Tag: Banks

Take profits on Starbucks after its huge run, and check out these 3 other stocks

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In Friday’s “Morning Meeting,” we dug into our inbox and found an excellent question raised by a member of the Investing Club. Starbucks – like Halliburton – has had a nice run lately. The Club trimmed some Halliburton on Thursday . Why not trim Starbucks too? I have a double-digit percent gain on shares accumulated over the past five months. It seems like I should take some off the table. I would appreciate your perspective on what I see as a similar situation, but two different stocks. -Clay In our video, we debated if it was time to take profits and pledged to come back with a definitive response. Our answer is yes, we would make a very small trim — 50 shares of our 750 share position in Starbucks (SBUX) — if we were not restricted from trading. We’ll also downgrade our rating to a 2, meaning we would wait for a pullback before buying. As Clay points out, Starbucks has had quite the run lately. The first leg was due to a bullish Investor Day event we centered our August investment thesis around . At the event, Starbucks management laid out an expansive reinvention plan to unlock efficiencies at its stores and an ambitious growth strategy. The second leg of the recent rally has been fueled by China loosening its once stringent Covid-related restrictions much faster than anyone expected six months ago. It was a complete 180 from the fears in October when SBUX tumbled on concerns that China would prolong its zero-Covid policy for longer after Chinese President Xi Jinping tightened his grip on power . This speculation hit the stock hard that day because China is a huge growth opportunity for the coffee retailer. Starbucks is targeting 3,000 new stores in China by its fiscal year 2025, implying a new store every nine hours over the next few years. While there was a lot of fear in the air about China, we kept our eye on the ball and added to our position into that weakness in the stock. Since that buy, Starbucks has rallied about 22% compared to a 1% gain in the S & P 500 . SBUX 1Y mountain Starbucks (SBUX) 1-year performance There is a lot to be bullish about in Starbucks’ future, but a lot of that good news is starting to get priced in. Shares are now trading at around 31 times its next twelve-month earnings. That’s a four-multiple turn from when we first started buying in August at around $85 per share. The higher multiple is justified by the improving margin outlook and China growth plan, but it also raises the stakes around execution. Out of prudence and general discipline after a big run, we’ll take some stock off the table the next time we are unrestricted. We’ll also increase our price target up to $120 as we still believe there is more upside here over the long term as China comes back and we see the benefits of the U.S. store investments. In addition, we believe it’s prudent to let a little stock go when the market is this overbought. Following Thursday’s positive session for stocks, the market pushed even deeper into overbought territory, according to the S & P Oscillator . The value on this technical indicator increased from plus 6.46% to plus 9.46%. As a reminder, any value north of 4% means the market is technically in overbought territory and potentially due for a pullback. It’s a sign that the buyers may have exhausted themselves and any piece of negative news could trigger some selling, kind of like what we saw Friday morning when the market freaked out over bank earnings that actually weren’t bad at all. It’s uncommon for the Oscillator to reach a value that high. The last time it happened was in November 2020. We went back and looked at how the market fared in the time it took to work off its then-overbought condition. The result was surprising. There was a pullback of about 2% five sessions later. But in the days it took for the overbought condition to completely work off, the Dow Jones Industrial Average actually moved slightly higher. The action was similar to the previous time before that in June 2020. Now, of course, the market back then was in a bull market fueled by a zero-interest rate policy by the Federal Reserve to support an economy on the ropes due to Covid shutdowns. Rates are much higher today, and it’s hard to figure out exactly where earnings will land in 2023, especially for tech. Ultimately, earnings are what drive stock prices. .DJI 5Y mountain Dow 5 years However, our interpretation of the S & P Oscillator and the recent stock market gains is that things could get choppy over the next few days, maybe weeks. But we don’t want to be too negative with the charts looking favorable , signs indicating that inflation is finally starting to come down, and the Fed no longer needing to be as aggressive as thought a few months ago. Bottom line Again, earnings will be the most important driver of stocks over the next few weeks and we will need to see them hold up. But with the Fed winning its battle against inflation, we’ll be looking for pullbacks and weakness to add to positions of profitable companies that trade at reasonable price-to-earnings multiple valuations. Some Bullpen names we are taking a hard look at are Deere (DE) and Caterpillar (CAT). We would love to see their prices come down. Another potential name is BlackRock (BLK), and we’ll follow up next week with a formal Bullpen post on the investment management company. BlackRock on Friday beat estimates with fourth-quarter earnings and revenue. (Jim Cramer’s Charitable Trust is long SBUX, HAL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California.

Lucy Nicholson | Reuters

In Friday’s “Morning Meeting,” we dug into our inbox and found an excellent question raised by a member of the Investing Club.

Starbucks – like Halliburton – has had a nice run lately. The Club trimmed some Halliburton on Thursday. Why not trim Starbucks too? I have a double-digit percent gain on shares accumulated over the past five months. It seems like I should take some off the table. I would appreciate your perspective on what I see as a similar situation, but two different stocks.

-Clay

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We took a big step forward in putting our regulatory issues behind us, says Wells Fargo’s CFO

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Mike Santomassimo, Wells Fargo CFO, joins ‘Closing Bell’ to discuss the company’s earnings results and what WFC is doing to put lingering regulatory issues behind it.

