16 ★ FTWeekend 19 October/20 October 2019Robert Armstrong
On Wall Street
W
hat did we learn from
the avalanche of big US
bank earnings this
week? That the indus-
try can take a hard
punch — from interest rates falling to
historiclows—andstayuponitsfeet.
Bankers and bank investors can
breathe out and start towonder if there
aremorepunchescoming.
There was considerable anxiety com-
ing into third-quarter results season.
But the diversified giants, most notably
JPMorgan Chase andBank of America,
showedrealresilience.
Most of the banks beat analysts’ earn-
ingsestimatesandafewofthembywide
margins.Goldman Sachs, whose invest-
ment banking operationstumbled, was
thenotableexception.
Yes, revenue growth was lower
because lending margins were tighter —
lower interest rates and a flattening
yield curve will o that. And the banks’d
assessment of the state of the US econ-
omy has cooled somewhat. A year ago,
for example, JPMorgan’s finance chief
said: “We don’t see it slowing down.”
Thisquarter,theeconomywasjust“ona
solid footing”. Such tonal downgrades
wereaudibleacrosstheindustry.
Buteveninthisthinnerair,thebanks’
business models are working. The big
lenders are still collecting deposits t aa
healthy pace. Loan demand is holding
up too. BofA’s loan book is growing at
about5percent,upby$43bninthepast
year. EvenWells Fargo, its reputation
under repair after the fake accounts
scandal,isincreasingitsloansagain.
As a result, the margin compression
has, so far, been moderate. Indeed, net
interest income is still rising at the two
biggest banks by market capitalisation,JPMorgan and BofA. As a side note, it is
interestingthe growth has different
sources at the two banks. Both are har-
vesting large flows of deposits — almost
$140bn-worth over thepast year
betweenthem.
But JPMorgan has said it thinks it
wiser to invest that money into long-
duration debt securities, which have
modest yields but do notneed much
capitaltobeheldagainstthem.
BofA, on the other hand, prefers
higher yielding, more capital-intensive
loans.Onlyinthefullnessoftime illwew
findoutwhichstrategywasbest.
The banks can also depend on the USconsumer. Credit card businesses are
humming across the industry with no
sign of risingdefaults. Several of the
banks wereable to take advantage of
falling rates during the quarter, either
by underwriting abonanza n corporatei
debt refinancing (BofA wasactive here)
or trading volatile rates markets
(JPMorgan andMorgan Stanley). Mort-
gagerefinancingfeesarerollingin,too.
Meanwhile,thebanksarebuyingboat-
loadsofstock,keepingearningspershare
on the rise. AtCitigroup, for example,
tightening lending margins kept pre-tax
incomeflatbutrepurchaseshelpedpush
upEPSby20percent.
“Three quarters in a row now, people
have said, ‘rates are terrible and the
banks are going to get crushed’ — thenthe banks report and it’s ‘oh, there are
other levers the banks can pull’,” said
Brian Foran, a banks analyst at Autono-
mousResearch.
Still, this durability earned the banks
ameagrerewardfromthestockmarket.
The S&P Banks index climbed about
4 per cent over the week while the
broaderS&Pwasupabout2percent.
Part of the reason for this is surely
that, in the view of the futures market,
the Fed is not finished cutting rates —
the forward curve indicates one more
cutthisyear.
So lending margins are likely to com-
press in the fourth quarter, which will
include the full impact of the cut in Sep-
temberandanothertrimontopofthat.
But lower base rates will not turn the
US into sub-zero Europe or Japan,
where the banks andbig insurers rea
reallygroaning. The bigger question is
how loans will hold up if the US econ-
omytrulyslows.
Both non-performing loans and
reserves for losses are low. This may be
the result of10 years of cautious, post-
crisis underwriting — or so the banks
insist (“responsible growth” has long
been BofA’s mantra). It could also be
that companies do not default when
refinancing debt is as easy as it is now
and consumers do not go bust when
unemployment is at an all-time low.
Neitherconditionwillpersistforever.
