Megabanks like JPMorgan Chase and Wells Fargo have an edge in net interest income over their regional-bank rivals, according to Brian Mulberry at Zacks Investment Management. “If it’s David versus Goliath, Goliath is only getting bigger, and it seems like they’re winning more at this point in time,” he says.
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Two of the country’s biggest banks continue to rake in profits as the costs of their deposits rise less than expected, but it’s unclear how long the good times will last, or whether smaller competitors can pull off the same trick.
During the third quarter at JPMorgan Chase, net interest income increased 30% year over year, while it rose by 8% at Wells Fargo, as the interest the two megabanks charged on loans outstripped what they had to pay their depositors.
But executives at both companies were uncertain about whether their outperformance will continue, underlining an industrywide challenge if interest rates stay high longer than previously anticipated.
“We’re all in a bit of uncharted territory at this point with rates being where they are and the pace at which they got there,” Michael Santomassimo, chief financial officer at the $1.9 trillion-asset Wells Fargo, said Friday on an earnings call.
Interest expenses in the banking industry have jumped sharply, thanks to the Federal Reserve hiking rates from near 0% to more than 5% since March 2022. JPMorgan and Wells haven’t been immune to rising deposit costs, but the two banking giants have been able to keep a tighter lid on them than some competitors.
Still, JPMorgan Chase CFO Jeremy Barnum said Friday that the $3.9 trillion-asset bank has been “cautious about recognizing” that current levels of deposit costs don’t seem sustainable.
The growing likelihood of the Fed keeping rates higher for longer has clouded the profitability outlook for banks of all sizes — an issue that analysts will watch closely when regional banks begin to report their earnings next week. Industrywide net interest income is expected to decline in 2024 before picking back up in 2025, according to Jefferies research published this week.
Stronger-than-expected net interest income figures at JPMorgan Chase and Wells Fargo helped boost their stock prices on Friday by 1.50% and 2.99%, respectively. Shares in Citigroup, which reported a 10% pickup in net interest income, were roughly flat on Friday. Bank of America, the other of the four largest U.S. banks, is scheduled to report results on Tuesday.
Pittsburgh-based PNC Financial Services Group on Friday reported slightly lower net interest income for the third quarter, and its stock price fell by 2.62%. Executives at the $557 billion-asset bank said deposit-cost pressures have slowed, but they noted that the outlook on Fed policy is unclear. PNC said Friday its layoffs reported this week would affect about 4%, or 2,400, of its more than 60,000 employees.
JPMorgan revised higher its estimate of full-year net interest income, a key revenue driver in 2023. America’s largest bank now expects $88.5 billion of net interest income, up more than $2 billion from guidance released earlier this year.
While big banks are enjoying net interest income strength, analysts expect the comparable figures at regional banks to come under pressure in the coming months, thanks in part to rising deposit costs. Net interest income measures the difference between a bank’s lending revenue and its deposit costs.
Megabanks have more diversified streams of revenue than their smaller competitors, plus a broader footprint to pull in deposits, said Brian Mulberry, a portfolio manager at Zacks Investment Management.
“If it’s David versus Goliath, Goliath is only getting bigger, and it seems like they’re winning more at this point in time,” Mulberry said.
Still, even the largest banks have been forced to pay customers higher interest rates on deposit accounts. During the third quarter, interest expenses at JPMorgan rose 170% from the same period a year earlier to $21.8 billion. At Wells Fargo, interest-related expenses totaled nearly $9 billion between July and September, 275% higher than in the third quarter of 2022.
Total profit at JPMorgan rose 35% year over year to $13.2 billion in the third quarter. Wells Fargo’s earnings increased 61% from the third quarter of 2022, when it reported unusually high expenses tied to its regulatory troubles, to $5.8 billion in the latest quarter. At JPMorgan, revenue increased 22% to $39.9 billion during the same period, while it rose 7% to $20.9 billion at Wells.
JPMorgan said that its purchase of part of First Republic Bank drove about $1.1 billion of profit and $2.2 billion in revenue during the third quarter. But it also said that those metrics would have risen even without the acquisition, which was arranged by the Federal Deposit Insurance Corp. after First Republic failed.
Growing credit card balances helped drive loan growth at JPMorgan, which saw an 18% increase in total loans. Wells Fargo, which has been revamping its credit card portfolio under CEO Charlie Scharf, also reported double-digit growth in its consumer card business. In the San Francisco bank’s auto and home lending portfolios — two areas where it has been scaling back — loan volumes declined.
