Traders expect the Federal Reserve could start cutting rates as soon as September, sending returns on cash lower, but a few places still offer yields exceeding 5% to those willing to park their money. To that effect, Marcus by Goldman Sachs recently boosted the annual percentage yield on its 1-year certificate of deposit to 5.15%, reflecting a week-over-week boost of 15 basis points, BTIG found. One basis point is equal to one one-hundredth of a percent. Marcus’ yield hike places it in an exclusive group of financial institutions continuing to offer rates in the 5% range on deposits. Citizens Access and Capital One Financial each offer a 1-year CD that yields 5%, while Sallie Mae offers a 5.15% APY. Bread Financial is at the top of the heap, with an APY of 5.25% on a 1-year CD. Though the yields are solid, they likely will not last long. The Fed’s rate-hiking cycle, which started in March 2022, had the pleasant side effect of boosting yields on money market funds, CDs, high-yield savings accounts and other cash proxies. The party will start to wind down as rates slip — and investors hiding out in these short-term instruments will see their yields tumble. “Broadly we still expect online bank deposit rates to decline,” said Vincent Caintic, an analyst for BTIG, in a Friday report. “Almost all the banks in our coverage group expect flat to declining balance sheets.” Indeed, LendingClub recently slashed its 1-year CD APY to 4.2%, reflecting a cut of 95 basis points, Caintic found. “The move by LendingClub is a surprise, as they have usually been at the pointy-end of the deposit rate tables but have now placed themselves at the very bottom,” he said. CDs and money market funds may be a sound place for investors to sock away some short-term cash, especially because CDs permit investors to enjoy today’s higher yields for a set period. However, there are trade-offs for depositors. For instance, investors may forfeit some interest if they “break” their CD ahead of maturity, which makes these funds less liquid compared to money market funds. There is also the possibility that a bank may renew a maturing CD at a lower rate than what was originally offered. Longer term, investors who are heavily concentrated in cash run the risk of missing out on attractive returns in stocks or they may fail to lock in higher yields using longer-dated fixed income assets.
Led by the U.S. Chamber of Commerce, the card industry in March sued the CFPB in federal court to prevent the new rule from taking effect.
That effort, which bounced between venues in Texas and Washington, D.C., for weeks, is now about to reach a milestone: a judge in the Northern District of Texas is expected to announce by Friday evening whether the court will grant the industry’s request for a freeze.
That could hold up the regulation, which would slash what most banks can charge in late fees to $8 per incident, just days before it was to take effect on Tuesday.
“We should get some clarity soon about whether the rule is going to be allowed to go into effect,” said Tobin Marcus, lead policy analyst at Wolfe Research.
The credit card regulation is part of President Joe Biden’s broader election-year war against what he deems junk fees.
Big card issuers have steadily raised the cost of late fees since 2010, profiting off users with low credit scores who rack up $138 in fees annually per card on average, according to CFPB Director Rohit Chopra.
As expected, the industry has mounted a campaign to derail the regulations, deeming them a misguided effort that redistributes costs to those who pay their bills on time, and ultimately harms those it purports to benefit by making it more likely for users to fall behind.
Up for grabs is the $10 billion in fees per year that the CFPB estimates the rule would save American families by pushing down late penalties to $8 from a typical $32 per incident.
Card issuers including Capital One and Synchrony have already talked about efforts to offset the revenue hit they would face if the rule takes effect. They could do so by raising interest rates, adding new fees for things like paper statements, or changing who they choose to lend to.
Capital One CEO Richard Fairbank said last month that, if implemented, the CFPB rule would impact his bank’s revenue for a “couple of years” as the company takes “mitigating actions” to raise revenue elsewhere.
“Some of these mitigating actions have already been implemented and are underway,” Fairbank told analysts during the company’s first-quarter earnings call. “We are planning on additional actions once we learn more about where the litigation settles out.”
Like some other observers, Wolfe Research’s Marcus believes the Chamber of Commerce is likely to prevail in its efforts to hold off the rule, either via the Northern District of Texas or through the 5th Circuit Court of Appeals. If granted, a preliminary injunction could hold up the rule until the dispute is settled, possibly through a lengthy trial.
The industry group, which includes Washington, D.C.-based trade associations like the American Bankers Association and the Consumer Bankers Association, filed its lawsuit in Texas because it is widely viewed as a friendlier venue for corporations, Marcus said.
“I would be very surprised if [Texas Judge Mark T.] Pittman denies that injunction on the merits,” he said. “One way or another, I think implementation is going to be blocked before the rule is supposed to go into effect.”
The CFPB declined to comment, and the Chamber of Commerce didn’t immediately respond to a request for comment.
Nicolette Nelson was running late for her return flight to Fairbanks as she sprinted towards her gate at Cincinnati/Northern Kentucky International Airport (CVG). Overcome by a medical issue, she didn’t make it to her gate and wound up spending the night in a Cincinnati hospital. By the next day, she had recovered and awaited her flight home, but it was repeatedly delayed.
So Nelson spent hours of her delay in a quiet cubicle in an unlikely place — a bank — waiting for her flight and wiling away the time on electronic devices.
“It’s been really, it’s quiet and that is what I need,” Nelson said.
Fifth Third Bank was trying to appeal to this type of traveler when it rechristened its 40-year-old CVG branch last month as a combination lounge and lending center. Weary travelers and constantly working entrepreneurs stake out prime spots in the bank away from the airport hubbub, while corporate travelers use the center to squeeze out more business.
“One woman wanted to rent my office to work,” remembers Lisa Slocum, the airport Fifth Third Bank branch manager. Slocum directed the woman to other options in the branch.
Other customers use the bank on a purely transactional basis. On a recent day, Hannah Thelen and her mother, Ashley Thelen, were passing through on their way to Spain and stopped in to convert currency.
“I love the central location,” Ashley Thelen said as she converted dollars to euros.
It’s a central location for a flyer, but a maze of trams, moving sidewalks, and concourses need to be navigated to get to it in Terminal B, and it is past the TSA checkpoint, so the branch doesn’t get customers off the street.
Fifth-Third Bank isn’t the first financial institution to create an airport lounge vibe. Capital One closed its branch at Washington, D.C.’s Dulles International Airport in 2020, instead creating “airport lounges” for cardholders in Dulles, along with similar spots at airports in Denver and Dallas. The lounges offer amenities on par with an airline rewards club but are only for Capital One card holders, and banking services are not a part of the experience like they are at Fifth-Third’s CVG branch.
Capital One Lounge inside Dulles International Airport in Washington, D.C.
Capital One
If CVG were a city, it’d be the fourth or fifth largest in Kentucky on most days, with 16,000 workers employed on the airport campus daily, according to Mindy Kershner, CVG’s senior manager of communications, plus the nine million passengers going through the gates yearly. That’s a lot of potential banking customers. Yet full-service airport bank branches are a relative rarity, surprising in a retail landscape that often resembles an upscale mall more than a terminal.
Wings Credit Union has a small full-service branch at the Minneapolis-St. Paul International Airport, and Wings Vice President of Marketing Brent Andersen said the branch is also more about serving the large number of airport employees who are members than the traveling public. He adds, however, that in terms of visibility and advertising, even with the higher airport rent, the branch is a no-brainer.
“We’d have to spend a lot more in other advertising to get that kind of visibility,” Andersen said, crediting the branch with also landing new members.
For Fifth Third Bank, and a handful of other retail banking players, the airport branches are more than just expensive advertising for the brand (though that’s certainly part of the appeal). They are also functional financial centers, and in a digital era when bank branches are under existential scrutiny, some financial companies are betting on airports as a viable and visible place to keep their shingle hung.