05:44

Fri, Jan 13 20233:16 PM EST

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Wells Fargo’s solid 4Q and planned share buybacks support our thesis for the stock, as shares climb

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Wells Fargo (WFC) reported mixed fourth-quarter results on Friday. But the bank demonstrated a stellar bottom line, while committing to much-welcomed share buybacks in the current quarter. Total revenue fell 6% year-on-year, to $19.66 billion, missing analysts’ expectations for $19.98 billion in revenue. Earnings-per-share of 67 cents exceeded estimates of 59 cents per share. Included in this figure was a 70-cent headwind resulting from legacy issues, another 15-cent hit due to equity impairment charges largely related to the venture capital business, and a 7-cent impact resulting from severance expenses in the home lending business . A partial offset to these negative factors was a 13 cent per share discrete tax benefit. Shares of Wells Fargo initially plummeted by as much as 5.5% earlier in the day before rebounding on comments from CEO Charles Scharf, who said the bank would spend carefully and become more efficient this year. Wells Fargo was trading up more than 3% Friday afternoon, at $44.20 a share. WFC 1D mountain Wells Fargo (WFC) 1 day performance Bottom line In line with our thesis, higher interest rates resulted in a significant increase in net interest income (NII) as the net interest margin – the spread between what the bank pays on deposits and charges on loans – continued to expand. Sequentially, the biggest driver was higher interest rates. Annually, the benefit from higher loan balances and lower mortgage-backed securities premium amortization. Unfortunately, this was partially offset by a decline in fee-based noninterest income, which was down on both a sequential- and annual basis. In addition to the solid bottom-line performance, we are highly encouraged to see that management will begin to buy back shares in the current quarter. Looking to the full year, while the net interest income forecast came in below expectations, the expense guidance excluding operating losses indicates an annual decline, welcome news given that peers are looking at higher expenses in 2023. Additionally, Scharf said Friday that while the bank has earmarked a good deal of money for additional investments in growth, they are by no means planning to spend those funds “at all costs.” That commentary was welcome news to investors. Key company metrics Net interest income: $13.43 billion, up 11% quarter-over-quarter and 45% year-over-year, outpacing analysts’ forecasts of $12.99 billion. Net interest margin: 3.14%, compared with 2.11% during the same period a year prior, and above the consensus estimate of 3.02%. Non-interest income: $6.23 billion, down 16% quarter-over-quarter and 46% year-over-year, missing expectations of $7.03 billion. Non-interest expense: $16.20 billion, up 23% year-over-year and up 13% over last quarter, versus a $15.73 billion consensus estimate. That figure includes $3.3 billion in operating losses related to the bank’s legacy issues, without which total expenses would have been flat annually and up 5% sequentially. Return on average tangible common equity (ROTCE)*: 7.6%, below analysts’ forecasts of 8%. Heavily impacting performance was a $3.3 billion operating loss related to litigation, regulatory, and customer remediation matters, $1 billion of equity security impairments, $353 million in severance expenses, and $510 million in discrete tax benefits. Excluding these items, adjusted ROTCE was closer to 16%. Efficiency ratio*: 82%, up from 63% last year and above analysts’ expectations for 79.1%. Average loans: $948.5 billion, up 8% year-over-year and essentially unchanged from the third quarter, below expectations of $957.7 billion. Period end loans increased for the sixth consecutive quarter. Average deposits: $1.38 trillion, down 6% year-over-year, in line with analysts’ forecasts. Tangible book value per share (TBVPS)*: $34.89, down 4% year-on-year and up 2% from last quarter. Provisions for credit losses: $957 million, well ahead of analysts’ expectations for $825 million, and up from $784 million last quarter. Importantly, while net charge-offs increased, management noted that credit quality remains strong. * Financial definitions for bank stocks : ROTCE is a measure of annualized earnings applicable to Wells Fargo common shareholders as a percentage of average tangible common equity. Efficiency ratio is a measure of efficiency that is calculated as total non-interest expenses divided by net revenues. TBVPS is a measure of intrinsic liquidation value that removes intangibles such as goodwill. Segment results Consumer banking and lending total fourth-quarter revenue was $9.46 billion, up 8% over last year and up 2% over last quarter. Consumer and small business banking (CSBB) revenue increased 36% year-over-year, primarily due to higher rates. Within consumer lending, home lending was down 57% from last year, while credit card revenue increased 6% over last year. Auto loan revenue was down 12% year-over-year and personal lending increased 9% from last year. Commercial banking fourth-quarter revenue soared by 38% year-over-year, to $3.15 billion. Middle market banking revenue of $2.08 billion represented an increase of 78% over the same period last year, on the back of higher interest rates and loan balances. Asset-based lending and leasing revenue of $1.07 billion declined 4% year-over-year, as loan growth was more than offset by lower net gains from equity securities. Noninterest expenses increased 9% year-over-year, primarily due to higher personnel expenses and operating losses. Corporate and investment banking fourth-quarter revenue climbed by 18% year-over-year, to $4.14 billion. Total banking revenues increased 22% year-over-year to $1.65 billion thanks to higher interest rates and higher lending revenue on higher loan balances. Investment banking fees were down due to lower market activity. Commercial real estate revenue increased 16% year-over-year, a result of higher rates and loan balances. Markets revenue was up 17% year-over-year thanks to higher trading revenue in equities, commodities, foreign exchange. Municipal products, however, fell 5% sequentially. Noninterest expenses increased 4% year-over-year but were down 3% sequentially, with the annual increase resulting from higher operating costs and salary expenses. Wealth and investment management fourth-quarter revenue was $3.7 billion, up 1% year-over-year. Net interest income surged 69% year-over-year due to higher rates. Non-interest income, however, fell 14% year-over-year as a result of lower asset-based fees driven by a decline in market valuations. Non-interest expenses fell 6% year-over-year due to lower revenue-related compensation and efficiency initiatives. 2023 outlook Looking ahead, management believes that 2023 NII could be as much as 10% higher in 2023, compared with the the $45 billion seen in 2022, though actual results will depend on a slew of factors. This forecast assumes that the federal asset cap remains in place throughout 2023. The implied guidance of $49.5 billion is below the $52.05 billion Wall Street was looking for On the expenses side, excluding the impact of $7 billion in operating losses in 2022 and an expectation for $1.3 billion in “ongoing business-related operating losses in 2023,” management anticipates expenses to decline by about $100 million in 2023 to roughly $50.2 billion, even as competitor banks plan for higher expenses. Moreover, it’s the makeup of the expenses decrease that should be especially encouraging to longer-term investors. Embedded in this guidance is $3.2 billion in efficiency initiatives – meaning that once complete, those expenses should be gone for good – that was partially offset by $1.7 billion in incremental investments, which should aid future growth. Taken all together, the company expects a $1 billion decrease in net expenses, though total expenses excluding operating losses will only be down by about $100 million. While management indicated a desire to make new investments in the business, they also made clear they would proceed cautiously. “If we don’t see revenue growth and if we don’t see payoffs from the things that we’re doing, then we will spend less money, and so that’s the way we’re approaching it. We’re either going to get the efficiency ratio to continue to improve because we’re getting real pay off on some things or we will reduce on a net basis,” Scharf said. “But overall there’s still gross expenses that should come out of the company which gives us the latitude to continue to grow the investments inside the company,” he added. Capital returns Wells Fargo did not repurchase any stock in the fourth quarter, however, management noted that buyback activity will restart in the current quarter. Given that Wells Fargo ended the quarter with a Common Equity Tier 1 (CET1) ratio of 10.6%, up from 10.3% in the prior quarter and well above its regulatory minimum, along with buffers of 9.2%, there is plenty of balance sheet capacity to restart share repurchases without risking the bank’s financial health. (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Smith Collection/Gado | Archive Photos | Getty Images