In theprevious recession, banks
melted down in spectacular style. They
will need to prove they can punch their
way through the next one and emerge
with their balance sheets intact before
they will get credit for the gym work
theyhavedoneoverthepastdecade.[email protected]Big profits show banks
can take a punch from
historically low rates
Credit card businesses
are humming across
the industry with nosign of risingdefaults
3 Brexit news prompts sterling volatility
3 Renault warning helps drive down
European stocks
3 Chinese stocks slide following weaker
growth readingGlobal stocks drifted lower following an
eventful week in which trade war
headlines and Brexit buffeted markets.
Wall Street opened down yesterday
with investors remaining unconvinced
that Donald Trump’s “phase one deal”
between Beijing and Washington
amounted to a significant breakthrough.
“Not enough was achieved to alter
meaningfully the fundamental global
economic outlook, in our view,” said Mark
Haefele, chief investment officer at UBS
Global Wealth Management.
The S&P 500 was down 0.4 per cent
by midday in New Yorkwhile the
technology-heavy Nasdaq Composite slid
0.9 per centand the Dow Jones Industrial
Average dipped 0.4 per cent.
The US president’s trade pact was not
the only deal under scrutiny this week.
The UK’sefforts to broker anexit from
the EU hogged much of the limelight.
The pound, which tracks sentiment
towards Brexit, swung from a low of $1.
against the dollar to almost touch $1.
as news during the week rattled traders.
“It’s been a rollercoaster,” said Silvia
Dall’Angelo, a senior economist at
Hermes Investment Management, but
“the chances of no-deal now look very
low”.
Those shortened odds helped lift theFTSE 250’s companies, which are more
reliant on the UK economy.
The mid-cap index ended the week up
0.9 per cent, outperforming the global-
facing groups of the FTSE 100 index,
which fell 1.3 per cent during the same
period.
UK government debt, a traditional
haven asset, sold off as the risk receded
of the UK crashing out of the single
market. The more upbeat mood helped
the yield on the 10-year gilt rise 3 basis
points to 0.70 per cent yesterday.
The Brexit drama continues today as
MPs vote on the prime minister’s revised
deal. “If a deal is agreed on Saturday,
the... FTSE 250 index should getanother lift,” said Paul O’Connor, head of
the multi-asset team at Janus Henderson,
but a rebuff could see the pound back at
lows of “around $1.22”, added Rabobank.
Across the Channel, the continent-wide
Stoxx 600 Europe index fell 0.3 per cent
with automobiles & parts the worst
performing sector after a sales warning
from Renault.
Asian equities also ended the week on
a weaker footing with China’s CSI 300 of
Shanghai and Shenzhen stocks closing 1.
per cent lower as weaker Chinese GDP
data underscored worries that
momentum in the world’s second-largest
economy was waning.
Ray DouglasWhat you need to know
Brexit drama sends pound on rollercoaster ride
Source: BloombergAgainst the dollar ( per £) Mon Tue Wed Thu FriThe day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2985.63 1534.81 22492.68 7150.57 2938.14 104673.
% change on day -0.41 -0.38 0.18 -0.44 -1.32 -0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.459 1.114 108.515 1.290 7.082 4.
% change on day -0.152 0.180 -0.124 0.467 -0.016 -0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.735 -0.382 -0.155 0.628 3.172 6.
Basis point change on day 0.010 2.700 0.410 3.000 1.100 -2.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 346.38 59.34 53.62 1492.65 17.45 2790.
% change on day -0.41 -1.05 -0.87 0.51 1.13 0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index| ||||||| |||||||| ||||
Aug 2019 Oct2800288029603040| || |||||||| |||||||||
Aug 2019 Oct1440148015201560| ||||| |||||||| ||||||
Aug 2019 Oct7040720073607520Biggest movers
% US Eurozone UKUpsState Street 6.
Kansas City Southern 5.
E*trade Fin 5.
Intuitive Surgical 5.
People's United Fin 4.Edenred 2.
Seadrill 2.
Publicise 2.
Casino Guichard 1.
Talanx 1.Royal Bank Of Scotland 2.
Aveva 1.
Itv 1.
Segro 1.
Berkeley Holdings (the) 1.
%DownsL Brands -8.
Netflix -6.
Gap (the) -4.
Macy's -4.