Big banks are adding hundreds of branches
The banks and credit unions adding airport branches are just another indicator that the long-predicted demise of in-person banking at the hands of digital isn’t happening exactly as expected. The long-term trend is still less retail footprint, but branches have been staging a bit of a comeback. In fact, FDIC data shows that 2023 saw the first annual gain in branch count nationwide, to nearly 70,000, in a decade. This rebound comes as banking giants JPMorgan Chase and PNC have announced plans to open more branches — Chase up to 500, plus 1,700 renovations, while PNC is adding 100 new branches and renovating another 1,000 at a cost of $1 billion over the next three to five years.
When Fifth Third Bank, the nation’s tenth-largest bank by deposits, rechristened its 40-year-old CVG location last month, it did so with plenty of local media coverage, cementing its commitment to airport banking.
“There are very few full-service branches in airports, and this is one of a kind,” said John Sieg, regional retail executive for Fifth Third Bank. The bank is trying to create something like Delta’s Sky Club, except with on-site banking — cashing checks, checking balances, and converting currency — and open to all. And you won’t get dinged with an overdraft fee for lounging on their sofas.
“Our objective is for travelers to have a place to do their full-service banking and hang out with us. They could hang out with us all day if they have a delayed flight. We have had customers that have done it,” Sieg said.
Wells Fargo operates a full-service branch in Las Vegas’s Harry Reid International Airport, and according to a bank spokeswomen, has a multi-year relationship with the airport that involves both the branch and multiple ATMs throughout terminals. Although Wells Fargo had little to say about the branch, it’s not difficult to imagine why it might be popular in Vegas, where slots are as much a part of the landscape as espresso machines.
Truist Bank, formerly SunTrust, operates a full-service bank branch at Hartsfield-Jackson Atlanta International Airport, where serving customers remains a top priority, but Brian Davis, director of consumer and small business banking communications, also noted that being at the airport provides the bank with “a high level of brand visibility for the millions of passengers who pass through.”
Still, not everyone in the industry is sold on mixing anxiety about getting through security and to the gate on time with personal finance.
“I think it’s a bad idea,” says Paul McAdam, senior director of banking and payments intelligence at analytics firm J.D. Power. McAdam says ATMs and advanced-function kiosks are one thing, but a full-service branch, except maybe in the largest markets, is overkill. JFK Airport in New York City has three credit unions in its terminals.
“I sense that bank branches in airports would handle a lot of transaction volume but very little value-added volume of customers looking to open accounts or receive advice. Who wants to open a new account in an airport?” McAdam said.
Financial giants are testing the concept of bank-branded destinations more widely. Capital One has opened some cafes in New York that cater to the remote worker, offering a financial vibe without vaults of money and tellers watching your every move.
With most travelers focused on traveling, Fifth Third conceded that banking isn’t top of mind for many airport customers. Sieg says the CVG branch does about 1,700 transactions a month.
“That is probably on the smaller side of what a transaction count would be at a traditional bank mart or office,” he said, but the visibility of the branch makes up for lower volume.
The branch offers an array of spaces, including a service bar where travelers can tap away at their tablets while watching coffee-clutching, harried travelers racing for their gates. The bank also includes a fully private office with phones, a hydration station, sofas, and overstuffed chairs, an enticement for remote workers.
“Regardless of whether you are a customer or a non-customer, we wanted to put out the best welcome sign we could have. Everybody is invited and can use this space,” Sieg said.
However, if someone feels a need to apply for a mortgage during their layover or open a savings account, the branch has that functionality.
The identity of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.
That’s because unless Berkshire has been granted confidential treatment on the investment for a third quarter in a row, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO may decide to explain his rationale to the thousands of investors flocking to the gathering.
The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.
That’s an area he has dialed back on in recent years over concerns about rising loan defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the yield on Berkshire’s cash pile in instruments like T-bills suddenly attractive.
“When you are the GOAT of investing, people are interested in what you think is good,” said Glenview Trust Co. Chief Investment Officer Bill Stone, using an acronym for greatest of all time. “What makes it even more exciting is that banks are in his circle of competence.”
Under Buffett, Berkshire has trounced the S&P 500 over nearly six decades with a 19.8% compounded annual gain, compared with the 10.2% yearly rise of the index.
Coverage note: The annual meeting will be exclusively broadcast on CNBC and livestreamed on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.
Berkshire requested anonymity for the trades because if the stock was known before the conglomerate finished building its position, others would plow into the stock as well, driving up the price, according to David Kass, a finance professor at the University of Maryland.
Buffett is said to control roughly 90% of Berkshire’s massive stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.
While investment disclosures give no clue as to what the stock could be, Stone, Kass and other Buffett watchers believe it is a multibillion-dollar wager on a financial name.
That’s because the cost basis of banks, insurers and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.
At the same time, Berkshire exited financial names by dumping insurers Markel and Globe Life, leading investors to estimate that the wager could be as large as $4 billion or $5 billion through the end of 2023. It’s unknown whether that bet was on one company or spread over multiple firms in an industry.
If it were a classic Buffett bet — a big stake in a single company — that stock would have to be a large one, with perhaps a $100 billion market capitalization. Holdings of at least 5% in publicly traded American companies trigger disclosure requirements.
Investors have been speculating for months about what the stock could be. Finance covers all manner of companies, from retail lenders to Wall Street brokers, payments companies and various sectors of insurance.
“Schwab was beaten down during the regional banking crisis last year, they had an issue where retail investors were trading out of cash into higher-yielding investments,” Shanahan said. “Nobody wanted to own that name last year, so Buffett could’ve bought as much as he wanted.”
Other names that have been circulated — JPMorgan Chase or BlackRock, for example, are possible, but may make less sense given valuations or business mix. Truist and other higher-quality regional banks might also fit Buffett’s parameters, as well as insurer AIG, Shanahan said, though their market capitalizations are smaller.
Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and confidence — into the industry on multiple occasions.
Buffett served as CEO of a scandal-stricken Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into Goldman Sachs in 2008 and another $5 billion into Bank of America in 2011, ultimately becoming the latter’s largest shareholder.
But after loading up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and U.S. Bank, he deeply pared his exposure to the sector in 2020 on concerns that the coronavirus pandemic would punish the industry.
Since then, he and his deputies have mostly avoided adding to his finance stakes, besides modest positions in Citigroup and Capital One.
Last May, Buffett told shareholders to expect more turbulence in banking. He said Berkshire could deploy more capital in the industry, if needed.
“The situation in banking is very similar to what it’s always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes it wasn’t.”
Wherever he placed his bet, the move will be seen as a boost to the company, perhaps even the sector, given Buffett’s track record of identifying value.
It’s unclear how long regulators will allow Berkshire to shield its moves.
“I’m hopeful he’ll reveal the name and talk about the strategy behind it,” Shanahan said. “The SEC’s patience can wear out, at some point it’ll look like Berkshire’s getting favorable treatment.”
Customers shop in a Walmart Supercenter on February 20, 2024 in Hallandale Beach, Florida.
Joe Raedle | Getty Images News | Getty Images
Walmart’s majority-owned fintech startup One has begun offering buy now, pay later loans for big-ticket items at some of the retailer’s more than 4,600 U.S. stores, CNBC has learned.
The move puts One in direct competition with Affirm, the BNPL leader and exclusive provider of installment loans for Walmart customers since 2019. It’s a relationship that the Bentonville, Arkansas, retailer expanded recently, introducing Affirm as a payment option at Walmart self-checkout kiosks.
It also likely signals that a battle is brewing in the store aisles and ecommerce portals of America’s largest retailer. At stake is the role of a wide spectrum of players, from fintech firms to card companies and established banks.
One’s push into lending is the clearest sign yet of its ambition to become a financial superapp, a mobile one-stop shop for saving, spending and borrowing money.
