by tyler | Apr 27, 2023 | CNN, investing
Barclays and Deutsche Bank have shrugged off a turbulent first quarter to post strong profit growth, helping to calm investors worried about the prospect of another US bank failure.
The robust set of results was helped by income earned from higher interest rates, the lenders said Thursday.
Shares in Barclays
(BCS) jumped more than 4%, making it the top performer in Europe’s benchmark banking index, which was up less than 1%. Deutsche Bank
(DB) gained 2.6%.
The earnings come just weeks after the failure of two US regional banks and a rescue of Credit Suisse sparked turmoil in the banking sector. Governments and major central banks had to intervene to prevent the crisis from spiraling into a broader financial sector meltdown.
As recently as late March, European bank stocks were hit by fears that the tumult could engulf more lenders, and some regulators in the region warned that the sector remained exposed. Deutsche Bank’s shares plunged as much as 14.5% during the March 24 trading session.
Fears have since receded, and central banks signaled Wednesday that their immediate concerns had eased.
The crisis may not be over yet, however. Another American bank, First Republic, is hanging by a thread.
There was little sign of weakness at Germany’s biggest bank. Deutsche Bank’s profit reached its highest in a decade, vindicating the once-struggling lender’s turnaround plan, launched in 2019.
The bank said first-quarter net profit rose 8% to €1.3 billion ($1.4 billion). Profit before tax jumped 12% on the previous year to €1.9 billion ($2.1 billion), the highest quarterly profit since 2013.
“In the first quarter, we again proved the strength and resilience of Deutsche Bank in challenging conditions,” chief financial officer James von Moltke said in a statement.
CEO Christian Sewing added that the results “demonstrate the relevance” of the bank’s strategy and underscore that it is “well on track” to meeting its cost, revenue and returns targets for 2025.
The bank said it would cut jobs in “management layers” and enforce “strict limitations on hiring in non-client facing areas,” without providing further details. Sewing later told journalists that the layoffs would affect about 800 people, Reuters reported.
Barclays also delivered better-than-expected results. The bank said net profit rose to £1.8 billion ($2.2 billion) in the first quarter, a 27% increase on the same period last year. The result beat analyst expectations by almost £400 million ($498 million), according to Refinitiv data.
Profit at Barclays UK shot up 30% to £515 million ($641.7 million), “primarily driven by net interest income growth from higher rates,” the bank noted.
Rapidly rising interest rates have boosted banks’ profitability because they are able to charge more interest on loans.
Barclays and Deutsche Bank’s results contrast with the troubles at First Republic Bank in the United States. The bank is teetering on the brink of collapse, threatening to unleash a fresh bout of turmoil in the banking sector.
“Signs look promising that issues over the pond aren’t leaking into the wider ecosystem,” Matt Britzman, an equity analyst at broker Hargreaves Lansdown, said in a note.
by tyler | Apr 26, 2023 | CNN, investing
First Republic Bank is in a fight for its survival.
The past few weeks have been brutal for the San Francisco-based lender. Now, some analysts say a collapse of the bank is imminent.
“It’s becoming clearer each day” that First Republic is “toast,” said Don Bilson at Gordon Haskett, in a note Wednesday. “The only question that really needs to be answered is whether the [Federal Deposit Insurance Corporation] moves in before the weekend or during the weekend, which is when it usually does its thing.”
The bank reported on Monday that its total deposits fell 41% in the first quarter, sending its stock to record lows. Shares fell by nearly 30% on Wednesday after plunging by 49% on Tuesday.
The stock’s trading was halted numerous times on Tuesday and Wednesday as its rapid decline triggered volatility-triggered timeouts by the New York Stock Exchange.
First Republic said in its latest earnings call that is exploring its strategic options, Wall Street code for searching for a white knight. The company noted that it is “taking actions to strengthen its business and restructure its balance sheet.”
David Chiaverini, managing director of equity research at Wedbush Securities, told CNN there are just three viable options left.
One option is that First Republic
(FRC) stays the course and “muddles along as a standalone company.” That would mean waiting for its securities and loans to mature.
“That’ll be a long road, but they do have some liquidity that will enable them to continue,” said Chiaverini.
First Republic CEO Michael Roffler attempted to assure investors in an earnings call Monday that the bank had enough liquidity to do that. The lender, he said, had twice the available liquidity of uninsured deposits (excluding the $30 billion received from large banks).