Johnson & Johnson -4.
Prices taken at 17:00 GMTRenault -11.
Danone -8.
Thales -5.
Yara Int -4.
Kerry Grp -3.
Based on the constituents of the FTSE Eurofirst 300 EurozoneIntercontinental Hotels -4.
Evraz -4.
Relx -2.
Rolls-royce Holdings -2.
Ocado -2.
All data provided by Morningstar unless otherwise noted.RetailersGap,Macy’s nda L Brands, the
Victoria’s Secret owner, all dropped after
Credit Suisse advised selling.
Recent results from Hugo Boss and
Levi Strauss suggest sector expectations
remain unrealistic both for autumn sales
and for improving trends next year, said
the broker. With property owners
“bracing for another round of large-scale
store closure announcements after the
holiday”, the stocks’ low valuations will
not be enough to counter structural
concerns, it said.
Johnson & Johnson lid on news it wass
recalling around 33,000 bottles of baby
powder after the US health regulator
found traces of asbestos in a bottle
bought from an online retailer.
The voluntary recall drew attention to
J&J’s exposure to thousands of lawsuits
brought by people who claim talc-based
products caused them to develop cancer.
Snap ained after Merrill Lynch addedg
the Snapchat owner to its “buy” list.
It said advertising industry data look
solid and Snapchat’s new feature rollouts
should underpin average revenue per
user growth, suggesting a recent pullback
on competition worries looked misplaced.
Netflix eversed Thursday’s results-r
inspired rally as analysts moved their
forecasts lower.
“We expect content spending to trigger
substantial cash burn for many years,”
said Wedbush. Macquarie downgraded to
“neutral” on worries that competition
would erode pricing power.Bryce ElderWall Street Eurozone London
A profit warning leftRenault he sharpestt
faller among European auto stocks.
The French group’s revised full-year
sales and margin targets cut earnings
expectations by about 15 per cent to
reflect weak market conditions affecting
both its eponymous brand and its partner
network.
Renault management also said there
was no current talks with Fiat Chrysler,
widely considered its most likely merger
partner.
Danone etreated after reportingr
weaker than expected third-quarter sales
and lowering full-year growth guidance.
Falling sales in Russia, where
consumers have been trading down from
its premium yoghurt brands, and
increased competition in the US yoghurt
market were among its highlighted
problems.
Eurazeo, the Paris-based private equity
group, dropped after the alternative asset
manager Tikehau Capital sold a 4.45 per
cent stake.
Wirecard ell after filings showedf
hedge fund Marshall Wace holding a 0.
per cent short position.
Getinge of Sweden led the Stoxx
Europe 600 gainers after better than
expected quarterly results from the
medical equipment maker bolstered
turnround hopes.
Morgan Stanley said the numbers
showed an encouraging step-change in
profitability as well as improved organic
growth.Bryce ElderInterContinental Hotels lipped afters
posting a 0.8 per cent fall in third-quarter
revenue per available room, a sharp
deterioration from its half-year figure.
Management blamed one-off factors
such as Hong Kong unrest and trade
tension so left full-year guidance
unchanged.
InterContinental’s update and a
warning a day before from French peer
Accor suggested there could be “the
beginning of a synchronised global
downturn but there is a lot of political
noise that can be blamed,” said Morgan
Stanley.
Avast it a record high on better thanh
expected results and reiterated full-year
guidance.
Rolls-Royce aded after research housef
Redburn downgraded the jet engine
maker to “neutral”.
Hospital operatorNMC Health alliedr
after Morgan Stanley started coverage
with “overweight” advice.
Worries about NMC’s extensive use of
acquisitions and its cash flow conversion
look unfounded while accounting policy
concerns “appear immaterial”, the broker
told clients.
WHSmith as carried higher for aw
second day on the back of its deal to buy
US peer Marshall Retail Group for $400m.
HSBC, repeating “buy” advice, said the
acquisition was a game-changer for WH
Smith as it would double the size of the
group’s travel division in the key North
American market.Bryce ElderMARKETS & INVESTING
OCTOBER 19 2019 Section:Markets Time: 10/201918/ - 18:59 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR , 16, 1