Since it burst onto the scene in 2021, luring Goldman Sachs veteran Omer Ismail as CEO, the fintech startup has intrigued and threatened a financial landscape dominated by banks — and poached talent from more established lenders and payments firms.
But the company, based out of a cramped Manhattan WeWork space, has operated mostly in stealth mode while developing its early products, including a debit account released in 2022.
Now, One is going head-to-head with some of Walmart’s existing partners like Affirm who helped the retail giant generate $648 billion in revenue last year.
Walmart’s Fintech startup One is now offering BNPL loans in Secaucus, New Jersey.
Hugh Son | CNBC
On a recent visit by CNBC to a New Jersey Walmart location, ads for both One and Affirm vied for attention among the Apple products and Android smartphones in the store’s electronics section.
Offerings from both One and Affirm were available at checkout, and loans from either provider were available for purchases starting at around $100 and costing as much as several thousand dollars at an annual interest rate of between 10% to 36%, according to their respective websites.
Electronics, jewelry, power tools and automotive accessories are eligible for the loans, while groceries, alcohol and weapons are not.
Buy now, pay later has gained popularity with consumers for everyday items as well as larger purchases. From January through March of this year, BNPL drove $19.2 billion in online spending, according to Adobe Analytics. That’s a 12% year-over-year increase.
Walmart and One declined to comment for this article.
One’s expanding role at Walmart raises the possibility that the company could force Affirm, Capital One and other third parties out of some of the most coveted partnerships in American retail, according to industry experts.
“I have to imagine the goal is to have all this stuff, whether it’s a credit card, buy now, pay later loans or remittances, to have it all unified in an app under a single brand, delivered online and through Walmart’s physical footprint,” said Jason Mikula, a consultant formerly employed at Goldman’s consumer division.
Affirm declined to comment about its Walmart partnership. Shares of Affirm climbed 2% Tuesday, rebounding after falling more than 8% in premarket activity.
For Walmart, One is part of its broader effort to develop new revenue sources beyond its retail stores in areas including finance and health care, following rival Amazon’s playbook with cloud computing and streaming, among other segments. Walmart’s newer businesses have higher margins than retail and are a part of its plan to grow profits faster than sales.
In February, Walmart said it was buying TV maker Vizio for $2.3 billion to boost its advertising business, another growth area for the retailer.
When it comes to finance, One is just Walmart’s latest attempt to break into the banking business. Starting in the 1990s, Walmart made repeated efforts to enter the industry through direct ownership of a banking arm, each time getting blocked by lawmakers and industry groups concerned that a “Bank of Walmart” would crush small lenders and squeeze big ones.
To sidestep those concerns, Walmart adopted a more arms-length approach this time around. For One, the retailer created a joint venture with investment firm firm Ribbit Capital — known for backing fintech firms including Robinhood, Credit Karma and Affirm — and staffed the business with executives from across finance.
Walmart has not disclosed the size of its investment in One.
The startup has said that it makes decisions independent of Walmart, though its board includes Walmart U.S. CEO, John Furner, and its finance chief, John David Rainey.
One doesn’t have a banking license, but partners with Coastal Community Bank for the debit card and installment loans.
After its failed early attempts in banking, Walmart pursued a partnership strategy, teaming up with a constellation of providers, including Capital One, Synchrony, MoneyGram, Green Dot, and more recently, Affirm. Leaning on partners, the retailer opened thousands of physical MoneyCenter locations within its stores to offer check cashing, sending and receiving payments, and tax services.
But Walmart and One executives have made no secret of their ambition to become a major player in financial services by leapfrogging existing players with a clean-slate effort.
One’s no-fee approach is especially relevant to low- and middle-income Americans who are “underserved financially,” Rainey, a former PayPal executive, noted during a December conference.
“We see a lot of that customer demographic, so I think it gives us the ability to participate in this space in maybe a way that others don’t,” Rainey said. “We can digitize a lot of the services that we do physically today. One is the platform for that.”
One could generate roughly $1.6 billion in annual revenue from debit cards and lending in the near term, and more than $4 billion if it expands into investing and other areas, according to Morgan Stanley.
Walmart can use its scale to grow One in other ways. It is the largest private employer in the U.S. with about 1.6 million employees, and it already offers its workers early access to wages if they sign up for a corporate version of One.
There are signs that One is making a deeper push into lending beyond installment loans.
Walmart recently prevailed in a legal dispute with Capital One, allowing the retailer to end its credit-card partnership years ahead of schedule. Walmart sued Capital One last year, alleging that its exclusive partnership with the card issuer was void after it failed to live up to contractual obligations around customer service, assertions that Capital One denied.
The lawsuit led to speculation that Walmart intends to have One take over management of the retailer’s co-branded and store cards. In fact, in legal filings Capital One itself alleged that Walmart’s rationale was less about servicing complaints and more about moving transactions to a company it owns.
“Upon information and belief, Walmart intends to offer its branded credit cards through One in the future,” Capital One said last year in response to Walmart’s suit. “With One, Walmart is positioning itself to compete directly with Capital One to provide credit and payment products to Walmart customers.”
A Capital One Walmart credit card sign is seen at a store in Mountain View, California, United States on Tuesday, November 19, 2019.
Yichuan Cao | Nurphoto | Getty Images
Capital One said last month that it could appeal the decision. The company declined to comment further.
Meanwhile, Walmart said last year when its lawsuit became public that it would soon announce a new credit card option with “meaningful benefits and rewards.”
One has obtained lending licenses that allow it to operate in nearly every U.S. state, according to filings and its website. The company’s app tells users that credit building and credit score monitoring services are coming soon.
And while One’s expansion threatens to supersede Walmart’s existing financial partners, Walmart’s efforts could also be seen as defensive.
Fintech players including Block’s Cash App, PayPal and Chime dominate account growth among people who switch bank accounts and have made inroads with Walmart’s core demographic. The three services made up 60% of digital player signups last year, according to data and consultancy firm Curinos.
But One has the advantage of being majority owned by a company whose customers make more than 200 million visits a week.
It can offer them enticements including 3% cashback on Walmart purchases and a savings account that pays 5% interest annually, far higher than most banks, according to customer emails from One.
Those terms keep customers spending and saving within the Walmart ecosystem and helps the retailer better understand them, Morgan Stanley analysts said in a 2022 research note.
“One has access to Walmart’s sizable and sticky customer base, the largest in retail,” the analysts wrote. “This captive and underserved customer base gives One a leg up vs. other fintechs.”