The second option, said Chiaverini, would be to try to sell some of its loans and securities at the same cost they bought them for. In exchange, the buyer would receive a preferred equity interest in the company.
That’s a hard sell, said Chiaverini, since those assets would probably sell for well above market rate. First Republic’s bonds maturing in 2046 are currently trading at just 43 cents on the dollar.
But big banks find themselves between a rock and a hard place. If First Republic fails, the FDIC will likely want to avoid systemic risk and offer insurance to all depositors, even those without insurance. That will cost a pretty penny and will be funded mostly by large banks, costing them tens of billions of dollars. That’s on top of $30 billion in bailouts led by JPMorgan Chase last month. Earlier in March, JPMorgan also extended a $70 billion line of credit to First Republic.
It essentially comes down to impact analysis for banks: Pay a few billion dollars now or a few more billion dollars later.
Investors who are buying First Republic stock are clinging to the hope “that a bailout package spearheaded by the largest US banks will leave something left for equity holders,” wrote Bilson.
“We suppose that isn’t completely far fetched, though we have a hard time imagining Jamie Dimon or Brian Moynihan or Jane Fraser each agreeing to buy $5 billion of mortgages and Treasuries for prices that are well above the market,” he added.
Either way, private equity could still swoop in and save the day, said Chiaverini. “Private equity would be a more likely buyer and participant in that sort of transaction,” he said. “They’re willing to take that sort of risk, whereas the big banks aren’t in the business of purchasing preferred equity in in other banks.”
Bloomberg reported Tuesday that the lender is looking to sell as much as $100 billion of its loans and securities in a bid to balance its books. First Republic declined to comment to CNN on the story. Other reports say that First Republic is considering asking big banks to help with such a deal.
The biggest fear that investors have is that First Republic goes into receivership, said Chiaverini. When a struggling bank goes into receivership it means that a regulatory authority or government agency takes control of the bank and its assets, usually with the goal of liquidating the bank’s assets to repay its creditors. Going into receivership can have significant consequences for the bank’s customers, shareholders, and employees, as well as for the wider financial system.
This is the worst possible option for equity holders and preferred equity holders, added Chiaverini, as they would see their money wiped out in that scenario.
That’s what happened to Silicon Valley Bank on March 10 when the California Department of Financial Protection and Innovation took possession of and closed Silicon Valley Bank and on March 12 Signature Bank was closed by the New York State Department of Financial Services. Both were put into the “receivership” of the FDIC, which sold off the banks at a steep discount.
While all depositors were made whole, shareholders were not compensated — they lost everything. President Joe Biden made it clear at the time that he had no interest in protecting investors. “They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works,” he said.
The FDIC, meanwhile, is actively considering lowering First Republic’s financial ratings, according to a Bloomberg report. A lower rating would hinder the bank’s ability to use the Fed’s overnight lending program and an emergency lending program launched last month in the wake of Silicon Valley Bank’s collapse to prevent further turmoil.
But Joe Brusuelas, principal and chief economist for RSM US told CNN that “at the end of the day in a banking crisis, it’s the central banks who are the shot callers.”
Officials at the Federal Reserve are likely worried that First Republic’s collateral is no longer sufficient enough to borrow against and will soon begin pressuring the bank to arrange an orderly wind down. Officials at the central bank will also likely communicate to potential private capital providers that now is the time to consider making a deal with First Republic, Brusuelas said.
The Federal Reserve declined to comment and the FDIC did not immediately respond to request for comment from CNN.
First Republic sits at the center of the ongoing banking chaos, and investors are worried that its woes could indicate more trouble to come in the sector.
But the bank’s situation is unique, in that it is unusually vulnerable to liquidity problems, Chiaverini said.
When the banking crisis erupted, about two-thirds of First Republic’s deposits were uninsured with the Federal Deposit Insurance Corporation. That’s lower than the 94% at Silicon Valley Bank — but at the end of last year, First Republic had an exceptionally high ratio of 111% for loans and long-term investments to deposits, according to S&P Global — meaning it has loaned and invested more money than it has in deposits.
Investors don’t seem to be too worried about more contagion in the sector. The SPDR S&P Regional Banking ETF (KRE
(KRE)) that tracks the broader regional bank sector ended Wednesday up 0.6%. Western Alliance Bancorp (WAL
(WAL)) was flat and PacWest (PACW
(PACW)) gained 7.5%.
by tyler | Apr 26, 2023 | CNN, investing
Wall Street was able to breathe a sigh of relief on Tuesday as Google-parent company Alphabet
(GOOGL) and Microsoft
(MSFT) both beat the market’s relatively modest earnings expectations. The companies saw big boosts from their search and cloud computing businesses.