Wells Fargo’s overall loan totals were down slightly from the third quarter of last year, with Scharf citing weaker loan demand and tighter underwriting criteria amid a more uncertain economic outlook.
The economic environment will drive the direction of loan growth moving forward, JPMorgan CEO Jamie Dimon said on a call with analysts.
“Depending on what you believe about a soft landing, mild recession, no landing, you have slightly lower or slightly higher loan growth,” Dimon said. “But in any case, I would expect it to be relatively muted.”
U.S. banks can add the revival of student loan payments to the list of obstacles to deposit growth.
With more than 40 million Americans scheduled to resume making student loan payments this month, some consumers are tapping funds that otherwise would stay in their checking and savings accounts. Student loan payments for all Americans with such debt will total about $18 billion per month, according to a Jefferies report from this summer.
It is an unwelcome dynamic for an industry that has already seen consumer deposits flatline amid heightened competition among financial institutions. Thanks to higher interest rates, banks are also paying more for deposits — a contrast with the cheap funding that financial institutions enjoyed after the Federal Reserve cut interest rates sharply in 2020.
To prepare for the expected impact of the end of the pause on federal student loan payments, banks are modeling worst-case scenarios and bracing for a continued decline in deposits. Some are partnering with third-party vendors that promise to help bank customers with student debt reduce their monthly payments. Lower payments for consumers mean fewer deposits leaving the bank each month to pay down student debt.
“There are certainly areas of deposit pressure, and student loan payments are one more layer of pressure,” said Chris Marinac, director of research at Janney Montgomery Scott.
Other factors eating away at both consumer and commercial deposits include the rising cost of goods and services, which is leading banks’ customers to spend funds that would otherwise be deposited at the bank, as well as fierce competition from other financial institutions.
Deposits at U.S. commercial banks totaled $17.3 billion in late September, down from $17.9 billion a year ago. Bank deposits surpassed $18 billion for the first time in 2022, after consumers spent more than two years putting stimulus funds and other pandemic-era savings into their bank accounts.
“To limit deposit declines, banks have had to increase the rates they pay in the face of rising yields on products such as money market funds and Treasuries, as well as competition from other banks,” S&P analysts wrote in a report last week.
At the onset of the COVID-19 pandemic in 2020, the federal government paused student loan payments and lowered interest rates for borrowers to 0%. The moratorium was extended several times before the Biden administration announced earlier this year that payments would once again be due this fall.
As consumers adjust to resuming payments on their student loans, the relationship between household income and deposits may become more relevant for banks.
Lower-income households typically have a larger share of their assets in the form of bank deposits than their higher-income counterparts, according to research published Thursday by the Federal Reserve Bank of New York. Because households with lower incomes are more likely to have student loan debt, banks could see a particularly robust decline in deposits among those customers.
Households with the lowest incomes kept about 66% of their money in checking or savings accounts and the remaining 34% spread across other asset categories, according to the New York Fed data. At the same time, households in the highest income tier kept 17% of their money in deposit accounts, with the other 83% in stocks, bonds and investment accounts.
Several large U.S. banks have partnered with Payitoff, a startup that helps financial institutions automate debt management for consumer loans. Payitoff will help banks take advantage of existing relief programs for student loan borrowers, said Bobby Matson, the company’s CEO and founder, which can result in more of their customers’ funds remaining in deposit accounts.
“[Banks] should be really thinking about how to minimize the payments so they can reduce how many deposits are just getting allocated to these accounts,” Matson said.
Payitoff saves the average borrower with student loan debt about $240 per month, Matson said.
A clearer picture of deposit trend lines will come into view next week, when U.S. banks begin reporting their third-quarter results. Analysts expect the data to show that industry-wide deposits remained stable in the third quarter.
At Wells Fargo, commercial deposits are expected to stay at the same level, but deposits from consumers are set to decline through the end of the year, Chief Financial Officer Michael Santomassimo said at an industry conference late last month.
“The primary driver there is really spending that’s driving those deposits down,” Santomassimo said.
Navy Federal Credit Union won a contract from the Department of Defense to operate the Overseas Military Banking Program. Bank of America had held the contract for 40 years before deciding not to renew it.
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U.S. military bases across the globe are about to see a major change on the financial services front.