What a difference a year makes. Club holding Wells Fargo will post quarterly results on Friday, followed by our other financial holding, Morgan Stanley, on Tuesday. The industry’s first-quarter results will come against a more pleasant backdrop than last year, when the March 2023 collapse of Silicon Valley Bank sent shockwaves throughout the sector. The major banks are also beyond last quarter’s messy numbers as they paid for the FDIC’s regional bank rescue efforts. Meanwhile, the Federal Reserve’s stance on interest rate hikes has also changed from a year ago when central bankers were increasing rates to the current talk about how many rate cuts to expect in 2024. The impact of higher-for-longer interest rates is in focus again this earnings season. Some analysts believe it’s a positive for a key financial gauge for Wells Fargo. We’re also optimistic but want to temper expectations because several factors play into the firm’s performance. Expectations for Fed rate cuts have continued to come down since the start of 2024 when the market ambitiously priced in six reductions. With some recent data signaling an uptick in inflation, including Wednesday’s consumer price index for March, market odds are now in the two-cut neighborhood for this year, with the first projected one to arrive in September. Jim Cramer has been saying repeatedly that the resilient economy could re-ignite inflation and that the Fed should not cut rates anytime soon, if at all, this year. A higher rate environment could lead Wells Fargo to boost full-year net interest income (NII) guidance, which we saw as conservative when it was delivered alongside fourth-quarter 2023 results . At the time, its NII outlook, which assumed five Fed rate cuts this year, hit the stock. WFC YTD mountain Wells Fargo (WFC) year-to-date performance NII is the revenue generated from loans, securities, and other interest-earning assets minus the interest expenses paid on its liabilities like customer deposits. Higher rates can be seen as a positive for Wells Fargo’s NII because the firm relies heavily on its consumer banking and lending segment. It accounted for roughly 44% of overall revenue in 2023. In theory, higher borrowing costs mean Wells Fargo can generate more money from those interest-earning assets, but it’s not that simple. Rates are one of many factors that play into a firm’s interest income, including potentially sluggish loan growth, which was a factor in the fourth quarter. It’s hard to say with the fluid inflation and rate expectations whether Wells Fargo might change its NII outlook when it reports on Friday. During a UBS financial services conference in February, Wells Fargo CFO Mike Santomassimo said the bank is “still very comfortable” with its NII guidance. “When you look at rates in isolation, higher rates, [for a] modestly asset-sensitive business [like Wells] is a positive,” Santomassimo said at the Feb. 26 event. However, he added it’s only “one factor that you sort of have to look at across the whole balance sheet.” Wells Fargo’s expense guidance will also be in focus after the bank barely hit estimates last quarter. Expense control is crucial for Wells Fargo to continue improving its efficiency ratio , a profitability measurement in the banking industry. In the fourth quarter, management indicated that the firm met its multiyear goal to cut expenses by $10 billion. We don’t predict any thesis-changing events in Friday’s release and remain bullish long-term on the bank stock. During Wednesday’s Morning Meeting , Jim said, “I like Wells. Let Wells sell off $3 [per share], and then you buy it.” The stock was above $56 apiece when Jim made his statement, and it traded modestly lower on Thursday. Wells Fargo also has a key long-term growth prospect in the potential removal of its $1.9 trillion Fed-imposed asset cap. This is a big part of our investment thesis and why we have continued to own the stock, though we trimmed some earlier this year when its outperformance resulted in it becoming our largest position. Once the bank gets its growth cap lifted, which we expect next year, Wells Fargo will be able to grow its balance sheet again. Wells Fargo has also been making noise about getting into the investment banking business in a bigger way. In February, Wells Fargo cleared a big regulatory hurdle tied to past misdeeds, which gave us more optimism around CEO Charlie Scharf and the rest of management’s strides to get the growth cap lifted. “Charlie’s got a great handle on things,” Jim said earlier this week. “He’s also a great risk manager.” Shares of Wells Fargo have gained more than 15% year to date — due in part to February’s regulatory victory — but in recent weeks, the financial name has cooled off. Over the past month, the stock was down slightly while the S & P 500 was up more than 1 percent. Morgan Stanley has generally been hurt by higher interest rates over the past two years because they have injected uncertainty into the economic landscape, limiting dealmaking activity for its investment banking division to partake in. Investment banking came back “strongly” in the first quarter of 2024, JPMorgan analysts said in a note to clients this month. Industrywide fees rose 21% quarter over quarter and 10% on an annual basis, the firm said, reaching their highest levels since the first quarter of 2022 — coinciding with the start of the Fed’s rate-hiking campaign . Although these JPMorgan analysts don’t cover Morgan Stanley directly, the improved dealmaking backdrop is encouraging for our financial holding’s once-lucrative investment banking business. After booming during the early parts of the Covid pandemic, the segment has lagged for over a year amid muted mergers & acquisitions (M & A) activity and a weaker initial public offering (IPO) market. In a note to clients last week, Jefferies analysts similarly said investment banking activity has “begun to rebound,” adding that an increase in M & A announcements “bodes well” for Morgan Stanley’s advisory revenues during the second half of 2024. Morgan Stanley served as a financial advisor to Discover in Capital One’s $35 billion acquisition of the credit-card issuer, which was one of the biggest deals announced in the first quarter of the year. MS YTD mountain Morgan Stanley (MS) year-to-date performance The Club agrees with the Wall Street firms, considering the many signs we’ve seen that indicate the dealmaking environment is improving. In addition to increased acquisitions, there’s been a slew of big-name IPOs already in 2024. Morgan Stanley’s investment banking services were tapped for big public debuts from the likes of Wilson tennis racket maker Amer Sports and chip firm Astera Labs , both of which are in the top five IPOs so far this year based on money raised, according to Jefferies. Perhaps most notably, Morgan Stanley was a lead underwriter for Reddit’s multibillion-dollar IPO in March. The stock debuted at around $34 per share and is trading around $45 per share Thursday. Reddit’s successful debut on the New York Stock Exchange can be viewed as a positive for both investors’ current appetite and the future dealmaking environment. And our hope is private companies that want to go public will choose Morgan Stanley as a facilitator for their future offerings. Morgan Stanley earns a fee based on the size of the IPO and for selling the stock to investors. Elsewhere, margins in Morgan Stanley’s wealth management division will be under scrutiny after leaving plenty to be desired in the fourth quarter. One factor that weighed on profitability in the segment, which houses online brokerage E-Trade, was that clients were moving their deposits into higher-yield accounts in a process sometimes called “cash sorting.” However, deposit trends generally seem to have stabilized, according to Jefferies analysts. And a more supportive market should help Morgan Stanley’s margins, analysts suggested. We want to see the firm get back on track toward its previously issued goal of 30% operating margins for the segment down the line. Under recently departed CEO James Gorman, Morgan Stanley embarked on an aggressive push into asset and wealth management, in a bid to become less reliant on the boom-and-bust nature of its traditional investment banking operations. The firm bought E-Trade in 2020 as part of that transformation, but the brokerage has become “sleepy,” Jim said, during the Club’s most recent Monthly Meeting, alongside a plea for management to improve the bank’s overall performance. “New CEO Ted Pick has to come out swinging on this next conference call about how he’s going to grow revenues in a faster, less-complacent pace,” Jim said. “He’s got a better IPO market to crow about, but this company has been a big disappointment versus some others in the industry.” Shares of Morgan Stanley tumbled 5% on Thursday after The Wall Street Journal reported that multiple federal regulators are probing the bank for its wealth management practices. To be sure, the report cited people familiar with the matter and has not been confirmed yet. With the information the Club has now, though, we think the stock decline was a market overreaction. Still, Thursday’s losses add on to an overall lackluster 2024 performance for the stock. Morgan Stanley shares have now lost nearly 7% year to date, compared with a roughly 8% gain for the S & P 500 financials sector. (Jim Cramer’s Charitable Trust is long WFC, 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.
A woman walks past Wells Fargo bank in New York City, U.S., March 17, 2020.
Jamie Dimon, President & CEO,Chairman & CEO JPMorgan Chase, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 17th, 2024.
“My view is, let them compete,” Dimon said. “Let them try, and if we think it’s unfair we’ll complain about that.”
Dimon, speaking to CNBC’s Leslie Picker from a Miami conference, acknowledged that if regulators approve the Capital One-Discover deal, his bank will be eclipsed as the nation’s biggest credit-card lender. But that didn’t stop him from praising Capital One’s CEO Richard Fairbank.
“I’m not worried about it really, but we do track everything he does,” Dimon added.
The deal has two major components: the credit card business and the payment network, Dimon noted.
“The credit card business⦠they’ll be bigger and [have] more scale,” Dimon said. “They’re very good at it. I have enormous respect for Richard Fairbanks and Capital One.”
It’s unclear if Capital One can create a true alternative to the dominant card networks in Visa and Mastercard with this deal, Dimon said.
He added that Capital One will have an “unfair advantage versus us” in debit payments, owing to the fact that legislation known as the Durbin Amendment caps debit fees for large banks, but not Discover or American Express.
