The "procyclical behaviors" of banks haven't improved as much as one might expect, says S&P analyst Bernard De Longevialle. He wonders why some lenders are raising capital when they have limited ability to use their already strong capital bases.
The Minneapolis Fed president says under his plan there would be fewer "mega-banks," community banks would thrive, and mid-sized banks would gain market share.
Step one would be boosting capital requirements of lenders with more than $250B of assets to 23.5%. Next, have the Treasury Secretary force banks to be no longer systemically important or face a "systemic risk charge" which could bring their total capital requirement to 38%.
The third step would impose a tax on the debt of shadow banks with assets over $50B. Finally, create a simpler and less burdensome regulatory regime for community banks.
The major averages are down just marginally, but the banks (KBE -1.3%), (KRE -1.1%) are sporting sizable early losses as the sell-side cashes in some chips after a big run higher for the sector.
Valuations are full, higher interest rates have been baked in, and an uncertain election outcome are the common themes to the downgrades, which include earlier-reported cuts by Citigroup for Goldman, KeyCorp and Citizens Financial, and a downgrade to Regions Financial (RF -1.7%) by Sandler O'Neill.
A Bloomberg report says the ECB is likely to gradually wind down bond purchases ahead of the scheduled March 2017 end of its QE program. The central bank is currently buying €80B per month of government and corporate paper, and may begin to slow that amount by €10B per month, according to the story.
Yields are higher in Europe and the U.S., with the 10-year U.S. Treasury up five basis points to 1.675% and the German 10-year Bund yield is up four bps to -0.048%. TLT -1.1%, TBT +2.2%
Though the Dow and S&P 500 are each lower by 0.5%, the yield-starved XLF is up 0.6%, with Bank of America (BAC +2.1%), Citigroup (C +1.9%), and JPMorgan (JPM +0.4%) leading the way. Shrouded in scandal, Wells Fargo (WFC -0.2%) continues to underperform.
"Large banks are going to be forced to take on more capital," says Dick Bove. "It will make the cost of funding more, not less, expensive. It will reduce the appeal for investors to put money at risk in the banking system."
Bove is commenting on a weekend announcement from Fed Governor Daniel Tarullo promising future stress tests will be geared to demanding even higher cash buffers for banks. Set to take effect next year, the new rule could raise capital requirements for the largest banks by 3 or 4 percentage points, writes Jeff Cox at CNBC.
There's good news though, as those lenders with less than $250B in assets won't be subject to the same standards. FBR's Edward Mills calls it a "significant positive" for regionals, which now have more certainly on the process, reduced regulatory expenses, and thus the ability to return more capital to owners.
That a flatter yield curve is bad for bank profit margins isn't news, but Fitch reminds lenders need more than Fed rate hikes - for the max benefit, they need a corresponding boost to medium and long-term rates.
Keep an eye over the yield curve, not the Fed Funds rate, for sustained net interest margin improvement, says Fitch.
The Too Big To Fail lenders are naturally among the day's big losers following the U.K. vote to leave the EU, but losses in the financial sector are wide and deep as - among other things - interest rates look to be a lot lower for a lot longer.
Among asset managers, Invesco (IVZ -10.8%) - with a sizable U.K. exposure - is faring about the worst. WisdomTree (WETF -7.8%) takes a hit as the yen is the solo currency surging against the dollar, reducing demand for its popular hedged Japan ETF.
It's wait till next year (or even 2018 if you believe short-term rate futures markets) for rate hikes, meaning regional lenders can't celebrate their passing of the Fed stress tests last night. Regions (RF -7.8%), KeyCorp (KEY -6.4%), PNC Financial (PNC -5.5%), U.S. Bancorp (USB -4.2%), BB&T (BBT -5.1%).
Even lower rates put even more pressure on the business models of the life insurers: MetLife (MET -8.8%), Prudential (PRU -7.7%), Lincoln National (LNC -9.9%), Voya (VOYA -7%). Online brokers too: E*Trade (ETFC -9.4%), Schwab (SCHW -9.5%).
Banks across the globe are taking a serious beating post-Brexit.
Much of the regulations that govern the financial services industry and allow for cross-border transactions are at the EU level, meaning regulatory changes will need to be negotiated and altered from their current financial infrastructure.
At the moment, it's looking like "wait till next year," for the higher interest rates much of the yield-starved financial sector has been waiting for. This morning's disappointing jobs numbers has traders quickly reversing bets on a rate hike this summer.
Meanwhile, the 10-year Treasury yield has crumbled to a two-month low of 1.70%.
The XLF is down 1.9%, leading the S&P 500's 0.5% decline. The SPDR KBW Bank ETF (KBE -3.5%), the SPDR Regional Banking ETF (KRE -3.4%).
Among the Too Big To Fail names, Bank of America (BAC -4.7%) and Citigroup (C -4.8%) are hardest hit. In regionals, Regions Financial (RF -4.4%), KeyCorp (KEY -4%), BB&T (BBT -3.3%), Fifth Third (FITB -4.4%).
State Street (STT -3.5%), Northern Trust (NTRS -3.8%), Schwab (SCHW -5.4%), E*Trade (ETFC -5.8%), Ameritrade (AMTD -5.5%), MetLife (MET -3.6%), Prudential (PRU -3.2%), Lincoln Financial (LNC -4.1%)
"The days of negative provisioning are pretty much dead," says D.A. Davidson's Kevin Reevey. "Now, they're going to have to take provisioning expense and build up reserves based on loan growth."
Total bank loan loss reserves were north of $250B in Q1 2010, before falling to about $24B at the end of last year. Amid the energy crash, they edged higher in Q1. Naturally, those lenders with the most exposure to energy posted some of the largest reserve increases in Q1. "It wasn't just the levels that [oil] went to, it was the speed at which prices dropped," says Peter Guilfoile, chief credit officer at one of those banks - Comerica (NYSE:CMA). Colorado-based National Bank Holdings (NYSE:NBHC) posted the largest Q/Q increase in reserves-to-loans, jumping 39 basis points to 1.43%.
Meanwhile, there were plenty of other banks which actually saw declines in that ratio, notably Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and U.S. Bancorp (NYSE:USB). These and other lenders in that bucket can thank denominator of that ratio growing quickly enough to offset reserve builds.
Mandatory arbitration clauses are the norm across products like credit cards, student loans, prepaid cards, and payday loans, and they're used by lenders to block class-action suits and force private negotiations to settle disputes.
Nobody wants banks, writes Ken Brown in the WSJ, but everybody wants commercial real estate. The result: Bank yields are higher than that of CRE.
A report from BAML says the big banks have boosted dividends faster than any other sector, and the total cash yield to owners, including buybacks, is at its strongest level since 2003. "Both are signs of strength," writes Brown, "though investors refuse to believe them."
On the other hand, "Real estate is not cheap anymore," says Green Street's Peter Rothemund. One particular warning sign: Foreigners flooded the market last year, buying a net $57B of U.S. property vs. an average of just $3B annually for the previous five years.