Wells Fargo (WFC) reported mixed fourth-quarter results on Friday. But the bank demonstrated a stellar bottom line, while committing to much-welcomed share buybacks in the current quarter.

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Bank earnings kick off

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CNBC’s Hugh Son joins ‘Power Lunch’ to discuss this morning’s bank earnings and what they say about the possibility of a recession.

02:55

Fri, Jan 13 20232:35 PM EST

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Fed: Interest expense paid to banks soars

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CNBC's Steve Liesman reports on the Federal Reserve.

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We need to take the bank numbers with a grain of salt, says Interactive Brokers’ Steve Sosnick

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Squawk on the Street

Steve Sosnick, Interactive Brokers chief strategist, joins ‘Squawk on the Street’ to discuss big bank results and what to expect moving forward.

00:58

10 minutes ago

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Breaking down JPMorgan Chase and Wells Fargo earnings

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Ken Leon of CFRA and David Long of Raymond James discuss their respective calls on banks, specifically JPMorgan and Wells Fargo.

03:27

Fri, Jan 13 202311:05 AM EST

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Citigroup’s fourth-quarter profit declines by 21% as bank sets aside more money for credit losses

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Citigroup said it had identified the cause of the flash crash and corrected the error “within minutes.”

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Citigroup said fourth-quarter net income decreased by more than 21% from a year ago as the bank set aside more money for potential credit losses.

Shares rose 1.7% as investors looked to some positives in the report including a record fourth quarter for fixed income trading.

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Here are the fourth-quarter numbers versus what Wall Street expected:

Net income: $2.5 billion versus $3.2 billion a year ago.
Earnings: $1.10 a share, excluding certain divestitures. (It was not clear if that was comparable to the $1.14 a share estimate from analysts.)
Revenue: $18.01 billion in revenues, above the $17.9 billion expected from analysts polled by Refinitiv.
Net Interest Income: $13.27 billion, above the 12.7 billion expected by analysts, according to StreetAccount
Trading Revenue: Fixed Income $3.16 billion, above expectations. Equities trading was $789 million, below expectations.
Provision for credit losses: $1.85 billion compared to $1.79 billion expected by analysts polled by StreetAccount.

CEO Jane Fraser’s turnaround efforts at Citigroup have hit a snag amid concerns over a global economic slowdown and as central banks around the world battle inflation. Like the rest of the industry, Citigroup is also contending with a sharp decline in investment banking revenue, partly offset by an expected boost to trading results in the quarter.