“Of course, I have a problem with that,” Dimon said. “You know, like why should they be allowed to price debit different than we price debit just because of a law that was passed?”
This story is developing. Please check back for updates.
Capital One headquarters in McLean, Virginia on February 20, 2024.Â
Brendan Smialowski | AFP | Getty Images
Capital One‘s blockbuster takeover proposal for Discover Financial includes a $1.38 billion breakup fee if Discover decides to go with another buyer, but no such fee if U.S. regulators kill the deal, people with knowledge of the matter told CNBC.
While Discover can’t actively solicit alternative offers, it can entertain proposals from other deep-pocketed bidders before shareholders vote on the transaction.
In the unlikely event that Discover decides to go with another offer, it would owe Capital One $1.38 billion, which aligns with the typical breakup fee in bank deals of between 3% and 4% of the transaction’s value, said the people.
Breakup fees are an industry practice designed to motivate both sides of an acquisition to close the transaction. They can result in massive payouts when deals sour, like the estimated $6 billion AT&T paid to T-Mobile after giving up its 2011 takeover effort because of opposition from the U.S. Department of Justice.
Watchers of the Capital One agreement are taking particular interest in whether U.S. banking regulators will allow it to happen. Regulators have blocked deals across industries in recent years on antitrust grounds, and getting a transaction done during an election year in an environment considered hostile to bank mergers has been called uncertain.
Neither side will owe the other a breakup fee if regulators block the acquisition, which is said to be typical for bank deals. Still, last year Canadian lender TD Bank agreed to pay $225 million to First Horizon after its takeover collapsed amid regulatory scrutiny of the larger firm.
When asked about the “intense regulatory backdrop” for this deal during a conference call Tuesday, Capital One CEO Richard Fairbank said he believed he was “well-positioned for approval” and that the companies have kept their regulators informed.
Capital One needs to get approvals from the Federal Reserve and the Office of the Comptroller of the Currency for the deal to go through. The Justice Department also has the right to comment on the acquisition, and can litigate to block the transaction.
The deal happened after Capital One approached Discover, and didn’t include a wide search for all possible bidders, according to one of the people.
Capital One’s recently announced $35.3 billion acquisition of Discover Financial isn’t just about getting bigger â gaining “scale” in Wall Street-speak â it’s a bid to protect itself against a rising tide of fintech and regulatory threats.
It’s a chess move by one of the savviest long-term thinkers in American finance, Capital One CEO Richard Fairbank. As a co-founder of a top 10 U.S. bank by assets, his tenure is a rarity in a banking world dominated by institutions like JPMorgan Chase that trace their origins to shortly after the signing of the Declaration of Independence.
Fairbank, who became a billionaire by building Capital One into a credit card giant since its 1994 IPO, is betting that buying rival card company Discover will better position the company for global payments’ murky future. The industry is a dynamic web where players of all stripes â from traditional banks to fintech players and tech giants â are all seeking to stake out a corner in a market worth trillions of dollars by eating into incumbents’ share amid the rapid growth of e-commerce and digital payments.
“This deal gives the company a stronger hand to battle other banks, fintechs and big tech companies,” said Sanjay Sakhrani, the veteran KBW retail finance analyst. “The more that they can separate themselves from the pack, the more they can future-proof themselves.”
The deal, if approved, enables Capital One to leapfrog JPMorgan as the biggest credit card company by loans, and solidifies its position as the third largest by purchase volume. It also adds heft to Capital One’s banking operations with $109 billion in total deposits from Discover’s digital bank and helps the combined entity shave $1.5 billion in expenses by 2027.
But it’s Discover’s payments network â the “rails” that shuffle digital dollars between consumers and merchants, collecting tolls along the way â that Fairbank repeatedly praised Tuesday when analysts queried him on the strategic merits of the deal. There are only four major card networks: giants Visa and Mastercard, then American Express and finally the smallest of the group, Discover.
Capital One and Discover credit cards arranged in Germantown, New York, US, on Tuesday, Feb. 20, 2024.Â
Angus Mordant | Bloomberg | Getty Images
“That network is a very, very rare asset,” Fairbank said. “We have always had a belief that the Holy Grail is to be able to be an issuer with one’s own network so that one can deal directly with merchants.”
From the time of Capital One’s founding in the late 1980s, Fairbank said, he envisioned creating a global digital payments tech company by owning the payment rails and dealing directly with merchants. In the decades since, Capital One has been ahead of stodgier banks, gaining a reputation in tech circles for being forward-thinking and for its early adoption of cloud computing and agile software development.
But its growth has relied on Visa and Mastercard, which accounted for the vast majority of payment volumes last year, processing nearly $10 trillion in the U.S. between them.
Capital One intends to boost the Discover network, which carried $550 billion in transactions last year, by quickly switching all of its debit volume there, as well as a growing share of its credit card flows over time.
By 2027, the bank expects to add at least $175 billion in payments and 25 million of its cardholders onto the Discover network.
The true potential of the Discover deal, though, is what it allows Capital One to do in the future if it owns the toll road, according to analysts.
By creating an end-to-end ecosystem that is more of a closed loop between shoppers and merchants, it could fend off competition from rapidly mutating fintech players like Block and PayPal, as well as buy now, pay later firms like Affirm and Klarna, who have made inroads with both businesses and consumers.
Capital One aims to deepen relationships with merchants by showing them how to boost sales, helping them prevent fraud and providing data insights, Fairbank said Tuesday, all of which makes them harder to dislodge. It can use some of the network fees to create new loyalty plans, like debit rewards programs, or underwrite merchant incentives or experiences, according to analysts.
“Owning a network allows us to deal more directly with merchants rather than a network intermediary,” Fairbank told analysts. “We create more value for merchants, small businesses and consumers and capture the additional economics from vertical integration.”
It’s a capability that technology or fintech companies probably covet. The Discover network alone would be worth up to $6 billion if sold to Alphabet,Apple or Fiserv, Sakhrani wrote Tuesday in a research note.
The Capital One-Discover combination could fortify the company against another potential threat â from Washington.
Proposed legislation from Sen. Dick Durbin, D-Ill., aims to cap the fees charged by Visa and Mastercard, potentially blowing up the economics of credit card rewards programs. If that proposal becomes law, the competitive position of Discover’s network, which is exempt from the limitations, suddenly improves, according to Brian Graham, co-founder of advisory firm Klaros Group. That mirrors what an earlier law known as the Durbin amendment did for debit cards.
Chairman Dick Durbin (D-IL) speaks during a US Senate Judiciary Committee hearing regarding Supreme Court ethics reform, on Capitol Hill in Washington, DC, on May 2, 2023.
Mandel Ngan | AFP | Getty Images
“There are a bunch of things aimed, in one way or another, at the card networks and that ecosystem,” Graham said. “Those pressures might be one of the things that creates an opportunity for Capital One in the future if they have control over this network.”
The biggest question for Capital One, its customers and investors is whether the merger will ultimately be approved by regulators. While Fairbank said he expects the deal to be closed in late 2024 or early 2025, industry experts said it was impossible to know whether it will be blocked by regulators, like a string of high-profile takeovers among banks, airlines and tech companies.
On Tuesday, Democratic Sen. Elizabeth Warren of Massachusetts urged regulators to swiftly block the deal, calling it “dangerous.” Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, said he would be watching the deal to “ensure that this merger doesn’t enrich shareholders and executives at the expense of consumers and small businesses.”
The Discover deal’s survival may hinge on whether it’s seen as boosting an also-ran payments network, or allowing an already-dominant card lender to level up in size â another reason Fairbank may have played up the importance of the network.
“Which thing you are more concerned about will define whether you think this is a good deal or a bad deal from a public policy point of view,” Graham said.
David George, Baird senior research analyst, joins ‘Squawk Box’ to discuss news of Capital One Financial acquiring Discover Financial Services in a $35.3 billion all-stock deal, what the deal means for consumers and the banking sector at large, and more.
