If you are looking for a sign of how bank earnings might be doing, look no further than Goldman Sachs. Goldman has struggled over the last several quarters as its trading business has failed to generate much revenue because of the broad lack of volatility over the last couple of years. However, in a divergence from the norm, this quarter is supposed to be very strong because of the volatility that has hit markets. One of the big x-factors in the earnings will be how Goldman’s proprietary investments perform.
FINSUM: If Goldman does well it will bode well for the rest of the banks, especially because other trading divisions will likely see a pick up too.
Banks may be about to receive a huge gift from regulators in a move that shows just how much the deregulatory push of the Trump era might help the financial industry. The US Federal Reserve, which has significant oversight of the financial regulatory landscape has proposed changes which would loosen restrictions on banks’ balance sheets, allowing them to become more reliant on debt financing, thus having more leverage.
FINSUM: All the details of the new proposals are not clear yet, but this could be a significant boon for banks.
There is some speculation that bank stocks may be set to go on a tear. Rising rates are usually good for banks. They cause bond volatility, which boosts trading income, and they boost net interest margins, which raises interest income. However, so far this year, things have been weak. Barron’s also adds a solid point—insiders are not buying bank stocks. It has been two years since Jamie Dimon bought his company’s stock, and BAML top brass have been notably absent too. That seems to reflect a lack of conviction on the part of management.
FINSUM: The lack of buying from management is a troubling sign for us, as they certainly have the best insight into the future of the company. It is odd though, as ostensibly things look very positive.
In a new bill to help small US banks, some of the biggest beneficiaries are exactly the opposite. The new bill is set to raise the threshold for strict oversight from regulators to $250bn in assets (up from $50 bn). However, three huge custody banks—BNY Mellon, State Street, and Northern Trust—will also see a major benefit. Because of their custodial structure they will be able to exclude some deposits, pushing their total deposits down under the $250 bn threshold. This development seems likely to boost earnings per share at the custodial banks by 8%.
FINSUM: Talk about regulation going right for these banks.
One of the financial industry’s most astute crisis callers has just told Barron’s that she thinks we are in for another financial crisis. Sheila Bair, former head of the FDIC, has successfully called the Enron scandal and the subprime crisis, and now she sees another one looming. The context is that Trump and the White House are leading the charge for less bank regulation, which Bair sees as crazy given this point in the cycle. According to her, “To loosen capital now is just crazy. When we get to a downturn, banks won’t have the cushion to absorb the losses. Without a cushion, we will have 2008 and 2009 again.”.
FINSUM: We are not supportive of too much loosening of bank regulation. Banks have been very profitable since the Crisis, and it is not as if the current regulatory paradigm is over-constraining them