After a disastrous year for both stocks, the shares rebounded strongly in the first quarter.
And so, with immediate concerns out of the way, executives at Microsoft and Alphabet focused their remarks during earnings calls on what excites them most: Artificial intelligence.
Microsoft, Google and a number of smaller rivals are in a race to integrate generative artificial intelligence technology (similar to ChatGPT) into their search functions and other applications.
Both companies see it as an integral part of their future, but it was apparent on Tuesday that Microsoft and Google aren’t in agreement about what that future will look like.
Analysts have expressed worry that Google is falling behind the competition when it comes to AI innovation. In March, Google introduced an AI chatbot named Bard, which met mixed reviews.
Google’s search engine has dominated the market for two decades, with Microsoft’s Bing struggling to gain market share. But the viral success of ChatGPT, which can generate compelling written responses to user prompts, appeared to put Google on defense for the first time in years.
Microsoft has invested in and partnered with OpenAI, the company behind ChatGPT, to deploy similar technology in Bing and other productivity tools.
Google CEO Sundar Pichai told analysts on his earnings call Tuesday that artificial intelligence marks a massive potential opportunity for the company, comparing it to the “successful transformation we made from desktop to mobile computing a decade ago.”
He said the company plans to integrate comparable generative AI tools into its search and cloud operations, but struck a balanced tone. “Throughout the years, we have gone through many, many shifts in search,” he said.
Pichai also hinted at concerns about the potential for generative AI tools to spread false information.
“We know that billions of people trust Google to provide the right information,” he said.
Microsoft CEO Satya Nadella, meanwhile, was more effusive about the future of AI in an earnings call Tuesday, telling analysts that he sees AI as a tool that will revolutionize the way people search online.
Nadella said that app installations for Bing have gone up four-fold since it became AI-powered this February. “We look forward to continuing this journey in what is a generational shift in the largest software category — search,” he said.
Shares of Microsoft were up about 8.5% in after hours trading on Tuesday. Shares of Alphabet were up 1.7%.
The numbers: Microsoft posted quarterly net income of $18.3 billion, up 9% year-over-year, and far exceeding expectations. The company also posted sales of $52.9 billion, up 7%.
Alphabet on Tuesday reported that profits fell slightly from the year-ago quarter to nearly $15.1 billion, or $1.17 per share, but still beat expectations. It was also much improved from the December quarter, when profits fell by a third. The company posted $69.8 billion in revenue, up 3% from the same period in the prior year and also slightly ahead of expectations.
What’s next: Facebook-parent company Meta reports first quarter earnings on Wednesday afternoon and Amazon reports Thursday. Apple is expected to report earnings next Thursday.
The past few weeks have been brutal for First Republic Bank
(FRC). The company saw its shares plunge by nearly 50% on Tuesday, hitting a new record low after the embattled lender reported that its total deposits fell 41% in the first quarter.
Trading of the stock was halted numerous times on Tuesday as its rapid decline let to volatility-triggered stops by the New York Stock Exchange.
First Republic Bank also said Monday that it expects to cut its workforce by 20-25% this quarter.
The bank said it saw a sharp drop in deposits after the collapse of Silicon Valley Bank and Signature Bank last month, but that outflows began to stabilize at the end of March.
First Republic also said in its earnings release on Monday that it was “taking actions to strengthen its business and restructure its balance sheet.”
One of those options could be selling off assets. Bloomberg reported Tuesday that the lender is looking to sell as much as $100 billion of its loans and securities in a bid to balance its books. First Republic declined to comment to CNN on the story.
The stock closed at just $8.10 a share, and is now down more than 90% for the year.
First Republic sits at the center of the ongoing banking chaos, and investors are worried that its woes could indicate more trouble to come in the sector.
The SPDR S&P Regional Banking ETF (KRE
(KRE)) which tracks the broader regional bank sector dropped 4.2% on Tuesday. Western Alliance Bancorp
(WAL) fell by 5.6% and PacWest
(PACW) was down 8.9%, though it later rebounded.
US Treasury Secretary Janet Yellen said on Tuesday that if Congress doesn’t vote to raise the debt limit, the resulting government default would cause an “economic catastrophe,” leading to elevated interest rates for years.
