Banks Buck Up

Banks Buck Up

almost 5 years ago3 mins

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👋 Welcome to the Weekly Review for April 13 - April 19. It's a little longer than the usual updates – so let us know what you think of it.

The major US banks revealed their first-quarter results this week. Most reported better-than-expected profits – but the rest of the year probably won’t be as bright 🌤️

  • In March, the US Federal Reserve announced it wasn’t planning any interest rate increases this year. > Read more

  • Last week, JPMorgan Chase reported declining first-quarter trading revenue but a higher profit than predicted. > Read more

  • This week, Citigroup and Goldman Sachs’ shares fell despite them reporting better earnings than expected. > Read more

  • Investment management came back into fashion last quarter, helping BlackRock and Morgan Stanley also deliver better-than-expected results this week. > Read more

Banking’s a funny old business. In the first quarter of 2018, trading stocks in a volatile market was all the rage – but the revenues banks raked in for helping investors chop and change their portfolios weren’t as forthcoming in the placid first quarter of this year. Less activity naturally led to declining stock-trading revenue last quarter. But in trading of “fixed income” products – where investor activity was in the doldrums at the end of 2018 – investment banks revealed something of a first-quarter resurgence, with investors’ bonds, currencies, and commodities rapidly changing hands 👐

But for banks like JPMorgan Chase and Bank of America – which also do a fine line in looking after peoples’ savings and making small business and personal loans – there was a ghost at the feast. Rising US central bank interest rates up until late last year helped such commercial banking activity increase its “net interest margin”: the difference between the amounts the banks charge borrowers and pay their own creditors. But frozen interest rates and a narrower yield curve may now discourage lending: the smaller gap between the payouts of long- and short-term bonds means banks make less profit from making loans. The Bank of New York Mellon flagged this on Friday, while also reporting surprisingly weaker-than-expected overall quarterly results.

🇪🇺 In Europe, the outlook for banks is bleaker still. Eurozone interest rates are even lower than in the US – and are also staying put until 2020, so there’s little hope of a profit boost in the short term. Banks are now looking to join forces in order to keep the wolf from the door. Deutsche Bank and Commerzbank are in merger negotiations – although Dutch and Italian rivals have designs on Commerzbank too – and Switzerland’s UBS is also weighing partnerships for its investment management business.

Wells Fargo had cost-cutting partly to thank for its higher-than-expected first-quarter profit. Other banks are taking the same approach: in Europe, UBS has got the shears out, as have French firms Société Générale and BNP Paribas. They’ll shed more light on their plans when reporting quarterly earnings in the coming weeks. Further afield, Japan’s largest investment bank, Nomura, is also making wholesale cuts to its business – including shutting a fifth of its consumer bank branches.

Banks control the flow of money through an economy – they’re at the heart of consumers’ and companies’ willingness (and ability) to borrow money that they then can spend generating economic output. When banks are doing well – making rising profits – it’s usually a sign of a strong economy, and vice versa. Just look to the haggard state of both the eurozone economy and the region’s banks for an example of the latter... 😔

  • Learn how central banks affect your own bank and the economy at large (Central Banks in the Packs tab 👇)

  • Find out what investors think the rest of the year has in store for markets (Second-Quarter Outlook in the Packs tab 👇)

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