It will be an all-stock deal and Capital One, which already uses Visa and Mastercard networks, plans to keep the Discover brand, the Wall Street Journal said.
The news comes on the back of a Bloomberg News report on Monday that Capital One was considering an acquisition.
CNBC has reached out for comment from both Capital One and Discover.
The merger of the two companies, who are among the largest credit card issuers in the U.S., would expand Capital One’s credit-card offerings. The company bought digital concierge service Velocity Black, a premium credit card and luxury market platform, in June of last year.
Shares of Discover are down 1.7% lower for the year, putting the company at a $27.63 billion market cap. Capital One has a market cap of $52.2 billion and shares of the company are up 4.6% in 2024.
The Capital One-Discover merger would be one of the largest deals announced so far this year. Synopsys announced a deal to buy Ansys for $35 billion in January and Diamondback Energy‘s $26 billion deal to buy privately held oil and gas producer Endeavor Energy was announced on Feb. 12.
Here are the biggest calls on Wall Street on Wednesday: TD Cowen names Liberty Formula One a top pick TD said the motorsports company is a top pick in 2024. “We view FWON as a capital-light royalty on the growth & monetization of a premium global sports league.” BMO reinstates Apollo Global as outperform BMO reinstated coverage of Apollo and said the private equity company is well positioned. “Amid a crowded fundraising environment, prized features in alternative asset management include credit origination capabilities, distribution channel diversification, and business model resiliency to higher interest rates.” Morgan Stanley downgrades Plug Power to underweight from equal weight Morgan Stanley said in its downgrade of the electric vehicle charging company that it sees deteriorating “hydrogen economics.” “In the U.S., we cut PLUG to UW on liquidity concerns and worsening hydrogen economics.” UBS upgrades Anheuser-Busch InBev to neutral from sell UBS said in its upgrade of the brewer that it’s getting more bullish on EBITDA growth. “We have been impressed with ABI’s share gains in recent years, however see a risk that part of these share gains are given back, particularly in Mexico, Brazil and South Africa.” Citi upgrades Signet to buy from neutral Citi said in its upgrade of Signet Jewelers that the “jewelry recession” is almost over. “This is a better business than pre-pandemic but achieving their 10% EBIT margin goal not necessary for the stock to work.” Bank of America names Qualcomm a top pick Bank of America said the company is a top AI beneficiary. “Our top pick is Qualcomm (QCOM US) under the on-device AI theme with its new smartphone application processor (AP), Snapdragon 8 Gen 3.” Morgan Stanley resumes J.M. Smucker at equal weight Morgan Stanley resumed coverage of the peanut butter and jelly maker, which recently closed on the purchase of Hostess Brands, with an equal weight rating, largely due to valuation. ” SJM’ s Q2 EPS beat and increased FY24 EPS guidance on the legacy business underscore its favorable topline drivers in FY24 and cost flexibility.” Raymond James upgrades Shake Shack to strong buy from outperform Raymond James said in its upgrade of the burger chain that it sees improving profit margins. “We are upgrading SHAK to Strong Buy from Outperform as we 1) believe the company is still in the early innings of driving improved margins and lowering development costs and 2) see idiosyncratic opportunities into 2024 to increase margins and potentially stimulate traffic, which could create upside to consensus 2024 expectations.” Raymond James upgrades AutoZone to strong buy from outperform Raymond James said the auto parts retailer has “compelling valuation and fundamentals.” “[W]e remain upbeat on the overall industry fundamentals (pricing environment remains rational) and AZO’s market share potential on a multiyear basis.” Bank of America upgrades Jack Henry to buy from neutral Bank of America said in its upgrade of the financial services company that it has an attractive pipeline of products. “We upgrade JKHY to Buy from Neutral, driven by the company’s high quality business model, solid bookings and pipeline, more palatable valuation, and prospect for margin expansion and [free cash flow] conversion to improve in F25.” Bank of America downgrades Toast to neutral from buy Bank of America said in its downgrade of the restaurant payment company that it sees too many risks. “We downgrade TOST to Neutral from Buy. Shares have lagged significantly since the 3Q print, and we see risks which could inhibit near-term re-rating higher.” Bank of America downgrades PayPal to neutral from buy Bank of America said it thinks it will take longer to fix the stock. “Shares have traded up from lows following PYPL’s modest 3Q beat and new CEO Alex Chriss’ fresh messaging around profitable growth and increased urgency around execution.” Bank of America upgrades Discover and Capital One to buy from neutral Bank of America upgraded several credit card stocks on Wednesday, believing “we are in the latter stages of the current credit cycle and expect losses to peak in 2H2024.” “We update our estimates for Capital One (COF) and Discover (DFS), upgrade to Buy from Neutral on both and raise POs to $129 and $116 (from $112 and $94) respectively.” JPMorgan upgrades Devon Energy to overweight from neutral JPMorgan said in its upgrade of the energy company that it sees an attractive risk/reward. “Upgrade Devon (DVN) to OW from N: DVN shares have lagged peers by ~20% YoY, but risk-reward is skewed favorably given low expectations plus self-help initiatives.” Redburn Atlantic Equities reiterates Walmart as buy Redburn is standing by its buy rating on the big box retail giant. “Overall, we believe Walmart remains exceptionally well-positioned for any macroeconomic scenario in 2024 and we maintain our Buy rating with a $180 price target.” Guggenheim reiterates Tesla as sell Guggenheim is standing by its sell rating following the cyber truck debut last week. “We believe TSLA will wait closer to launch to take orders (6-12 months prior) for vehicle to limit impact on selling current model lineup.” TD Cowen names Regeneron a top pick TD called the pharmaceutical company a top idea for 2024. ” Regeneron is one of the more fundamentally attractive companies in large-cap biotech.” Wedbush downgrades Shopify to neutral from outperform Wedbush downgraded the stock, mainly citing valuation. “While we continue to hold a favorable view of Shopify’s overall strategy and competitive positioning within eCommerce, shares have risen +53% since the company reported 3Q23 results on November 2nd and now trade at a significant premium relative to software peers across key valuation metrics.” Oppenheimer names Deere a top pick Oppenheimer says Deere is a “best-in-class through-cycle pick.” “And while we believe the downturn will prove less severe than the prior, evaluating swing factors it is simply too early to suggest 2025 can return to growth vs. 2024, adjusting all three models lower in 2025 to reflect a continued downtrend.” Guggenheim upgrades Sphere to buy from neutral Guggenheim said it’s seeing strong demand for the Las Vegas events and entertainment company. “Revenue in the quarter has been driven by strong demand for The Sphere Experience (SPHR’s owned content), the U2 show run, Exosphere activations, and the F1 takeover.” Mizuho reiterates Robinhood as buy Mizuho stood by its buy rating on Robinhood shares after a recent dinner with company management. “Following strong November crypto data (+75% vs. Oct. vs. just +60% for Coinbase), it was nice to hear that management is equally bullish on continuing to gain share in crypto.” Citi reiterates Johnson & Johnson as buy Citi said JNJ is “best-in-class” after a series of investor meetings. “What we walked away with was not just numbers and goals, but a sense that in its new formation the company and management are focused on striking a path forward and delivering best-in-class products and financial delivery.” HSBC downgrades Asana to reduce from hold HSBC said in its downgrade of the software company that it sees too many headwinds for Asana. “Margin expansion drives narrower 3Q FY24 loss; however, macroeconomic challenges continue.” KeyBanc initiates Vital Energy as overweight Key said in its initiation of the former Laredo Petroleum that it’s “in transition.” “On the heels of bold and reasonably structured (in our view) transactions, Vital is boot-strapping its way back to relevance with investors, and now has deeper and higher-quality inventory (~725 locations) it can leverage to lower cash opex/F & D costs and improve margins going forward.”
