Will earnings season bring surprises?; Wells Fargo’s tech troubles

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Earnings season begins

America’s largest banks are set to release fourth-quarter earnings this week, starting with JPMorgan Chase, Citigroup and Wells Fargo on Tuesday, followed by Bank of America and and Goldman Sachs on Wednesday and Morgan Stanley on Thursday. “KBW analysts expect big banks to post roughly 6% growth in fourth-quarter earnings compared with the prior year,” the Wall Street Journal reports. “But they expect earnings to fall about 6% from the third quarter.”

Lower interest rates are expected to be a mixed bag for earnings. “Lower rates crimp what banks can charge on loans, reducing the profitability on lending operations. But they can also fuel demand for loans and let banks lower what they pay for deposits.”

“The upshot is that the expectations game may now be working against banks,” the paper says in a separate article. “With the market not forecasting another Fed rate cut until at least very late in 2020, the outlook for net interest margins has finally stabilized.”

“Banks still have a few ways to surprise. For one, fourth quarter 2018 was dismal for trading desks, but the most-recent fourth quarter had a backdrop of rising prices, which generally boosts revenue. Loan growth may also help paper over any further compression in net interest margin, especially for banks with giant card units. What long-term investors should be focused on are finding banks doing more than just playing the best defense against low rates. Lenders that can decouple from the rate cycle by showing big gains in expense efficiency, particularly through technology investment, will be the ones that ultimately prevail in the expectations game.”

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“The late 2019 rally in U.S. bank share prices is likely to run out of steam early this year, investors and analysts warn, even as three of America’s top five banks prepare to announce double-digit increases in their fourth-quarter earnings this week,” the Financial Times says. “Banks were among the best performers in the U.S. stock market in the fourth quarter, with the largest five posting average share price gains of almost 17% in a period when the diversified S&P 500 index rose more than 8%. For 2019 as a whole, shares in JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America rose an average of 38%, while the S&P index gained 29%.”

Wall Street Journal

Tech troubles

As if it doesn’t have enough legal and regulatory problems, “technology failures have been occurring behind the scenes at Wells Fargo for years,” the paper reports. “The firm has struggled with tasks like monitoring employee pay and building a new platform for financial advisers, hampering key businesses. Antiquated systems have made it difficult for the bank to meet the demands of regulators, who are closely scrutinizing the firm after its 2016 fake-account scandal, according to more than a dozen current and former employees.”

“We need to be a technology company,” CEO Charles Scharf said in his first meeting with employees after assuming the role last October. “Saul Van Beurden, his head of technology and another relatively new arrival, said in an interview that his top priorities include fixing issues raised by regulators, attracting talent and making sure key systems don’t go offline again.”

Consequences

Iraq’s central bank risks losing access to its bank account at the Federal Reserve Bank of New York if the country follows through on its threat to kick out American forces, the U.S. State Department has warned. “Iraq, like other countries, maintains government accounts at the New York Fed as an important part of managing the country’s finances, including revenue from oil sales. Loss of access to the accounts could restrict Iraq’s use of that revenue, creating a cash crunch in Iraq’s financial system and constricting a critical lubricant for the economy.”

The lure of consumers

In a video, the paper explains why tech giants Google, Apple are getting into consumer finance.

Financial Times

In the middle

Santander’s “push into Britain would turn out to be a rare success story following the 2008 financial crisis. While rivals shrank, Santander UK grew rapidly via a string of acquisitions.” Now, however, “Santander UK is struggling. The bank is caught between smaller challengers who dismiss it as an old-fashioned incumbent and the Big Four — Lloyds, Barclays, HSBC and RBS — that still dwarf it in scale.”

Elsewhere

Making customers appy

Goldman Sachs last week finally launched an app for customers of its online bank, Marcus. “The lack of a mobile app had frustrated smartphone users who, until now, could only view account information, make loan payments or balance transfers on the bank’s website.” Goldman Sachs spokeswoman Kristen Greco told Reuters that software engineers and developers “spent the better part of 2019” creating one.

Quotable

“I certainly don’t think the trajectory of the improvement in [banking] stock prices in 2019 is sustainable.” — Andy Braun, a portfolio manager at Impax Asset Management, opining ahead of this week’s bank earnings releases