Speaking to Sacramento Metropolitan Chamber of Commerce members in Washington DC, Yellen said that if Congress failed to act that would lead to job losses and widespread economic strife.
“A default on our debt would produce an economic and financial catastrophe,” she said. “A default would raise the cost of borrowing into perpetuity. Future investments would become substantially more costly.”
by tyler | Apr 26, 2023 | CNN, investing
Norfolk Southern said a February derailment that released massive amounts of toxic chemicals in East Palestine, Ohio, cost the railroad $387 million. That dragged profit lower by about a third.
The Atlanta-based company reported it earned $466 million last quarter, down from the $703 million it earned in the same quarter a year earlier. Without the charge for the derailment, the railroad said income from rail operations would have totaled $1.1 billion in the quarter, comparable to a year ago.
Revenue at the railroad was up 7% to $3.1 billion.
A derailment on February 3 caused evacuations and massive clean-up efforts in East Palestine. The railroad said it has already committed $30.9 million in compensation and other support to the community. But that is a fraction of the money it continues to make.
Investors apparently viewed the costs associated with the derailment as a one-time cost. Shares were up 1% in premarket trading. But shares are still down 17% since before the derailment. Shares of two other major railroads, Union Pacific
(UNP) and CSX
(CSX), are also both still lower from before the derailment on concerns about legislation that would impose tougher regulation on freight railroads.
by tyler | Apr 17, 2023 | CNN, investing
First quarter earnings season kicked off last week with reports from some of the largest names in finance with investors watching closely for any potential inklings of an economic downturn.
JPMorgan Chase, Citigroup and Wells Fargo, as well as PNC and BlackRock
(BLK), all published their reports on Friday — giving the public some insight into how they fared through the first three months of the year, which included the collapse of Silicon Valley Bank and Signature Bank.
And it appears as though they largely made it out unscathed. The largest banks in the country benefited from the same heightened interest rates that tipped those regional banks over the edge, sending depositors fleeing to safer names.
All beat estimates: PNC
(PNC) and Wells Fargo
(WFM) by about 9%, Citi by around 13% and JPMorgan
(JPM) by nearly 21%.
Still, the market reaction wasn’t equal. JPMorgan shares surged 7.5% on Friday, the stock’s largest one-day rally since November 2020. Citigroup shares advanced 4.8%, while Wells Fargo closed the day down 0.1%. PNC stock also felt the pressure.
Before the Bell spoke with Steve Sosnick, chief strategist at Interactive Brokers, to discuss Friday’s big bank earnings and explain that stock discrepancy.
This interview has been edited for length and clarity.
Before the Bell: What are your takeaways from Friday’s earnings reports?
Steve Sosnick: It’s JPMorgan and the other guys — Jamie Dimon is Bruce Springsteen and everyone else is the E Street Band. The market loved the first quarter results, the bank is firing on all cylinders and they’re clearly benefiting from the recent tremors in the banking industry.
Wells Fargo appeared to have a good, solid quarter but their stock was essentially unchanged on Friday. Citigroup, which should have benefited from the same trends, had a nice day. PNC, which is one of those super-regional banks that we need to pay a little more attention to, saw its stock fall. But JPMorgan was off to the races.
I’ve always complained about banks reporting their quarterly earnings first because they’re extraordinarily idiosyncratic. No other company is really dependent upon trading results or investment banking for their bottom line. They’re far more interest rate sensitive and certainly more yield curve sensitive than essentially any other industry. I’ve never liked the fact that they lead off because I think people extrapolate from them. But I think you’re extrapolating from a strange subset.
Why did JPMorgan stock outperform its competitors?
They all beat estimates, but shares of JPMorgan surged way beyond the competition.
They have good management. Jamie Dimon has become the face of the industry and his team benefits because of that — there are certain advantages to being the market leader. People who pulled their money from regional banks looking for safety disproportionately sent it to JPMorgan.
There are concerns about the health of commercial real estate (CRE)? What did you hear?
This was another situation where CEOs were careful not to amplify fears. I do think there was a lot of caution given. But I think the real action comes this week, because we’re going to hear from pure banks. We’re going to hear to what extent money might have flowed out of some of these banks and into the cohort we heard from on Friday. A lot of smaller and midsize banks do more construction lending.
We didn’t learn a ton about CRE today. Ultimately we need to talk about it, but maybe in the short term it’s better to say less.
