Here is an eye-opener. Investors have for years been buying bank stocks in the expectation of rising rates. That idea was a major component of the Trump rally. However, the view from the inside appears to be changing, as banks don’t think rates are going up. According to the Wall Street Journal, banks have given up on rising rates and are buying up all manner of loans that have low rates locked in for long periods, a sure sign they do not expect rates to move higher. Overall, the percentage of bank assets whose rates will not rise in the next five years hit a new high in the second quarter.
FINSUM: After all the hopes of increased profitability from higher rates, everything seems to have returned to the “lower for longer” post-Crisis paradigm.
The Republican party has been pushing to overturn one of the most hated of all the hated CFPB rules. The Consumer Financial Protection Bureau currently has a rule (poised to be implemented) which makes it easy for consumers to sue banks. The Republican party is trying to overturn the rule disallowing arbitration, allowing for banks and credit card companies to settle matters outside of court. However, momentum towards overturning it seems to be waning despite Republican backers pushing for a vote when they return from recess. The Senate needs to pass the measure in September when it returns, but the vote is looking tight.
FINSUM: This would be a big victory for financial companies, but we suspect that in the current political environment there will not be enough Senate votes to overturn this.
One of the crowning achievements of Dodd-Frank has been the Volcker Rule, or the rule which bars banks from undertaking trading on their own account. The US’ OCC this week took the first step to loosening the rule, which is hated by those on Wall Street. The leader of the OCC, appointed by President Trump, has opened a request for comment, which is a prelude to a possible loosening or overturning of the rule. Consensus has apparently been formed in Washington, across parties, that the Volcker Rule needs to be simplified in order to be more effective.
FINSUM: The devil has always been in the details with regards to the Volcker Rule, because the difference between trading one’s own account, and building up inventory for future client trades can become very blurry, especially in bond markets. The rule has certainly hollowed out corporate bond liquidity.
After years trailing behind its biggest rival, Morgan Stanley’s stock did something it hasn’t for years yesterday—it overtook Goldman Sachs in market cap. After a stock gain yesterday, combined with a GS fall, Morgan Stanley’s valuation is now $86.40 bn, ahead of Goldman’s $85.88. The bank’s fixed income division has been surging of late, boosting sentiment amongst investors. Goldman’s FICC division has been headed in the exact opposite direction, with a steep fall in their most recent quarterly earnings.
FINSUM: James Gorman has done a great job steering Morgan Stanley and boosting their ROI. We like the overall direction of the bank.
There have been a lot of worries about bank earnings over the last couple of weeks. The market has been flooded with articles about bored Wall Street traders with nothing to do and a flurry of analyst earnings downgrades on the back of lower expected trading revenue. However, JP Morgan released its earnings Thursday and things were not nearly as bad as many expected. Profit per share was up significantly over last year and revenue was well ahead of expectations. Trading was weaker than in previous quarters, but on the whole the stock rose 1.5% as earnings were better than expected.
FINSUM: So the opinions that universal banks would be better off seem to be vindicated thus far. It will be interesting to see how Goldman Sachs, which is not universal, fares.