The Department of Defense has awarded Navy Federal Credit Union a contract to begin operating the Overseas Military Banking Program later this year. The $3.1 trillion-asset Bank of America in Charlotte, North Carolina, has held the contract for the past 40 years.
The program was established after World War II to provide active duty military members with retail, financial and cash services. It provides access to foreign currency, local ATMs, bill pay, savings and checking accounts, and other products.
“We’re very proud to have been awarded this contract. Supporting active-duty personnel and their families, wherever they are stationed, is at the core of Navy Federal’s mission,” Mary McDuffie, president and CEO of Navy Federal, said in a press release.
Under the contract, the $165 billion-asset Navy Federal — the largest credit union in the world — will operate 60 banking facilities and 275 ATMs throughout Europe and the Pacific. Per federal requirements, the program will be known overseas as “Community Bank, Operated by Navy Federal Credit Union.”
But there are concerns about Navy Federal’s ability to obtain sufficient deposit insurance to fulfill the contract.
In a letter to the Department of Defense, the Defense Credit Union Council said it is “deeply concerned” about some of the terms and the bid selection process.
The group, which advocates for the interests of America’s credit unions serving the military and veteran communities, said it believes there are legal and regulatory compliance issues that could harm military members and their families and erode goodwill with the credit union industry.
At issue, the group said, is the ability for a credit union to obtain mandatory deposit insurance for overseas bank customers and military families that are served through this particular program. The group said that Navy Federal has entered uncharted territory and it is not clear that credit unions, through standard processes, can insure deposits outside of the United States under this contract.
An NCUA spokesman confirmed that the program is not currently insured through the National Credit Union Share Insurance Fund but did not elaborate. The NCUA fund insures credit union deposits in the U.S.
“Executing an overseas banking contract without deposit insurance would be unconscionable given recent bank failures such as Silicon Valley Bank and Signature Bank,” wrote the group’s President and CEO Anthony Hernandez.
Vienna, Virginia-based Navy Federal acknowledged the concerns but said it expects it will be able to address the insurance issue during a transition period. A spokesperson said the contract was awarded in two phases. The first phase will be a transition period where customer accounts will continue to be backed by BofA.
The second phase will begin on April 1 when Navy Federal will take over the program. That should provide “ample time to work alongside the Defense Finance Accounting Service to ensure the safety and soundness of the deposits when Navy Federal assumes responsibility,” the spokesman said.
The contract also contains eight additional one-year options.
Still, “DCUC remains concerned that DoD awarded a contract without federal deposit insurance for military members and their families who are serving overseas and in harm’s way. Our military deserves the same level of protection no matter where they serve,” Hernandez said.
For its part, BofA confirmed it made the decision not to renew its contract with the DoD, though it did not explain why.
“… Upon completion of the terms of the current contract, the decision was made to allow another financial institution to bid for the next global contract term,” BofA spokesman Andy Aldridge said. “Can’t get into the strategy of why we choose to enter or exit any particular business.”
The $35 billion-asset Pentagon Federal Credit Union in McLean, Virginia, operates branches on two military bases overseas — in Okinawa, Japan, and Guam. PenFed did not bid on the DoD contract, President and CEO James Schenck said. This contract is separate from the program that Navy Federal will be taking over.
“Having Navy FCU on overseas bases will give servicemembers several great organizations to choose from … to handle their financial needs while deployed,” he said.
Navy Federal serves all branches of the military, including the Navy, Army, Marine Corps, Air Force, Coast Guard and Space Force. Last year, members visited one of the 354 Navy branches worldwide more than 21 million times.
Delinquency rates on consumer loans last month hit their highest level since the spring of 2020, a potential sign that inflation and rising interest rates are taking a toll on household finances.
Banks are keeping a close watch on delinquency rates, spending trends and credit originations to determine the health of the most powerful driver of the U.S. economy. Consumer spending accounts for about 70% of the country’s economic output, and banks and other businesses are eager to find out whether consumer spending will help the U.S. economy avoid a recession in 2024.
The share of consumer loans between 30 and 59 days past due rose 0.84% in August, up from 0.65% in August 2022, according to data from VantageScore. About 0.29% of loans were between 60 and 89 days past due in August, up from 0.21% a year ago. And 0.13% of consumer loans were between 90 and 119 days past due, up from 0.09% the previous year.
The delinquency rate for each of the three past-due timeframes was higher in August than any month since April 2020.
“People are relying on their credit more and in some cases are having trouble meeting their obligations,” said Jeff Richardson, senior vice president at VantageScore Solutions, the consumer credit scoring company behind VantageScore.