Citigroup’s net income slumped 21% to $2.5 billion from $3.2 billion in the previous year, largely due to slowing loan growth in its private bank alongside expectations for a weaker macroeconomic environment going forward. The weakness was partially offset by higher revenues and lower expenses.

The bank said it set aside more money for credit losses going forward, increasing provisions 35% from the previous quarter to $1.85 billion. This build included $640 million for unfunded commitments due to loan growth in the private bank.

Revenues in services and markets divisions increased 32% and 18% respectively, driven by growth in interest income and in fixed income markets. The fixed income markets division saw revenues jump 31% to $3.2 billion, the highest fourth-quarter results ever, due to strength in rates and currencies.

“With their revenues up 32%, Services delivered another excellent quarter, and we have gained significant share in both Treasury and Trade Solutions and Securities Services,” Fraser said in a press release. “Markets had the best fourth quarter in recent memory, driven by a 31% increase in Fixed Income, while Banking and Wealth Management were impacted by the same market conditions they faced throughout the year.”

There was also strength in banking, with private bank revenues gaining 5% and U.S. personal bank revenues up 10%. Retail banking revenues, however, fell 3% due to lower mortgage volumes.

JPMorgan, Bank of America and Wells Fargo also reported earnings on Friday. JPMorgan topped analyst estimates for the quarter and said that it now sees a mild recession as the base case for 2023. Bank of America also beat Wall Street’s expectations as higher interest rates offset losses in investment banking.

Wells Fargo shares rose despite the bank reporting that profits fell in the latest quarter due to a recent settlement and the bank’s boosted reserves amid economic weakness.

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Bank of America tops expectations as higher rates help offset declines in investment banking

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Brian Moynihan, CEO, Bank of America

Scott Mlyn | CNBC

Bank of America reported fourth-quarter results on Friday that showed higher interest rates helped the Wall Street giant make up for a sharp slowdown in investment banking.

Here are the key metrics compared with what Wall Street expected:

Earnings: 85 cents per share versus 77 cents a share, according to Refinitiv
Revenue: $24.66 billion versus $24.33 billion, according to Refinitiv

The results were boosted by sizeable gains in interest income thanks to higher rates and loan growth in the fourth quarter. The bank reported $14.7 billion of net interest income, up 29% year over year but slightly below Wall Street expectations of $14.8 billion, according to StreetAccount.

That gain helped offset a decline in investment banking fees, which fell more than 50% to $1.1 billion. That result was largely in line with expectations, according to StreetAccount.

However, the bank did guide for net interest income to decline sequentially in the first quarter of 2023.

Shares of Bank of America rose 2.2% on Friday.

“The themes in the quarter have been consistent all year as organic growth and rates helped deliver the value of our deposit franchise. That coupled with expense management helped drive operating leverage for the sixth consecutive quarter,” CEO Brian Moynihan said in a statement.

Bank of America was supposed to be one of the main beneficiaries of the Federal Reserve’s rate-boosting campaign. But bank stocks got hammered last year amid concerns a recession was on the way.

The bank implemented a $1.1 billion provision for credit losses, up $1.6 billion compared with the same quarter in 2021, but said net charge-offs remain below pre-pandemic levels.

Notably, that was below the $2.3 billion provision for credit losses from rival JPMorgan Chase, but Moynihan said Bank of America is similarly expecting a mild recession.

“Our baseline scenario contemplates a mild recession. … But we also add to that a downside scenario, and what this results in is 95% of our reserve methodology is weighted toward a recessionary environment in 2023,” Moynihan said on a call with investors.

On the consumer banking front, Bank of America reported that balances were roughly flat, while credit card and debit spending rose 5% year over year. Average outstanding balance on credit cards climbed by 14%.

Average loans and leases for the whole bank rose 10% year over year, while the same metric for consumer banking rose 6%.

The global wealth and investment management business saw total revenue increase marginally even as average deposits declined. Net income for the segment was down 2% year over year.

Revenue from fixed income, currency and commodity trading was another bright spot, rising 37% year over year.

Prior to the report, Bank of America’s stock was up 4% in the first few days of 2023.

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JPMorgan Chase is set to report fourth-quarter earnings — here’s what the Street expects

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Jamie Dimon, CEO of JPMorgan Chase, testifies during the Senate Banking, Housing, and Urban Affairs Committee hearing titled Annual Oversight of the Nations Largest Banks, in Hart Building on Thursday, September 22, 2022.

Tom Williams | CQ-Roll Call, Inc. | Getty Images

JPMorgan Chase is scheduled to report fourth-quarter earnings before the opening bell Friday.

Here’s what Wall Street expects:

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Earnings: $3.07 per share, 7.9% lower than a year earlier, according to Refinitiv.
Revenue: $34.3 billion, 13% higher than a year earlier.
Provision for credit losses $1.96 billion, according to StreetAccount
Trading revenue: fixed income $3.76 billion, equities $1.92 billion
Investment banking revenue: $1.57 billion

JPMorgan, the biggest U.S. bank by assets, will be closely watched for clues on how the industry is navigating an economy at a crossroads.

Analysts are expecting a mixed bag of conflicting trends from banks. Higher rates will help lenders earn more interest income, but some of that boost will be offset by larger provisions for expected loan losses as the economy slows.