Check out the companies making headlines in midday trading. Intel — Shares of the chipmaker popped 9.6% Friday, a day after Intel reported third-quarter results that topped analysts’ expectations. Intel also gave strong guidance for the current quarter, and CEO Pat Gelsinger said the company plans to cut costs by about $3 billion this year. Dexcom — Shares of Dexcom, which distributes continuous glucose monitoring systems, soared 11.2% after the company posted stronger-than-expected quarterly results and raised its full-year revenue forecast. Stanley Black & Decker — Shares rallied more than 8% Friday after the industrial tool maker posted an earnings beat in the third quarter. The company also issued full-year earnings guidance between $1.10 and $1.40 per share, coming in higher than prior guidance of 70 cents to $1.30 per share and the consensus estimate. Meanwhile, revenue in the third quarter came in below expectations. Juniper Networks — The network management software provider climbed 6.2% after exceeding Wall Street’s expectations on earnings and revenue for the third quarter. Juniper earned 60 cents per share on an adjusted basis, while analysts surveyed by FactSet expected 55 cents per share. Revenue came out at $1.4 billion for the period, slightly surpassing the average analyst forecast of $1.39 billion. Deckers Outdoor — The footwear and apparel company climbed 19% Friday, a day after beating analysts’ expectations for the second fiscal quarter and raising full-year guidance. Bank of America reiterated its buy rating on the stock Friday, noting the company’s Ugg and Hoka brands are “firing on all cylinders.” Chipotle Mexican Grill — Chipotle shares led the market higher Friday, gaining 8% after the company’s third-quarter earnings topped expectations. The fast-food chain reported $11.36 in adjusted earnings per share, while analysts surveyed by LSEG, formerly known as Refinitiv, were expecting $10.55 per share. Chipotle also saw its year-over-year restaurant-level operating margin rise. Enphase Energy — The solar company’s stock dropped about 15% after reporting mixed third-quarter results and sharing a disappointing revenue forecast for the current period. Enphase Energy said it expects revenue between $300 million and $350 million for the quarter, versus the $584 million expected by analysts polled by LSEG. Amazon — Shares of the e-commerce giant continued into the green on Friday, surging 8% after reporting strong third-quarter results and showing a 13% jump in revenue for the period. Chevron — The energy stock dropped more than 5.6% to hit a 52-week low following a disappointing earnings report. Chevron’s earnings fell to $3.05 per share, excluding items, on $54.08 billion in revenue. While profits fell short of Wall Street’s expectations, revenue topped estimates. Ford Motor — Shares of the automobile maker plunged nearly 10% Friday. Ford reported results for the third quarter that fell short of Wall Street’s expectations, and the company pulled its previous guidance as it copes with the nearly six-week long UAW strike. Capital One — Capital One shares added 10.3% after the financial services company posted adjusted earnings of $4.45 per share, which topped expectations. — CNBC’s Alex Harring, Samantha Subin, Yun Li and Hakyung Kim contributed reporting.
Nigel Morris, QED Investors managing partner and Capital One co-founder and fmr. COO, joins ‘Fast Money’ to talk headwinds facing the financial services sector, the state of consumer spending, the fintech space and more.
Nigel Morris, QED Investors managing partner and Capital One co-founder and fmr. COO, joins ‘Fast Money’ to talk headwinds facing the financial services sector, the state of consumer spending, the fintech space and more.
It’s a good time to buy cheap stocks in some sectors right now, according to Oakmark Funds’ Bill Nygren. The top value-focused fund manager said what’s “really unusual today” is how wide the spread is in price-to-earnings multiples. “The 50 most expensive stocks are about eight times as expensive as the 50 cheapest in the S & P 500 and that’s really unusual — that ratio is typically more like half what it is today,” Nygren told CNBC’s ” Squawk Box Asia ” on Wednesday. “What that means to us is the hunting ground of low P/E stocks provides more opportunity than it typically does,” he said, adding that the company’s portfolio includes many single-digit P/E stocks. Nygren added that he’s buying up stocks in high-quality companies in financial services, insurance, energy and some consumer durables — mostly paying single-digit P/E multiples for them. “It’s not going to be like the past decade where you just buy the great businesses and don’t worry about how expensive they are. But more of a fundamental investing focus on business value, we think it’s likely to be rewarded,” he said. Nygren, who joined Oakmark Funds in 1983, manages the $18 billion Oakmark Fund with Michael Nicolas and Robert Bierig. The fund, which was launched in 1991, has had an annualized return of 12.55% since its inception. That’s higher than the Russell 1000 Value’s 9.71% return and the S & P 500 Total Return Index’s 10.16%. The fund has 40% of its holdings in the financials sector, 15.3% in communication services, and 12.7% in consumer discretionary sector, with the rest in tech, energy, health care and others. Nygren also manages the Oakmark Select Fund. Banks Nygren said he’s been overweight on banks for a while now. He described Wells Fargo as a “tremendous opportunity.” “So a company like Wells Fargo — around tangible book value, single digit P/E multiple with one of the strongest retail deposit franchises and moving well along the path of being out of the extra regulatory supervision that they’ve had — we think provides a tremendous opportunity for long-term investors,” said Nygren. But, he said, that’s not unique to Wells Fargo. He also likes Capital One , which he said is also trading at a single-digit P/E. He said top management in the large banks have “become very comfortable” with returning excess capital to shareholders. “There’s not this competition any longer to measure each other on loan growth as we possibly go into a slower economy. So we think that puts the whole banking industry in a much better position than it’s been in the past. It’s cheaper than it’s been in the past,” said Nygren. “And we think the big names are more competitively advantaged.” Both Wells Fargo and Capital One are in the Oakmark Fund’s top 10 holdings, at 2.9% and 3.4%, respectively. Energy Nygren said they own “a lot of stocks where there is risk, where investors are worried about the futures of the [companies]” — but because of that, the entry level price is very low. One sector “in that ballpark” is energy companies, he said. One stock he’s positive on is U.S. oil company ConocoPhilips , which he describes as a “really compelling story.” Nygren noted that the company has said it could, over the next decade, return “one and a third times” its current market cap to shareholders in a combination of dividends and share repurchases. “We think that’s a really, really compelling story for a management team that has created one of the lowest cost producers in the energy industry, very focused on key basins and a mentality of management that they aren’t going to invest our capital except in areas where they’re additively advantaged,” he said.
“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts Jill Cetina and Ana Arsov said in the accompanying research note.
“Meanwhile, many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital. This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels, with particular risks in some banks’ commercial real estate (CRE) portfolios.”
Though authorities went to great lengths to restore confidence, Moody’s warned that banks with substantial unrealized losses that are not captured by their regulatory capital ratios may still be susceptible to sudden losses of market or consumer confidence in a high interest rate environment.
The Federal Reserve in July lifted its benchmark borrowing rate to a 5.25%-5.5% range, having tightened monetary policy aggressively over the past year and a half in a bid to rein in sky-high inflation.
“We expect banks’ ALM risks to be exacerbated by the significant increase in the Federal Reserve’s policy rate as well as the ongoing reduction in banking system reserves at the Fed and, relatedly, deposits because of ongoing QT,” Moody’s said in the report.
“Interest rates are likely to remain higher for longer until inflation returns to within the Fed’s target range and, as noted earlier, longer-term U.S. interest rates also are moving higher because of multiple factors, which will put further pressure on banks’ fixed-rate assets.”
Regional banks are at a greater risk since they have comparatively low regulatory capital, Moody’s noted, adding that institutions with a higher share of fixed-rate assets on the balance sheet are more constrained in terms of profitability and ability to grow capital and continue lending.