The combination of inflation and rising interest rates over the past 18 months has made it more difficult for Americans to stay on top of their loan payments. When the costs of goods and services rise, consumers often face higher monthly debt payments, and they may have to choose between necessities and debt payments.
Credit cards and auto loans saw the largest jump in delinquency rates between August 2022 and August 2023, according to the VantageScore data. Because the interest rate paid on cards is tied to short-term interest rates, those monthly payments can rise more quickly than consumers had anticipated.
“Your monthly obligation, because of the rate increases, is much harder to meet now than it was 13 or 15 months ago,” Richardson said.
Still, consumers as a whole are proving resilient, according to bank executives.
Consumer spending will likely help the U.S. avoid a recession in 2024, Bank of America CEO Brian Moynihan said this week. Spending by consumers at the $3.1 trillion-asset bank is up 4.8% this year, he said, but that growth is declining.
Credit card utilization increased just 0.1% between July and August, according to VantageScore data, a potential indicator that consumers are wary about the prospect of taking on more debt. Originations for personal loans, auto loans and mortgages also fell in August, thanks to lenders’ tighter standards and slowing demand growth for consumer loans. Only credit card originations increased in August.
Economic growth is expected to slow to 1.3% in 2024, down from 2.3% in 2023, according to a forecast released Wednesday by S&P Global. Lower consumer spending on nonessential items is expected to drive much of that decline, analysts said.
“The increase in subprime auto loan and credit card delinquencies suggests consumer discretionary spending will soon weaken,” S&P analysts wrote. “Moreover, student loan payments restart next month at a time when excess household savings have been largely depleted.”
Pandemic-era payment pauses and grace periods helped keep past-due rates on consumer loans low during the pandemic. Many U.S. consumers used stimulus funds and unemployment payments to stay up-to-date on debt payments and add to their savings accounts.
But much of those excess savings have since been spent, and consumers drove their credit card balances up by double-digit percentages in 2022. The high rate of spending continued for much of 2023 before slowing in recent months.
For banks, that means a cooling of consumer lending this year. Consumer loan growth at U.S. commercial banks was 5.6% in August, down from 12.3% a year ago, according to data from the Federal Reserve.
Consumers are set to further “tighten their purse strings” in 2024, S&P analysts wrote.
USAlliance Federal Credit Union names Harry Zhu as its next president and chief executive; HSBC launches business account-opening portal in 20 countries; Swift enters next phase of its central bank digital currency solution and more in the weekly banking news roundup.
Wells Fargo has agreed to pay nearly $5 billion — including the $1 billion settlement of a securities class action lawsuit — to resolve various claims related to its phony-accounts scandal.
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Wells Fargo’s $1 billion settlement of a shareholder lawsuit over unauthorized customer accounts was approved by a federal judge, bringing the total amount the bank has agreed to pay to resolve claims over the scandal to nearly $5 billion.
U.S. District Judge Jennifer L. Rochon authorized the agreement following a hearing in New York Friday, more than three months after the deal was reached, lawyers for investors said in a statement. The approval couldn’t be immediately confirmed in court records.
The deal resolves claims filed in 2020 alleging that former Chief Executive Officer Tim Sloan and other bank executives made misleading statements to investors, the media and Congress that presented an overly optimistic picture of the company’s interactions with regulators after a 2016 scandal over the accounts.
Wells Fargo declined to comment on the approval. After the deal was reached in May, the bank said that it resolved a case involving several former executives and a director who had not been with the company for several years.
Plaintiffs’ lawyers said the agreement is one of the six largest securities class-action settlements of the past decade and the 17th largest of all time.
The proceeds of the settlement will go to investors who bought Wells Fargo stock from Feb. 2, 2018, through March 12, 2020. Wells Fargo previously agreed to pay $800 million to settle two lawsuits over the bogus accounts and $3 billion to resolve US investigations.
Investigators found that the company set overly aggressive sales targets that led employees to open millions of fake accounts for customers to meet goals, often by creating false records or misappropriating their identities, generating millions of dollars in fees and interest and damaging some clients’ credit ratings, according to the Justice Department.
U.S. prosecutors said earlier this month that the company’s former head of retail banking, Carrie L. Tolstedt, the only executive charged with criminal wrongdoing, should spend a year in prison for impeding their probe.
