More than a third of executives surveyed by Sageworks have little or no familiarity with a proposed new FASB rule which could force lenders to boost reserves held against troubled loans. More than half say they're not planning on modifying their processes until after the rule is implemented (could come by year-end).
The changes wouldn't take effect until 2017 or 2018, but banks need to start getting ready to amass data now, says Sageworks, as they'll "need a lot more granular data" on individual loans - three or four years worth - to deal with the new regime.
The new rule would require banks to record losses based on future projections of loans going bad, rather than the current practice of waiting to record losses until they actually occur.
"Five years ago, if the risk group recommended against a strategy or product, it might just be one part of a debate," says Wells Fargo (WFC -0.4%) chief risk officer Michael Loughlin. Now, "when we say no, it's usually no."
The naysayers are gaining power and multiplying across the banking industry as lenders bow to pressure from regulators to simplify and make safer their operations in the hope of preventing the next financial collapse. For its part, Wells has 2.3K employees in its core risk-management department, up from 1.7K two years ago, and the unit's annual budget has doubled to $500M over that period. Earlier this year, Goldman Sachs (GS -0.2%) made its chief risk officer part of the trader/rainmaker-dominated company management committee for the first time ever.
The changes are expensive and come at a time of sluggish loan growth and trading revenue, but the banks have no choice as regulators wield the power given them by Dodd-Frank.
KeyCorp (KEY +0.1%), for instance, used to pay loan officers for meeting profit goals. Now those bonuses can be lost if their work falls short of new risk-management standards. It's no doubt one factor behind sharply lower loan commitments for construction and real-estate development.
The quest for yield is winning out over regulator efforts to clamp down on risky lending, as an OCC report finds signs of rising credit risk in the banks. The agency notes two areas in particular - leveraged loans and indirect auto loans.
Leveraged loans are essentially the banker version of high-yield bonds and indirect auto loans are banks financing car loans through an auto dealer.
2013's issuance of covenant-lite leveraged loans - which strip away some protection for the lenders - hit $258B in 2013, about equal to the total amount issued between 1997 and 2012.
"Banks are looking for asset classes that performed better during the last crisis," says the OCC's Darrin Benhart. "The concern of course is that the previous crisis is not always the best indicator of what issues may happen next."
The agency will have fewer of its people stationed in the offices of the largest U.S. banks, instead bringing the workers back to OCC offices where they can develop a broader perspective on what may be happening in the financial system.
The move comes after Comptroller Thomas Curry - who took the reins in 2012 - brought in external consultants to review the OCC's examination program which failed to sniff out much in the way of systemic risk ahead of the financial crisis.
This action stands in contrast to that of regulators like the FRBNY (which also whiffed on the financial crisis), which is boosting its on-site presence at banks.
First they came for the big banks, and I did nothing ... The nation's largest lenders nearly sucked dry from mortgage settlements, housing regulators have turned their attention to a number of smaller players, with Fifth Third Bancorp (FITB), SunTrust (STI), and Regions Financial (RF) all recently disclosing investigations into the origination and servicing of home loans. U.S. Bancorp (USB) and Capital One (COF) have also disclosed probes into various mortgage practices.
Any money recouped from the regional lenders would go a long way towards stabilizing the finances of the FHA which required a $1.7B taxpayer infusion last year. "Settling with the large guys gave [the government] a template," says Eric Wasserstrom from Robinson Humphrey. "The agencies involved in the national mortgage settlement had planned to focus on the largest mortgage servicers first," says the Iowa assistant AG. "Then you move on to other entities."
It's only about the "fifth inning" of mortgage investigations, says Michael Stevens, in a phrase likely to send a chill through the boardrooms of banks across the country. Stevens is the FHFA's acting inspector general, and Bloomberg's Jody Shenn - in attendance at the MBA event where Stevens is speaking - says there was a "loud, collective gasp" from the crowd when he uttered that line.
Stevens says investigators have found improper actions "not only occasionally, but in the end, with almost every" deal examined. “I don’t see anything in the near future that’s going to wipe the slate clean with all of the investigations.”
"Multiple currencies" have been subject to attempted manipulation, says Raimund Roseler, head of banking supervision at Germany's BaFin. Those targeted tended to be the smaller currencies as opposed to large ones like the dollar and euro, he adds.
The news comes on the same day the EU charged three banks for anti-competitive behavior in interest rates and one day after Credit Suisse plead guilty to U.S. charges of tax evasion. Two months back, Swiss competition watchdog Weko became the first regulator to claim it had spotted illegal activity in currencies.
“We see continued deterioration of the litigation environment especially in the U.S.," said Deutsche Bank CFO Stefan Krause yesterday. Indeed.
The KBW Bank Index (ETF: KBE) is off about 8% from early April, with the performance of high-profile members like BofA, JPMorgan, Citigroup, Goldman is even worse (though Wells Fargo remains close to an all-time high).
It used to be, writes Michael Santoli, bank stock action was key to gauge the broader health of the market, but few are fretting now. Instead attention is being paid to the slides in the Russell 2000, high-flying growth names, and Treasury yields.
Rather than saying anything about the economy, the drop in bank shares could be more about thinning out an easy trade (long) that got too crowded. The latest BAML fund manager survey shows pros as big sellers of bank names in the last few weeks, dropping their allocations to a 10-month low. Even with the selling, their exposure to the sector remains far above the national average.
