republic of Germany.”

Business as usual

Brian Brooks, the acting head of the Office of the Comptroller of the Currency, said “banks will not be able to use Covid-19 as cover to shut branches or to win permanent concessions from regulators,” according to an interview with the FT. “Existing rules governing branch closures would remain in place, he said, and banks should not expect a permanent extension of the waivers they have enjoyed on some regulations to keep them lending through the pandemic.

“I don’t believe this is the worst thing that’s ever happened in the history of the Republic and so therefore I’m not prepared to revisit the fundamentals of bank regulation,” he said.

Washington Post

Back at bat

The Senate Banking Committee “plans to move forward with the nomination of controversial economist Judy Shelton to the Federal Reserve Board, setting the stage for a political battle as the central bank tries to shore up the economy during the worst recession in decades. The committee on Friday announced that a vote on Shelton’s nomination will take place July 21.”

“Democrats swiftly criticized the move and are calling for another hearing. It is unclear whether she has enough support on the Senate Banking Committee to advance her nomination to the full Senate. Pushback by one Republican on the panel could thwart a simple majority and derail the nomination.”

The committee will also vote on the nomination of Christopher Waller, research director at the Federal Reserve Bank of St. Louis, for another Fed board seat, American Banker’s Neil Haggerty reports.

https://www.americanbanker.com/news/senate-banking-committee-to-consider-controversial-fed-board-pick