One of the changes that the credit crunch brought in was that rules that were previously considered normal were broken. Let me start with what looks like an example of a previous rule.
LONDON, April 27 (Reuters) – Barclays (BARC.L) reported better than expected first-quarter profit of 2.6 billion pounds ($3.24 billion) on Thursday after strong performance at its credit card business offset pressure on other profit engines, including investment banking.
The British bank’s 16% profit jump from a year earlier beat analyst forecasts of 2.2 billion pounds in a robust set of results that underlined its increasing ties to the United States, where it has grown its investment and consumer banking businesses.
In essence the rule is that banks make money when we have higher interest-rates and that seems true here. In Barclays home the UK Bank Rate is 4.25% and in the US it is between 4.75% and 5%. The share price is up nearly 5% as I type this at £1.61. If we switch to the Financial Times it has a different spin but also confirms my point.
The performance was led by Barclays UK, its ringfenced consumer lender, where profit jumped 30 per cent to £515mn. The bank said this was “primarily driven by net interest income growth from higher rates” with the Bank of England boosting its base rate to a 15-year high of 4.25 per cent last month.
Actually it then goes onto an implicit criticism of the claims from the ECB about negative interest-rates.
This allowed its net interest margin — the difference between the interest it receives on its loans and the rate it pays for deposits — to grow to 3.18 per cent from 2.62 per cent last year.
The era of negative interest-rates really rather took away much of the banking business model. Of course. we could learn this from the official denials. But before we do we can take a further look at Barclays where things are good but there is a warning shot.
But there were signs higher credit card spending could have a sting in the tail. The bank’s bad loans provision for the quarter soared to 524 million pounds from 141 million a year earlier, which it blamed mainly on its U.S. cards business. ( Reuters)
There must also be issues for the mortgage book which got pumped up by ever lower and then record low mortgage rates. Also we saw ever higher house prices as a consequence. Whilst any house price falls have so far been minor the rise in mortgage rates in the UK must mean that some of the borrowers are struggling. If we look at the Bank of England quoted mortgage rate series then a 2 year fix if you have 25% equity was 1.49% last April and 4.74%in March. That is quite a rise and has come after many years of falls.
Banks in Trouble
The US banking saga which had gone quiet picked up the pace again late on Monday UK time. Things were unsettled by the statement that First Republic would not take questions in its press call which is never a good sign and then everyone saw why.
Customers pulled more than $100bn of deposits from First Republic last month amid wider turmoil in the banking industry, the California-based lender revealed on Monday, sending its shares down by as much 20 per cent.
Deposits held by First Republic fell by $72bn during the first quarter, a decline of 40 per cent, although that included a financial lifeline from large US lenders that parked $30bn in its accounts in an attempt to shore up confidence in the ailing bank. ( Financial Times)
So “Trouble, Trouble, Trouble” as Taylor Swift put it. We have now a different view on why Janie Dimon of JP Morgan organised the deposit injection. It also made minds return to this.
FRC is in focus ….. very good bank
That was from Jim Cramer of Mad Money on CNBC from March 10th which had not gone so well. Anyway he was back on Tuesday.
It looks like First Republic v. everything else judging from these fine earnings
That was not backed up by trading on Tuesday when the share price fell again. Then yesterday things deteriorated further.
April 26 (Reuters) – First Republic Bank’s (FRC.N) market value plunged again on Wednesday as investors waited to see if it would be able to find buyers for assets and engineer a turnaround without government support.
In a brutal sell-off, the bank’s market capitalization briefly sank as much as 41% to about $888 million and the first time under $1 billion, a far cry from its peak of more than $40 billion in November 2021. It closed around $1.1 billion.
It is a bit early for the US pre-market but it looks to be around 6 dollars or some 79 or so below when Jim Cramer described it as a “very good bank”.
In essence there are 3 options now. One is that another bank or consortium of banks buys it. There is some logic in the sense that they may get a FDIC bill anyway if it has to step in. Next is that it could sell some assets, after all they are supposed to be fine.
They’re “good assets, just bad interest rates,” said Christopher Wolfe, head of North American banks at Fitch Ratings, referring to successive rate hikes since last year that eroded the value of securities held by the bank.
That is like a financial version of the Comical Ali speech as they look awful at present valuations on the balance sheet. Here if we step back for a moment is a consequence of the low and negative interest-rate era where banks in this case, insurance companies and pension funds bought bonds which had been Ekvis Costello’d by the central banks.
Pump it up when you don’t really need it.
Pump it up until you can feel it.
Now they have stopped buying ( and raised interest-rates) there are large losses for those who thought this was some new reality.
Lastly the final alternative is support from the US government. There is something of a circularity here because the US Treasury Secretary is the same Janet Yellen who as head of the Federal Reserve helped drive bond prices to the unrealistic levels they reached. More recently she was in charge of all deposits at SVB and Signature Bank being backstopped. However something of a curve ball appeared yesterday.
However, U.S. government officials are currently unwilling to intervene in the First Republic rescue process, CNBC reported on Wednesday, citing sources.
Bloomberg reported on Wednesday that U.S. bank regulators are weighing the prospect of downgrading their private assessments of First Republica, which could lead it to face potential curbs on borrowing from the Federal Reserve. ( Reuters)
Whoever released that news destroyed the share price because First Republic is now dependent on borrowing from the US Federal Reserve. Somewhat ironically the bank could end up being nationalised and thus owned by the US government because another of its arms no longer backs it.
Also the saga at SVB may not be completely over.
(Reuters) – Silicon Valley Bank’s former owner may need to take out a bankruptcy loan amid uncertainty about the U.S. Federal Deposit Insurance Company’s seizure of $2 billion in cash from the company, its attorney said Wednesday.
Comment
What we are presently seeing is a consequence of the years of low and sometimes negative interest-rates. One of my criticisms of that time was that capital gains or rather the hope of them replaced yield. But in essence the capital gains relied on being able to sell to central banks at ever higher prices. This was encouraged by the “Forward Guidance” of the central banks who were even willing to ignore what is supposed to be their number one which is inflation control in the name of keeping interest-rates low. Then something they have tried to boast about – raising interest-rates quickly- meant that some were trapped in bonds and holders were singing along with Talking Heads.
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
There will be plenty of others in this mess. Adding to it will be mortgage borrowers who were effectively advised by central banks – something for which the Reserve Bank of Australia has been forced to apologise for – which is another issue for banks from their mortgage book.
If we look around surely there have to be issues at the Italian banks due to Italian bonds being at negative yields for quite some time? When the QE position is added up I rather think it will be seen as reckless and thus the numbers will be shuffled under the carpet. The immediate consequence is that banks are unlikely to be keen to lend or if we recall our economic history have a touch of the Vapors.
I’m turning Japanese, I think I’m turning JapaneseI really think soTurning Japanese, I think I’m turning JapaneseI really think so