Tolstedt pleaded guilty in May and agreed to a ban on working in the banking industry and to pay a $17 million penalty. She’s scheduled to be sentenced Sept. 15.
The case is In Re: Wells Fargo & Co. Securities Litigation, 20-cv-4494, US District Court, Southern District of New York.
USAA had the best reputation among customers and noncustomers for the seventh year. Management attributed that to focusing on serving the needs of military members and their families, a key customer group.
JUSTIN BROWNELL USAA
The public perception of banks took a hit this year after a string of bank failures this spring forced many customers to take a hard look at their financial service providers.
The industry saw its biggest decline in sentiment since 2018, according to American Banker’s annual reputation survey, with regional banks accounting for the bulk of this deterioration. Sven Klingemann, senior director at RepTrak, the reputation consulting group that conducted the survey, said the findings were a “powerful” showcase of how vulnerable banks’ reputations are to periods of crisis.
“This represents a stark departure from some of the positive gains the industry had seen over the past three years, in which banks had actually gained a lot of goodwill among the public and its customers,” Klingemann said, noting that the downturn erased the positive sentiment banks enjoyed for their handling of COVID-19 as both employers and service providers.
The responses, gathered between late April and early June, also demonstrate just how much more regional banks suffered as a result of the failures than larger and more specialized banks. “Regional bank customers are much more concerned about their institution’s financial stability and five times as likely to want to switch to other banks as compared to customers of other bank types,” he said, “driven by a desire for more financial stability, but also by a desire for lower fees [and] costs, better financial advice and higher reputation.”
An eye on stability
The survey had consumers rate their own bank and others that they were highly familiar with on seven factors: products and services, innovation, workplace, conduct, citizenship, leadership and performance. It also tracked emotional sentiment toward banks and the actions consumers would take related to a given institution — including whether they would use its services, recommend it to someone else or work there. These factors were then indexed together to generate a cumulative score.
This year’s survey, which launched a little more than a month after the failures of Silicon Valley Bank and Signature Bank, also gauged how the demise of the two banks impacted customers’ views on their own banks.
More than half of regional bank customers surveyed reported having at least some concern about the stability of their bank as a result of the crisis, including 20% who reported “strong concern” about their bank. Those stability worries translated to customers docking their banks nearly 12 points on average. Overall, 15% of regional bank customers considered changing banks.
Of the 40 banks included in the survey, nearly all saw their overall reputation fall among noncustomers and more than half saw their scores fall among customers. But a select few regional banks were able to demonstrate that they were fiscally sound and had business models well suited for the moment. Pasadena, California-based East West Bank, which was not featured in the 2022 survey, registered the fifth-highest score among customers in this year’s report. Among noncustomers, it ranked third.
Irene Oh, chief financial officer of the $64 billion-asset bank, said the institution actually saw an inflow of deposits and opened thousands of accounts in the wake of Silicon Valley Bank’s collapse, thanks to its strong presence in the Bay Area. Oh credit’s East West’s ability to not only maintain but grow its business through the period of distress to the hands-on approach the bank’s executives took to address customer concerns.
“I, personally, had many, many conversations with clients who now suddenly wanted to talk about all the bank capital ratios and liquidity stress tests,” she said. “The access to people in leadership positions that can provide confidence, that matters and that’s one of the strengths of the regional banks such as East West.”
Providence-based Citizens Bank also saw its reputation trend in a positive direction, bumping its score by four points over last year to achieve the tenth highest marks among customers. Like many firms, the $160 billion-asset bank saw its standing among noncustomers fall this year, with its score in that category tumbling six points to a ranking of 28.
But, Beth Johnson, vice chair and chief experience officer at Citizens, said the bank was able to perform well and open “many new accounts.” She noted that Silicon Valley and Signature had distinct strategies — with the former focusing primarily on venture capital clients and the latter banking crypto clients — and their failures were “idiosyncratic.” They do not represent the full gamut of regional bank strategies, most of which are diversified and prudent.
“We take a thoughtful approach to how we manage our balance sheet and it has helped us navigate the rising rate environment well and continue to deliver for our customers,” Johnson said. “While we had to play strong defense in the short-term, we continue to simultaneously prioritize smart investments to drive future growth.”
Customers of the five largest banks included in the survey — Bank of America, Chase, Citibank, HSBC and Wells Fargo — remained more confident in their institutions, with 55% reporting no concerns and just 9% indicating strong concerns. Similarly, noncustomers were most confident in large banks, with 42% reporting no concern about their stability, compared to 40% for nontraditional banks and 32% for regionals.