Wall Street won’t likely come to the rescue. Investment banking revenue is expected to plunge 50% in the wake of frozen IPO markets and subdued deals, Barclays analyst Jason Goldberg said in a Jan. 11 note.

That will be partly offset by a 10% rise in trading revenue, thanks to a boost from fixed income operations, he wrote.

Of greater interest, perhaps, is what JPMorgan CEO Jamie Dimon says about the economy. The veteran CEO rattled markets last year when he said an economic “hurricane” caused by the Federal Reserve was headed for the U.S.

Shares of JPMorgan have climbed 4% this year, compared with the 6% rise of the KBW Bank Index.

The other large retail banks, including Bank of America, Wells Fargo and Citigroup, are also scheduled to release results Friday, while Goldman Sachs and Morgan Stanley report Tuesday.

This story is developing. Please check back for updates.

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Watch CNBC’s full discussion on bank earnings with Wells Fargo’s Mike Mayo

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Wells Fargo’s Mike Mayo joins ‘Closing Bell: Overtime’ to discuss upcoming bank earnings, which kick off tomorrow with Citi, Bank of America, JPMorgan and Wells Fargo, all reporting before the opening bell.

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We’re excited about big banks with strong consumer deposits, says RBC’s Gerard Cassidy

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CNBC’s Hugh Son and Gerard Cassidy of RBC join ‘The Exchange’ to discuss upcoming bank earnings, Cassidy’s picks and projected declines in earnings.

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These under-the-radar bank stocks are among Wall Street’s favorites as earnings season begins

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JPMorgan shutters website it paid $175 million for, accuses founder of inventing millions of accounts

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Dimon said in June that he was preparing the bank for an economic “hurricane” caused by the Federal Reserve and Russia’s war in Ukraine.

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JPMorgan Chase on Thursday shut down the website for a college financial aid platform it bought for $175 million after alleging that the company’s founder created nearly 4 million fake customer accounts.

The country’s biggest bank acquired Frank in Sept. 2021 to help it deepen relationships with college students, a key demographic, a Chase executive told CNBC at the time.

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JPMorgan touted the deal as giving it the “fastest-growing college financial planning platform” used by more than five million students at 6,000 institutions. It also provided access to the startup’s founder Charlie Javice, who joined the New York-based bank as part of the acquisition.

Months after the transaction closed, JPMorgan said it learned the truth after sending out marketing emails to a batch of 400,000 Frank customers. About 70% of the emails bounced back, the bank said in a lawsuit filed last month in federal court.

Javice, who had approached JPMorgan in mid-2021 about a potential sale, lied to the bank about her startup’s scale, the bank alleged. Specifically, after being pressed for confirmation of Frank’s customer base during the due diligence process, Javice used a data scientist to invent millions of fake accounts, according to JPMorgan.

“To cash in, Javice decided to lie, including lying about Frank’s success, Frank’s size, and the depth of Frank’s market penetration in order to induce JPMC to purchase Frank for $175 million,” the bank said. “Javice represented in documents placed in the acquisition data room, in pitch materials, and through verbal presentations [that] more than 4.25 million students had created Frank accounts to begin applying for federal student aid using Frank’s application tool.”

Instead of gaining a business with 4.25 million students, JPMorgan had one with “fewer than 300,000 customers,” JPMorgan said in the suit.

Javice’s defense

A lawyer for Javice told the Wall Street Journal that JPMorgan had “manufactured” reasons to fire her late last year to avoid paying millions of dollars owed to her. Javice has sued JPMorgan, saying that the bank should front legal bills she incurred during its internal investigations.

“After JPM rushed to acquire Charlie’s rocketship business, JPM realized they couldn’t work around existing student privacy laws, committed misconduct and then tried to retrade the deal,” attorney Alex Spiro told the Journal. “Charlie blew the whistle and then sued.”

Spiro, a partner with Quinn Emanuel, didn’t immediately return a call from CNBC.

JPMorgan spokesman Pablo Rodriguez had this response:

“Our legal claims against Ms. Javice and Mr. Amar are set out in our complaint, along with the key facts,” he said. “Ms. Javice was not and is not a whistleblower. Any dispute will be resolved through the legal process.”

‘Pinch me’

The alleged fraud perpetrated by Javice and one of her executives “materially damaged JPMC in an amount to be proven at trial, but not less than $175 million,” JPMorgan said in its suit.

Regardless of the outcome of this legal scuffle, this is an embarrassing episode for JPMorgan and its CEO Jamie Dimon. In a bid to fend off encroaching competitors, JPMorgan has gone on a buying spree of fintech companies in recent years, and Dimon has repeatedly defended his technology investments as necessary ones that will yield good returns.

The fact that a young founder in an industry known for shaky metrics and a “fake it ’til you make it” ethos managed to dupe JPMorgan calls into question how stringent the bank’s due diligence process is.

In an interview at the time of the deal, Javice marveled at how far she had come in just a few years leading her startup.

“Today is my first day employed by someone else, ever,” Javice told CNBC. “I mean it still feels very much like, pinch me, did this really happen?”

As a result of the legal scuffle, JPMorgan shut down Frank early Thursday morning.

“Frank is no longer available” the website now reads. “To file your Free Application for Federal Student Aid (FAFSA), visit StudentAid.gov.”