“Risks may be more pronounced if the U.S. enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion,” the analysts added.
Though the stress on U.S. banks has mostly been concentrated in funding and interest rate risk resulting from monetary policy tightening, Moody’s warned that a worsening in asset quality is on the horizon.
“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” the agency said.
The U.S. Federal Reserve said Wednesday that all 23 banks in this year’s stress tests withstood a hypothetical “severe” global recession and losses of up to $541 billion as well as a 40% decline in commercial real estate prices.
The banks in the 2023 stress tests hold about 20% of the office and downtown commercial real estate loans held by banks and should be able to handle office space weakness that has loomed amid slack demand for space in the wake of the COVID-19 pandemic.
“The projected decline in commercial real estate prices, combined with the substantial increase in office vacancies, contributes to projected loss rates on office properties that are roughly triple the levels reached during the 2008 financial crisis,” the Fed said in a prepared statement.
Fed vice chair of supervision Michael S. Barr said the exams confirm that the U.S. banking system remains resilient, even in the wake of the failure of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year.
Barr also alluded to comments he made last week when he said the Fed should consider a wider range of risks that could derail banks in a process he described as reverse stress tests.
“We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses,” Barr said in a prepared statement.
The bank stress tests are closely watched because they help determine what capital banks have left over for stock buybacks and dividends. However, expectations are not particularly high at the current time for any huge payouts to investors given talk by regulators about high capital requirements tied to Basel III international banking laws, as well as a challenging economic environment with interest rates on the rise in an attempt to cool economic activity and tame inflation.
Senior Fed officials said banks will be clear to provide updates on their stock buybacks and dividends after the market close on Friday.
For the first time, the Fed conducted an “exploratory market shock” on the trading books of the U.S.’s eight largest banks including greater inflationary pressures and rising interest rates.
The results showed that the largest banks’ trading books were resilient to the rising rate environment tested. That group included Bank of America Corp., the Bank of New York Mellon, Citigroup Inc., the Goldman Sachs Group Inc., JPMorgan Chase & Co. , Morgan Stanley , State Street Corp, and Wells Fargo & Co.
Senior federal officials said they’re studying a wider application of the exploratory market shock to other banks.
In last year’s tests, the Fed did not place an emphasis on a rapid rise in interest rates partly because expectations were high for a recession with lower interest rates in 2023. Instead, interest rates rose. That market dynamic was a factor in the collapse of Silicon Valley Bank, which sold securities with lower interest rates at a loss to cover an increase in withdrawals, only to spark a run on the bank.
All told, the Fed said the 23 banks in the stress test managed to maintain their capital requirements even with a projected $541 billion in losses. (See breakdown below).
U.S. Federal Reserve chart
Under the most severe stress, the aggregate common equity risk-based capital ratio would decline by 2.3% to a minimum of 10.1%.
Other facets of the hypothetical recession included a “substantial” increase in office vacancies, a 38% reduction in house prices and a 6.4% increase in U.S. unemployment to a high of 10%. The drop in house prices in this year’s stress tests is worse than the decline in the Global Financial Crisis in 2008.
“The results looked pretty good,” said Maclyn Clouse, a professor of finance at the University of Denver’s Daniels College of Business. “The banks were in pretty good shape from a capital standpoint and they’d be able to withstand some shock. It’s good news.”
Barr’s remark on Fed officials being “humble” reflects the fact that regulators largely missed the Global Financial Crisis as well as the sudden demise of Silicon Valley Bank in March.
“They need to be humble,” Clouse said. “We need to be a little more humble about the results and a little more alert about new challenges that normally haven’t been looked at with stress tests.”
This year, the banks that took part in the stress tests including Bank of America Corp. BAC, -0.60%,
Bank of New York Mellon Corp. BK, -0.64%,
Capitol One Financial Corp. COF, +0.52%,
Charles Schwab Corp. SCHW, +1.01%,
Citigroup C, -0.37%,
Citizens Financial Group Inc. CFG, -1.61%
and Goldman Sachs Group Inc. GS, +0.07%.
KBW analyst David Konrad said in a June 22 research note he expected no “huge surprises” in addition to capital uncertainty around dividends and buybacks already expected by Wall Street.
Providing guidance on how the Fed will study bank strength, Fed chair of supervision Michael Barr said last week that the Fed needs to consider “reverse stress tests” to look at “different ways an institution can die” instead of simply submitting banks to a specific list of hypothetical hardships.
“We have to work harder at looking at patterns we haven’t seen before,” Barr said at an appearance on June 20.
Michael Barr, Vice Chair for Supervision at the Federal Reserve, testifies about recent bank failures during a US Senate Committee on Banking, House and Urban Affairs hearing on Capitol Hill in Washington, DC, May 18, 2023.
Saul Loeb | AFP | Getty Images
All 23 of the U.S. banks included in the Federal Reserve’s annual stress test weathered a severe recession scenario while continuing to lend to consumers and corporations, the regulator said Wednesday.
The banks were able to maintain minimum capital levels, despite $541 billion in projected losses for the group, while continuing to provide credit to the economy in the hypothetical recession, the Fed said in a release.
Begun in the aftermath of the 2008 financial crisis, which was caused in part by irresponsible banks, the Fed’s annual stress test dictates how much capital the industry can return to shareholders via buybacks and dividends. In this year’s exam, the banks underwent a “severe global recession” with unemployment surging to 10%, a 40% decline in commercial real estate values and a 38% drop in housing prices.
Banks are the focus of heightened scrutiny in the weeks following the collapse of three midsized banks earlier this year. But smaller banks avoid the Fed’s test entirely. The test examines giants including JPMorgan Chase and Wells Fargo, international banks with large U.S. operations, and the biggest regional players including PNC and Truist.
As a result, clearing the stress test hurdle isn’t the “all clear” signal its been in previous years. Still expected in coming months are increased regulations on regional banks because of the recent failures, as well as tighter international standards likely to boost capital requirements for the country’s largest banks.
“Today’s results confirm that the banking system remains strong and resilient,” Michael Barr, vice chair for supervision at the Fed, said in the release. “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.”
Losses on loans made up 78% of the $541 billion in projected losses, with most of the rest coming from trading losses at Wall Street firms, the Fed said. The rate of total loan losses varied considerably across the banks, from a low of 1.3% at Charles Schwab to 14.7% at Capital One.
Credit cards were easily the most problematic loan product in the exam. The average loss rate for cards in the group was 17.4%; the next-worst average loss rate was for commercial real estate loans at 8.8%.
Among card lenders, Goldman Sachs‘ portfolio posted a nearly 25% loss rate in the hypothetical downturn — the highest for any single loan category across the 23 banks— followed by Capital One’s 22% rate. Mounting losses in Goldman’s consumer division in recent years, driven by provisioning for credit-card loans, forced CEO David Solomon to pivot away from his retail banking strategy.
The group saw their total capital levels drop from 12.4% to 10.1% during the hypothetical recession. But that average obscured larger hits to capital — which provides a cushion for loan losses — seen at banks that have greater exposure to commercial real estate and credit-card loans.
Regional banks including U.S. Bank, Truist, Citizens, M&T and card-centric Capital One had the lowest stressed capital levels in the exam, hovering between 6% and 8%. While still above current standards, those relatively low levels could be a factor if coming regulation forces the industry to hold higher levels of capital.
Big banks generally performed better than regional and card-centric firms, Jefferies analyst Ken Usdin wrote Wednesday in a research note. Capital One, Citigroup, Citizens and Truist could see the biggest increases in required capital buffers after the exam, he wrote.
Banks are expected to disclose updated plans for buybacks and dividends Friday after the close of regular trading. Given uncertainties about upcoming regulation and the risks of an actual recession arriving in the next year, analysts have said banks are likely to be relatively conservative with their capital plans.