The reputational score fell year over year for large banks, but not as steeply as the decline for regional banks. As a result, the gap between the two strata of banks — which has always favored regionals — was 2.5 points, the smallest since RepTrak began tracking the space in 2017.
Klingemann said this shift in sentiment aligns with a broadly held view that global systemically important banks are a safe harbor for deposits in excess of the Federal Deposit Insurance Corp.’s $250,000 insurance cap. But, he noted, this is also a continuation of a years-long trend of large banks making up ground on the regional counterparts. The gap between large and regional banks was 8.5 points in 2017 and has fallen annually.
“Historically we have seen large institutions get more credit as good corporate citizens, an area in which they were perceived to have the largest deficits versus regional and non-traditional banks,” he said.
Not all large banks saw their standing improve. Wells Fargo maintained its position at the bottom of the noncustomer rankings once again, after another year of hefty regulatory citations and fines. In the customer survey, it finished with the second lowest score, ahead of only fellow San Francisco-based bank First Republic, which failed in the middle of the survey period.
“When you look at the banks that are doing well in gaining share, it really does get back to an unwavering customer focus, or in our case member focus, and what banks are doing around user-centered design for their products and services,” said Paul Vincent, president of USAA Federal Savings Bank.
The winning formula
Despite the digital banking implications in the first two failures of this year — in which a crush of mobile withdrawal requests drained the banks’ liquidity in a matter of hours — online-native banks were the big reputational winners in 2023.
So-called non-traditional banks, including USAA Bank, Discover Bank, Ally Bank, Chime and Synchrony Bank, saw the highest level of customer confidence, with 60% reporting no concern and just 6% citing strong concern. As a group, they also increased their cumulative standing with their customers.
San Antonio, Texas-based USAA maintained its position as the top rated bank among both customers and noncustomers for the seventh year running. Among customers, it increased its industry-leading reputation score by 2.2 points, while only losing a tenth of a point among noncustomers.
Paul Vincent, president of USAA Federal Savings Bank, attributes the firm’s continued success to its focus on a key customer base — military members and their families — and creating products and services that appeal to their distinct needs.
Vincent said it is of little surprise that other banks that fared well in an overall down year had a similar retail centric approach.
“When you look at the banks that are doing well in gaining share, it really does get back to an unwavering customer focus, or in our case member focus, and what banks are doing around user-centered design for their products and services,” he said. “For us, our members in the military and their families are extremely mobile, whether they are stationed around the U.S. or they’re called up to deploy, that digital-first capability is something we’ve continued to build on.”
Indeed, products and services played an outsize role in shaping public opinions about banks in this year’s survey, with 19.7% of customers ranking that category as the most important for assessing their bank this year, up 1.8 percentage points from 2022.
Klingemann notes that this heightened focus on products and services is part of a broader trend of “pocketbook issues” taking higher priority for consumers. Across the board, customers are trying to make sure they get the most bang for their buck from their banking relationships, a trend he attributes to persistent inflationary pressures weighing on household balance sheets.
“As consumers are looking to get the best returns on their banking business relationships, all institutions need to make a case for why customers should stay with them or why they are the best choice for prospective clients,” he said. “Value, in that context, certainly pertains to fee structures, interest rates and investment returns, but also to the quality of services received, the willingness of banks to offer an array of products and services adapted to changing needs or to work with clients who are facing financial challenges.”
Vincent said USAA aims to provide this kind of value in several ways, including making funds from direct-deposit military paychecks available two days earlier, offering 0% balance transfer fees, 5% interest rates on certified deposits and low-cost, unsecured loans. He also noted that the bank does not charge overdraft fees.
“We’re constantly being agile, based on our members’ needs, to get what is new, current and top of mind out there and continue helping them adapt to all of life’s changes while achieving financial security,” he said.
Roger Hochschild, then-president and CEO of Discover,said in July providing relative value to consumers was a founding principle for the bank and a driving force behind its decisions to forego physical branches and establish its own payments network. The Riverwoods, Illinois-based firm’s ability to offer competitive rates and services contributed to its strong performance among customers and noncustomers alike, he said.
Discover was one of the few banks to see its reputation climb from last year among both customers and noncustomers. It ranked fourth and eighth, respectively in the two categories.