A check of the global banks finds the group pacing market declines in morning action after Friday night's warning on Q2 trading revenue from JPMorgan (JPM -2.2%).
Nomura's Steven Chubak is first out with lower JPMorgan earnings estimates.
Jim Cramer sums up sentiment: "This has been a house of pain. You can't own these right now. You just can't."
Morgan Stanley (MS -1.9%), Goldman Sachs (GS -1.5%), Citigroup (C -1.2%), and Bank of America (BAC -1%), Deutsche Bank (DB -1.2%). Far less trading dependent than the other Too Big Too Fails is Wells Fargo (WFC -0.2%).
Financial ETFs are the worst performers today thanks to Bank of America's near 5% dive in the wake of the suspension of its capital return plan. BofA is a top-10 holding of no fewer than 28 of about 880 equity-based ETFs tracked by S&P Capital IQ.
The Financial Sector SDRP (XLF -0.8%) has 6.35% of its AUM in Bank of America, the Vanguard Financials ETF (VFH -0.4%) has a 5.1% weight, and the iShares U.S. Financials ETF (IYF -0.4%) 4.8%. The SPDR KBW Bank ETF (KBE -0.9%) has a 1.92% weighting.
Bank of America (BAC) is 1.1% lower in premarket action after last night's leak of the DOJ seeking more than another $13B out of the hide of shareholders over legacy mortgage issues, according to Bloomberg. The settlement would come on top of the $9.5B agreed to by the bank to resolve FHFA claims, and a deal could come within the next two months, according to sources.
Most of the loans in question became BofA's problem after it purchased Countrywide and Merrill Lynch - one made the punk loans and the other packaged them into MBS.
This deal - which would also resolve state AG charges - would tower over JPMorgan's eye-popper of a $13B settlement from last year, which included $4B for the FHFA.
They're coming for your banks next: There are another eight lenders under investigation by the DOJ and state attorneys general over similar charges.
The average compensation at the OCC and the CFPB in 2012 was $190K, writes the AEI's Paul Kupiec, which towers over the average salary of about $50K for bank employees. Is it the special skills of regulators? Probably not. OCC secretaries average about $80K per year and FDIC limo drivers pull down $82K. Human resources management trainees at the CFPB make about $111K.
In 2012, 68% of FDIC and CFPB staff - and 66% at OCC - made more than 100K per year, with 19% earning over $180K. Less than 7% of employees at these agencies earn less than 50K - put another way, 93% earned more than the average banker's salary in 2012.
Who pays? Bank shareholders (and customers), mostly, through deposit insurance premiums and examination fees levied by the agencies. The CFPB is funded through the Federal Reserve (which doesn't disclose pay, but it's likely even higher than the other regulators).
Finalizing the criteria on the eight largest banks' leverage ratios - a minimum 5% at the holding company level and 6% at the bank subsidiary level - U.S. regulators impose a far tougher standard than international norms of 3%.
The regulators at work were the Fed, the FDIC, and the OCC, and the Fed's Dan Tarullo indicates he wants to go further, signaling the central bank may boost the risk-based capital surcharge to a higher level than the international standard. The most to lose in this scenario would be investment banks like Goldman and Morgan Stanley who don't have the deposit bases of their retail brethren.
Banks have until January 1, 2018 to comply with the new rule.
Growth over the last several quarters has been between 15-20%, says the team, but a major slowdown to a decline of 3-5% in now expected in Q1 (results begin coming in this week). The reasons are the usual suspects: Weak mortgage banking, weak capital markets, and legal and regulatory issues that are going nowhere.
Among the banks whose estimates are cut is Bank of America (BAC), now seen earning just $0.02 per share in Q1 from $0.30 previously. For all 2014, EPS should be $0.98, down from $1.06 originally forecast.
Other cuts of note: JPMorgan (JPM) now expected to earn $1.30 in Q1 from $1.36. U.S. Bancorp (USB) at $0.72 vs. $0.75. First Horizon (FHN) $0.13 vs. $0.16, and CVB Financial (CVBF) $0.23 vs. $0.24.
Having its EPS estimate boosted is Wells Fargo (WFC) to $0.94 from $0.90.
Regulators are due to vote today on whether to increase the "leverage ratio" for the eight largest U.S. banks to 5-6% of their total assets. The Basel III standard is 3%.
The move would force banks to add tens of billions of dollars in loss-absorbing capital, although many firms have already been bulking up in anticipation of the rule change.
Meanwhile, the Fed has given banks two extra years - until July 2017 - to ensure that their collateralized loan obligations (CLO) comply with the Volcker rule's restrictions on speculative investments. The extension is a reaction banks' fears that selling their CLOs would lead to substantial losses.
Add another to list of banks being downgraded in the wake of mostly conservative capital returns, and just ahead of what are expected to be sluggish Q1 earnings reports: BB&T (BBT -0.5%) is cut to Outperform from Strong Buy at Raymond James.
The PowerShares KBW Bank Portfolio (KBWB) is based on the KBW Bank Index. The Fund will normally invest at least 90% of its total assets in securities that comprise the Underlying Index. The Index is a float adjusted modified-market capitalization-weighted index that seeks to reflect the performance of companies that do business as banks or thrifts that are publicly-traded in the U.S. The Index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and is composed of approximately 24 companies representing leading national money centers and regional banks or thrifts.
See more details on sponsor's website