Economists at the Federal Reserve recently predicted that the US will enter a slight recession later this year. But US Treasury Secretary and former Fed chair Janet Yellen doesn’t agree.
She believes that a soft landing is still possible.
“I do think there’s a path to bring down inflation while maintaining what I think all of us would regard is a strong labor market,” Yellen told CNN’s Fareed Zakaria in an exclusive interview Friday. “And the evidence that I’m seeing suggests we are on that path.”
Yellen added that she didn’t want to downplay the many risks to the economy including Russia’s war in Ukraine, which raised food and energy prices, and pandemic-era supply chain disruptions, which caused key material shortages that gummed up critical pieces of the economy, such as the auto industry.
“We’re seeing those supply chain bottlenecks that boosted inflation, they’re beginning to resolve,” she said. “We had big shifts in the way people live and low interest rates, and housing prices rose a lot. Now, housing prices have essentially settled down.”
Yellen also told Zakaria that Russia should pay for the damage caused in Ukraine and that talks are ongoing as to how to make that happen.
“That’s a responsibility that I think the global community expects Russia to bear,” she said. “This is something we’re discussing with our partners, but there are legal constraints on what we can do with frozen Russian assets.”
There’s no denying that big banks and financial institutions benefited from the collapse of SVB and Signature Bank, either through new deposits or more flow into money market funds. But two of the biggest names in finance have addressed that windfall very differently.
JPMorgan’s Dimon insisted in his letter to shareholders last week that, “these failures were not good for banks of any size.”
The CEO of the largest bank in the United States said that “while it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”
BlackRock’s Larry Fink, meanwhile, struck a more bullish tone.
“I believe today’s crisis of confidence in the regional banking sector will further accelerate capital markets growth, and BlackRock will be a central player,” he wrote in BlackRock’s earnings release on Friday.
A lack of trust in regional banks will drive more investment into money market investments, and BlackRock is poised to benefit as that happens. “Increased financing through the capital markets will require the scale, multi-asset capabilities and excellence in portfolio construction that BlackRock consistently delivers across market cycles,” he said.
“Throughout our history, moments of market dislocation and disruption have served as inflection points for BlackRock,” concluded Fink.
by tyler | Apr 13, 2023 | CNN, investing
Shares in LVMH, the world’s biggest luxury group, jumped to a record high after it reported strong first-quarter sales buoyed by the economic re-opening in China.
The stock of Europe’s most valuable company rose 4.6% Thursday to hit €875 ($965) apiece, boosting the fortune of its owner Bernard Arnault, already the world’s richest man.
LVMH
(LVMHF) was targeted by opponents of French President Emmanuel Macron’s pension reforms on Thursday. Protesters taking part in a nationwide strike against an increase in the retirement age forced their way into the company’s headquarters in Paris.
“If Macron wants to find money to finance the pension system, he should come here to find it,” Fabien Villedieu, a union leader, told CNN affiliate BFMTV outside the building.
The owner of brands such as Tiffany & Co. and Dior reported late on Wednesday sales of €21 billion ($17 billion) in the first three months of the year, up 17% from the same period in 2022.
The conglomerate said first-quarter sales in Asia, excluding Japan, were up 14% year-over-year, which represented a “significant rebound.”
Sales were lifted by the relaxation of coronavirus restrictions in Asia, LVMH said in a statement. China ended its strict zero-Covid policy in December.
“We registered some pretty nice pick-up in China, which bodes well for the rest of the year,” Jean-Jacques Guinoy, LVMH’s chief financial officer, said Wednesday.
The company’s cosmetics lines were still a “little under pressure” in mainland China, Guinoy added, though leather goods and jewelry were performing well in the world’s second-biggest economy.
“Overall, we are extremely optimistic,” he said.
In Europe and Japan, first-quarter sales were strong, rising 24% and 34% respectively, thanks to “robust demand” from local consumers and international travelers. In the United States, sales rose 8%.
Stocks in the $460 billion company have rocketed 29% since the start of the year, with the luxury goods market proving resilient in the face of high global inflation and fears that some economies could tip into recession.
Arnault, LVMH chairman and CEO, overtook Elon Musk to become the world’s richest person in December, with a total net worth of $198 billion to Musk’s $176 billion, according to the Bloomberg Billionaires Index.
— Oliver Briscoe and Xiaofei Xu in Paris contributed reporting.