“The digital/direct model does give you, especially if you’re at scale and thrifty like us, a lower cost base that can translate into a superior value proposition for customers,” Hochschild said. That could include the bank paying customers a better rate for a savings account than an institution that must support a branch network.
“Also, because we have a proprietary network, we are able to afford cash back on debit transactions. That will be a big differentiator and further build trust with customers,” he added.
The second most important factor for respondents was conduct, ensuring that banks treat their customers, employees and broader communities with “fairness and transparency,” Klingemann said. This is an area in which banks that do offer the same value proposition as others were able to make up ground, but it was also a potential downside risk, as a poor reputation on this front could severely impact a bank’s standing with noncustomers.
Klingemann said there are several ways in which banks can achieve a “competitive advantage” through good conduct and citizenship, including “showcasing active community involvement, being environmentally responsible or highlighting their contributions as an employer of choice.”
Citizens, which has expanded its presence in the New York City area by purchasing 80 branches from HSBC Bank and adding another 150 branches by purchasing Investors Bancorp, has made an effort to engage with its new communities, Johnson said.
“Since our arrival last year, we’ve begun our work with close to 15 local organizations and multiple small businesses to launch tailored programs in our neighborhoods, from Chinatown and Ocean Bay to the East Village and Queens,” Johnson said. “All of these efforts show that Citizens is here to listen, to take in the dynamic energy that makes the city tick and put that knowledge to good use.”
Doing what’s right
The survey also explored how important other issues were to consumers, including their banks’ environmental, social and governance, or ESG, practices. Overall, it appears ESG is valued most by regional bank customers, with 49% of respondents calling it “very important,” compared to 45% of non-traditional bank customers and 39% of large bank customers.
Close to 60% of respondents favored ESG-focused investment strategies provided they generated the same or better returns. Few felt ESG should be pursued in exchange for lower returns, with just 14% favoring that approach, and even fewer felt ESG should never be considered, at just 10%. A significant number of respondents, 20%, were undecided on the matter.
Respondents were also asked whether or not it was important for their banks to address issues related to diversity, equity and inclusion. The survey found a direct correlation between a customer’s age and their likelihood of valuing their bank’s DE&I efforts, with 63% of the youngest cohort, those who were 18 to 24 years old, stating its importance, compared to just 39% of those 65 and older.
Overall, just half of respondents said they cared about their bank’s DE&I strategy, a decrease of 5 percentage points from last year. The only segment polled that showed a higher value for such considerations were Asian Americans and Pacific Islanders, which 55% said the topic was relevant, an uptick of 7 percentage points.
Oh said she was not sure how closely these findings track with her own customers, but she said “Chinese affinity” is one of the leading reasons why East West’s retail and small-business customers choose to do business with the bank. The bank was founded in 1973 to serve recent immigrants who otherwise struggled to access financial services due to language barriers and discrimination. In the decades since, it has adapted to the evolving needs of those communities, including developing services to help customers transmit funds to families overseas. Oh said many Asian Americans have been acutely aware of discrimination and other mistreatment in recent years in light of a rise in violent attacks against their communities since 2020.
“For Asian Americans, especially after the pandemic and some of what came out after that, there’s a renewed focus around DE&I,” Oh said.
The survey also delved into public sentiment on the government’s handling of the bank crisis and what steps should be taken moving forward. The most popular next step, with 55% of respondents favoring it, was to regulate investment risk within banks more heavily, while 44% said banks should be forced to hold more capital. More than a third of respondents would like to see all deposits covered by the FDIC, including those above the $250,000 cap, and 17% endorse the government providing more liquidity to the banking system, if needed.
Only 11% said the government should do nothing at all, an outcome that caught Klingemann by surprise.
“It is pretty notable that, in times of unprecedented political polarization, the overwhelming majority of respondents wants some form of governmental regulation [or] intervention, no matter their sociodemographic status or political affiliation,” he said.
Banks’ aggregate cost of deposits rose to 1.78% in the second quarter, up 37 basis points from the prior quarter and more than offsetting the impact of higher rates on loan yields, according to S&P Global Market Intelligence.
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Inflation reached a 40-year high in 2022, topping 9% in the aftermath of the pandemic and the supply chain snarls it created. This set in motion a range of unique challenges for banks — from rising deposit costs to weaker loan growth to fresh threats to credit quality.
Prices have since been largely tamed — the Consumer Price Index increased at a relatively modest 3.2% rate in July — but this was due to aggressive interest rate hikes that have weighed on banks’ profitability in 2023.