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Wells Fargo Shifts Focus Away From Mortgage Business

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On Tuesday, Wells Fargo shared major changes happening to its business in 2023.

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The company announced “strategic plans” to focus on serving bank customers and minority homebuyers. It also intends to descale its mortgage business — formerly one of the top lenders in the country.

Additionally, the company will exit the correspondent business, which purchases loans from third-party lenders, and reduce the size of its mortgage-servicing portfolio.

“We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus,” Kleber Santos, CEO of consumer lending, said in the press release.

Executives have acknowledged that the changes will result in a new round of layoffs, CNBC reported, but declined to estimate the number of employees who will be affected.

With the new focus and direction, Wells Fargo’s business model will more closely resemble that of rival banks such as JPMorgan Chase and Bank of America, both of which stepped back from the mortgage business after the Great Recession of 2008.

The de-escalation of Wells Fargo as a major lender might have implications for the mortgage market in the U.S. When major lenders exit the business, non-banks step in to meet demand. However, these “nonplayers” are far less regulated than banks, CNBC reported.

Currently, Wells Fargo is the third-largest mortgage lender behind Rocket Mortgage and United Wholesale Mortgage, both of which are non-bank players.

One of the biggest initiatives in Wells Fargo’s new focus is supporting minority homebuyers. The bank will invest $100 million in advancing racial equity in homeownership and stated it intends to continue to invest in this sector for years to come.

“As the largest bank lender to Black and Hispanic families for the last decade, we remain deeply committed to advancing racial equity in homeownership,” Santos said in the release.

Additionally, Kristy Fercho, head of home lending and head of diverse segments, representation and inclusion at Wells Fargo, stated that the company will hire additional mortgage consultants in communities of color.

The initiative comes months after the bank was exposed for falsifying diversity efforts. A former employee claimed Wells Fargo had a practice of holding interviews for positions that were either already filled or didn’t exist. The interviews were a vehicle for recording diversity efforts on paper rather than carrying them out in reality. Joe Bruno, the former Wells Fargo employee who came forward with the claims, had been fired by the bank in August 2021.

“To the extent that individual employees are engaging in the behavior as described, we do not tolerate it,” a Wells Fargo spokesperson told The New York Times at the time.

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Madeline Garfinkle

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January 11, 2023

Potential recession doesn’t shake our conviction in Morgan Stanley and Wells Fargo

