Here is a chart showing the number of transactions that involve acquisitions of an asset management business by year. It tells us about a couple of trends developing in recent y Banks have stopped acquiring asset management businesses. In fact what the chart doesn’t tell us is that banks have been actively selling their asset management businesses
What is wrong with the international banking system? In order to maintain sustainable global economic growth, the banking system needs to be functional and profitable.
Here’s something you probably don’t know, and it will really tick you off.
Here are some updates to the recent discussion on loan growth weakness relative to rising deposit balances at US commercial banks
Credit underwriters pride themselves in their ability to cut lending when they sense that economic fundamentals have changed for the worse. For example one often hears bankers talking about passing on deals in 2007 because of “not liking the fundamenta…
The US banking sector continues to outperform the broader market. Furthermore, for the first time this year, regional bank shares are outperforming the overall bank index, which is driven primarily by the largest banks.
|Red = S&P500; Green = S&P total banking sector index ETF; Blue = S&P regional banks index ETF|
The key reason for the strong performance among US banks remains the steepening treasury curve. Banks pay next to nothing on deposits while charging a rate that is often linked to treasuries on the loans they make. The steeper the curve, the wider the “margin”. And given the leverage inherent in the banking system, even a small margin increase materially improves the return on equity.
The treasury curve has been steepening sharply in recent weeks – as seen from the spread between the 10y and the 2y yields (as well as 30y and 2y).
What’s driving this steepening? Historically, rising longer dated bond yields were caused by higher inflation expectations. That’s not the case this time around. In fact as the chart below shows, longer-term inflation expectations have been declining.
|Dow Jones Credit Suisse 10-Year Inflation Breakeven Index|
The rise in yields is instead mostly driven by higher expectations of earlier and faster reductions in securities purchases by the Fed. In particular, some at the Fed have been happy to see a bit of stabilization in monthly payrolls growth (at around 200K).
The sustainability of this trend is yet to be proven, but combined with better GDP figures (see chart) and improved new home sales (see chart), these data may be sufficient to push even this dovish FOMC into launching its exit sooner than expected. The fact that corporate spreads are at the levels not seen since 2007 (see post) doesn’t help the case for maintaining the current pace of QE either.
At the same time, Bernanke was quite clear that it will be some time before the Fed will begin pushing up short-term rates – even after QE ends. We therefore have the short-term rates (and therefore bank deposit rates) remaining near zero, while longer term rates rising due to expectations of taper. This is resulting in significant curve steepening, a great environment for banks.
The next question is why all of a sudden we are seeing regional banks outperforming the overall banking sector. The answer has to do with the changing regulatory landscape, as the Volcker Rule is about to go into effect.
WSJ: – Barring a last-minute surprise, the votes will result in tighter restrictions on certain trading activities that go beyond what regulators had agreed to just a few weeks ago, according to people familiar with the matter. Since then, regulators have been locked in tense negotiations that threatened to upend the provision.
Under the final rule, regulators are expected to closely track trading activities with an eye on whether certain trades known as hedges are designed to post a profit rather than offset risks that accompany trading with clients. The finished version of the Volcker rule is likely to require that hedges be designed to reduce specific risks, according to a portion of the proposed rule reviewed by The Wall Street Journal.
Hedging activity should shrink or alleviate “one or more specific, identifiable risks” such as market risk, currency or foreign-exchange risk, and interest-rate risk, the language says.
“This is the new era of Big Brother banking,” said Michael Mayo, an analyst with CLSA Americas. “Now banks’ fortunes are more closely tied to the government.”
This “Big Brother banking” will have a far greater effect on the largest financial institutions than on the regional or smaller banks. The inability to trade in “prop” accounts is already resulting in reduced liquidity and weaker market making capability among the larger banks. As a result, in the US bond markets for example, banks often do little more than act as “introduction brokers” for a quarter-point spread. In some instances this is far cry from the high volume market-making activities banks used to be involved in. All this is resulting in declining “sales & trading” revenue for the largest banks.
Bloomberg: – The $44 billion at stake represents principal trading revenue at the five largest Wall Street firms in the 12 months ended Sept. 30, led by New York-based JPMorgan, the biggest U.S. lender, with $11.4 billion. An additional $14 billion of the banks’ investment revenue could be reduced by the rule’s limits on stakes in hedge funds and private-equity deals. Collectively, the sum represents 18 percent of the companies’ revenue.
Not facing these same headwinds, regional banks are now outperforming.
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Two of the largest U.S. financial institutions kicked off third-quarter results for big bank earnings today, giving us a peek at how they fared amid tough times for both firms.
Wells Fargo & Co (NYSE: WFC) is in the midst of slashing headcount in its mortgage unit by some 1,800, and JPMorgan Chase & Co (NYSE: JPM) is tangled up in settlement talks with the U.S. Justice Department.
Three cheers for Elizabeth Warren!
Yesterday she launched a wire-guided Scud missile at the too-big-to-fail banks.
The freshman senator from Massachusetts, formerly a Harvard Law School professor specializing in bankruptcy law, introduced her “21st Century Glass-Steagall Act” co-sponsored with Sens. John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus King (I-Maine).
US equity markets are continuing to price in higher premiums for bank shares relative to the overall market. The increased steepness of the yield curve will mean higher net interest income, as banks borrow at historically low rates from depositors and …