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Fears of an impending recession have been a drag on bank stocks for months. But we’ve stayed invested in our two financials — Wells Fargo (WFC) and Morgan Stanley (MS) — on the belief that an economic slowdown isn’t enough to take the shine off their attractive qualities. Wells Fargo has benefited from the Federal Reserve’s higher interest rates and a focus on actively reducing expenses to boost profitability. It also stands to gain from renewed investor- and customer confidence as it moves past a slew of costly scandals. Morgan Stanley, meanwhile, is on steady ground with CEO James Gorman, who’s led a multiyear effort to turn the investment bank into an asset-and-wealth-management powerhouse with steadier earnings streams. Despite an uncertain economic outlook, we see the fundamentals of both banks intact as the sector approaches fourth-quarter earnings season. Wells Fargo is set to report Friday, while Morgan Stanley reports Jan. 17. Some on Wall Street think the banking sector has an especially favorable near-term setup, bolstering the Club’s own outlook. In a research note to clients Monday, Bank of America identified financials as very well positioned in the short term and the most attractive sector based on valuation, price momentum and earnings trajectory. It’s the first time in 18 months that energy did not hold the top spot in their survey. “We are overweight the sector and see it as a higher quality sector with better earnings stability than the S & P 500, cleaner balance sheets thanks to U.S. regulators, and less recession risk than other more crowded and expensive cyclical sectors like [information technology],” Bank of America analysts wrote in the note. When bank earnings get underway, analysts at Credit Suisse said they’ll be looking for commentary from management on forward guidance and signs of “banks’ fundamental resilience—sufficient earnings power and balance sheet strength to manage through macro deterioration with respectable results.” Wells Fargo A key aspect of Wells Fargo’s earnings story is higher interest rates from the Federal Reserve, which boost the company’s net interest income, or NII. This is essentially the money Wells Fargo makes on the difference between what the bank charges on loans and what it pays customers for their deposits. Higher interest rates tend to expand that difference, translating into higher NII. Wells Fargo’s large customer-deposit base makes it a major beneficiary of this dynamic. In the three months ended Sept. 30, Wells Fargo’s NII rose 36%, compared with the same quarter in 2021, when the Fed was holding interest rates near zero. Analysts expect Wells Fargo to generate $12.9 billion in NII in the fourth quarter, according to FactSet, which would be a 39.5% year-over-year increase. It also would be a nearly 7% increase quarter-over-quarter. The banks Q4 results are expected to be dented by a $3.5 billion operating loss expense, stemming partially from a settlement with the Consumer Financial Protection Bureau announced in December. But the sizable penalty is a positive step toward moving past the bank’s longstanding regulatory issues. Analysts at UBS agree. “In our view, WFC remains the most compelling turnaround story in large-cap financials, and we think the disappointing-on-the-surface late December announcement … on regulatory matters actually sets the stage for further regulatory remediation medium-term and potential near-term relief in operating losses,” the analysts, who have a buy rating on Wells Fargo shares, wrote in a note Tuesday. Investors also expect Wells Fargo to have set aside additional funds for credit losses in the fourth quarter, after provisioning $784 million in the third quarter. While we believe Wells Fargo maintains a high-quality loan book, banks should be proactive in building reserves in this economic environment. Strong NII, however, should help fund provisions for credit losses, “which will protect capital and also help maintain earnings levels as the cycle moves along,” Jefferies analysts wrote in a note to clients Monday. The analysts rated Wells Fargo shares a buy, with a $49-per-share price target, and called the bank their top pick among its peer group. Meanwhile, Wells Fargo’s decision to take a large step back from the U.S. housing market, as reported Tuesday by CNBC , aligns with CEO Charlie Scharf’s vision to reshape the scandal-ridden bank. It’s unlikely to significantly affect the bank’s upcoming quarterly results, but management may offer insight into the future of the bank’s mortgage business on Friday’s earnings conference call. Overall, Wall Street expects Wells Fargo to earn 63 cents per share in the fourth quarter on $20.02 billion in revenue, according to estimates compiled by Refinitiv. Morgan Stanley Morgan Stanley has been hurt by a sharp slowdown in mergers and acquisitions (M & A) and initial public offerings (IPOs) over the past 3 quarters — and the fourth quarter of 2022 should be no different. Analysts are projecting $1.33 billion in investment banking revenue in the period, according to FactSet, which would be a roughly 48.5% decline from the same period last year. That won’t come as a surprise to Wall Street. But going forward, it’s hard to imagine Morgan Stanley’s investment banking business having as bad of a year in 2023 as it did in 2022. We’re not expecting a dramatic rebound back to the booming days of the Covid pandemic in 2021, when a flurry of mergers and IPOs pushed investment-banking revenues to record levels . But investment banking should become less of a drag on the rest of the enterprise. Morgan Stanley is in the midst of a business transformation, as it leans into asset and wealth management to develop more stable earnings streams, relative to that of trading and investment banking. This is a key part of the Club’s thesis, and the progress has started to show up in the results following the acquisitions of brokerage E-Trade and investment management firm Eaton Vance . Those deals — valued at roughly $13 billion and $7 billion, respectively — pushed Morgan Stanley further into the money management world. In the third quarter of 2022, asset and wealth management accounted for 56% of Morgan Stanley’s $12.99 billion in revenue. That’s up from roughly 51% in the third quarter of 2019, prior to the Covid-19 pandemic, and analysts expect that figure could reach nearly nearly 60% of the firm’s total revenue by the third quarter of 2023. Over time, we expect investors to reward Morgan Stanley’s steadier earnings with a higher valuation. In the meantime, Morgan Stanley rewards investors for patience with a robust capital return plan. The stock’s dividend yield of roughly 3.5% is above its 5-year average of 2.5%, according to FactSet. And in the 3 months ended Sept. 30, the firm repurchased $2.6 billion worth of stock. Still, Wall Street is generally less sanguine on Morgan Stanley compared with Wells Fargo. Only 55% of the 29 analysts who cover the company have a buy or overweight rating on its stock, with 10% recommending it be sold, according to FactSet. Nearly 80% of 29 Wells Fargo analysts rate its stock buy or overweight, and there are no sell ratings. Wolfe Research is one Wall Street outlet that recommends selling Morgan Stanley, citing concerns over valuation and pressure on operating margins if NII peaks. Analysts at Wolfe last week downgraded Morgan Stanley to underperform, or sell, from outperform, or buy. Heading into next week’s earnings print, analysts expect Morgan Stanley to earn $1.25 per share on $12.64 billion in revenue for the fourth quarter, according to Refinitiv. Bottom line Opinions on bank stocks vary across Wall Street, thanks in large part to the uncertain economic outlook. We think being selective on the sector makes sense, which is why our positions are limited to only Wells Fargo and Morgan Stanley. These are investment opportunities with cause for optimism over a longer time horizon, not simply near-term trades that depend on macroeconomic clarity. (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Pedestrians pass a Wells Fargo bank branch in lower Manhattan.

Spencer Platt | Getty Images

Fears of an impending recession have been a drag on bank stocks for months. But we’ve stayed invested in our two financials — Wells Fargo (WFC) and Morgan Stanley (MS) — on the belief that an economic slowdown isn’t enough to take the shine off their attractive qualities.

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January 11, 2023

Wells Fargo stepping back from housing shows the impact of rising interest rates, says NewEdge’s Sechan

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Rob Sechan, NewEdge Wealth co-founder and CEO, joins ‘Closing Bell: Overtime’ to discuss Wells Fargo’s decision to scale back on its home mortgage business after being a market leader.

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January 10, 2023

Wells Fargo, once the No. 1 player in mortgages, is stepping back from the housing market

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Wells Fargo is stepping back from the multi-trillion dollar market for U.S. mortgages amid regulatory pressure and the impact of higher interest rates.

Instead of its previous goal of reaching as many Americans as possible, the company will now offer home loans to existing bank and wealth management customers and borrowers in minority communities, CNBC has learned.

The dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and heightened regulatory oversight — both industrywide, and specific to Wells Fargo after its 2016 fake accounts scandal — led to the decision, said consumer lending chief Kleber Santos.

“We are acutely aware of Wells Fargo’s history since 2016 and the work we need to do to restore public confidence,” Santos said in a phone interview. “As part of that review, we determined that our home lending business was too large, both in terms of overall size and its scope.”

It’s the latest, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019. Mortgages are by far the biggest category of debt held by Americans, making up 71% of the $16.5 trillion in total household balances. Under Scharf’s predecessors, Wells Fargo took pride in its vast share in home loans — it was the country’s top lender as recently as 2019, according to industry newsletter Inside Mortgage Finance.

More like rivals

Now, as a result of this and other changes that Scharf is making, including pushing for more revenue from investment banking and credit cards, Wells Fargo will more closely resemble megabank rivals Bank of America and JPMorgan Chase. Both companies ceded mortgage share after the 2008 financial crisis.

Following those once-huge mortgage players in slimming down their operations has implications for the U.S. mortgage market.

As banks stepped back from home loans after the disaster that was the early 2000’s housing bubble, non-bank players including Rocket Mortgage quickly filled the void. But these newer players aren’t as closely regulated as the banks are, and industry critics say that could expose consumers to pitfalls. Today, Wells Fargo is the third biggest mortgage lender after Rocket and United Wholesale Mortgage.

Third-party loans, servicing

As part of its retrenchment, Wells Fargo is also shuttering its correspondent business that buys loans made by third-party lenders and “significantly” shrinking its mortgage servicing portfolio through asset sales, Santos said.

The correspondence channel is a significant pipeline of business for San Francisco-based Wells Fargo, one that became larger as overall loan activity shrank last year. In October, the bank said 42% of the $21.5 billion in loans it originated in the third quarter were correspondence loans.

The sale of mortgage servicing rights to other industry players will take at least several quarters to complete, depending on market conditions, Santos said. Wells Fargo is the biggest U.S. mortgage servicer, which involves collecting payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, as of the third quarter, according to data from Inside Mortgage Finance.

More layoffs

Altogether, the shift will result in a fresh round of layoffs for the bank’s mortgage operations, executives acknowledged, but they declined to quantify exactly how many. Thousands of mortgage workers were terminated or voluntarily left the company last year as business declined.

The news shouldn’t be a complete surprise to investors or employees. Wells Fargo employees have speculated for months about changes coming after Scharf telegraphed his intentions several times in the past year. Bloomberg reported in August that the bank was considering paring back or halting correspondent lending.

“It’s very different today running a mortgage business inside a bank than it was 15 years ago,” Scharf told analysts in June. “We won’t be as large as we were historically” in the industry, he added.

Last changes?

Wells Fargo said it was investing $100 million towards its goal of minority homeownership and placing more mortgage consultants in branches located in minority communities.

“Our priority is to de-risk the place, to focus on serving our own customers and play the role that society expects us to play as it relates to the racial homeownership gap,” Santos said.

The mortgage shift marks what is potentially the last major business change Scharf will undertake after splitting the bank’s operations into five divisions, bringing in 12 new operating committee members and creating a diversity segment.

In a phone interview, Scharf said that he didn’t anticipate doing other major changes, with the caveat that the bank will need to adapt to changing conditions.

“Given the quality of the five major businesses across the franchise, we think we’re positioned to compete against the very best out there and win, whether it’s banks, non-banks or fintechs,” he said.

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January 10, 2023

Powell reiterates Fed is not going to become a ‘climate policymaker’

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Chair of the Board of Governors of the Federal Reserve System Jerome H. Powell participates in a panel during a Central Bank Symposium at the Grand Hotel in Stockholm, Sweden, January 10, 2023.

Claudio Bresciani | TT | via Reuters

Federal Reserve Chairman Jerome Powell on Tuesday said the central bank will not get involved in issues like climate change that are beyond its congressionally established mandate, and vowed the institution will not become a “climate policymaker.”

Powell’s remarks, delivered at a conference hosted by Sweden’s central bank, follow calls from some Democrats for the Fed to play a more active role in addressing climate change and ensuring the country’s financial system is prepared for climate-related risks.

Powell has reinterred that climate change is not a main consideration for the Fed when developing monetary policy, noting that climate-related issues are more for the federal government than for his institution.

“Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections,” Powell said on Tuesday.

“Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals,” Powell said. “We are not, and will not be, a ‘climate policymaker.’”

In recent years, the Fed has tiptoed into addressing climate change, including creating of two internal committees focusing on the issue. It’s also joined the Network for Greening the Financial System, a group of global central banks aimed at addressing the systemic risk climate change poses to the financial sector.

But Powell on Tuesday said the Fed’s regulatory powers give it a “narrow” role to ensure financial institutions “appropriately manage” climate-related risks. He added the Fed should “not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities.”

And while the Fed has requested big banks to examine their financial readiness in the event of climate-related disasters, Powell said this is as involved as the institution should be in addressing climate-related issues.

“The public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change,” Powell said.

The Fed is set to launch a pilot program this year for six of the country’s largest banks to take part in a climate scenario analysis exercise that would examine the firms’ ability to manage major climate events.

— CNBC’s Jeff Cox contributed reporting

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