The Federal Reserve has boosted rates 11 times since March 2022, driving borrowing costs higher, curbingconsumerspending and helping to curtail overall prices. However, the Fed’s actions also pushed up the interest rates that banks pay for deposits. When this happens, the margin between what banks pay for deposits and earn on loans — known as net interest margin — contracts. Shrinking margins tend to hurt banks’ bottom lines because most of them rely heavily on the income they earn from lending.
The median NIM for the U.S. banking industry fell to 3.40% in the second quarter, down 5 basis points from the prior quarter and down 20 basis points from the start of the year, according to S&P Global Market Intelligence data. The firm said banks’ aggregate cost of deposits rose to 1.78% in the second quarter, up 37 basis points from the prior quarter and more than offsetting the impact of higher rates on loan yields.
“No question in a high-rate environment, the pressure on margins becomes a challenge,” said Robert Bolton, president of bank investor Iron Bay Capital.
When NIMs dwindle, banks tend to scale back lending. They do this to reduce their need for high-cost deposits to fund loans and to minimize exposure to sectors vulnerable to an economic downturn. Historically, when spiking rates combine with inflation, the U.S. economy goes into a downturn. When lending slows, so does banks’ collective revenue.
For example, Optimum Bank in Fort Lauderdale, Florida, is methodically easing back on lending this year after strong growth in 2022. It still expects to expand this year, but investors should expect a noticeably slower pace, Moishe Gubin, chairman of the $622 million-asset bank, told shareholders in a second-quarter letter.
“I, for one, am in favor of slowing growth during this strange time in the world with interest rates being as high as they are,” Gubin said.
As Gubin suggested, lenders also grow more selective to avoid recession fallout — namely, souring loans and the losses that accompany them. In the current market, bankers are concerned about commercial real estate broadly and urban office properties in particular, given enduring remote-work trends and high vacancy rates.
With recession concerns, an increasing number of lenders boosted reserves for potential future loan losses during the first half of 2023.
Several community banks that cater to local businesses also said during second-quarter earnings season they were closely monitoring those customers’ ability to absorb both higher expenses imposed by inflation and increased borrowing costs.
Citizens Financial Group said its index of national business conditions worsened in the second quarter. It dipped to 48.5 from 53.9 the prior quarter. A reading below 50 indicates weakness.
Eric Merlis, managing director at Citizens, said that while the overall labor market remained strong in the second quarter, new business applications decreased in most states and manufacturing activity slowed. The Citizens index results show “a business environment where activity has slowed as interest rate hikes seem to be working to curb inflation,” Merlis said.
Bankers also are tempering fee-income expectations because of anticipated pullbacks in consumer spending and card use — on top of an already sharp drop in residential mortgage demand after interest rates spiked. Banks earn fees on home loan originations.
Against that backdrop, many banks are looking for ways to become more efficient to offset high deposit costs and falling revenue should lending recede in an economic downturn. Several have closed branches and laid off staff this year.
“I do think you see some urgency to rein in expenses,” said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates.
“ATM fees are biting harder than ever,” said Greg McBride, Bankrate’s chief financial analyst.
The average total fee a customer pays for an out-of-network ATM transaction rose to $4.73, a record high, Bankrate found, based on data from non-interest and interest accounts. This total combines the average fee the out-of-network ATM owner charges, $3.15, with the average fee the customer’s own bank charges the customer for the out-of-network transaction, $1.58.
On the upside, overdraft fees and non-sufficient funds fees are now significantly lower. The average overdraft fee fell 11% to $26.61 from last year’s average of $29.80, while non-sufficient funds fees hit an all-time low of $19.94, on average, according to Bankrate.
However, few banks have done away with them altogether: 91% of banks still charge overdraft and 70% charge non-sufficient funds fees, Bankrate also found.
Last month, the CFPB ordered Bank of America to pay more than $100 million to its customers and $150 million in penalties for double-dipping on overdraft fees, among other violations.
“Despite recent progress in addressing overdraft fees, the job is far from complete,” said Nadine Chabrier, the Center for Responsible Lending’s senior policy counsel, in a statement.
While free checking accounts are widely available, many banking customers are encountering monthly service fees and rising balance requirements, Bankrate found.
More than a quarter of checking account holders, or 27%, are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year, according to another survey from Bankrate.
The average fee on an interest checking account is typically even higher, while the average yield is just 0.05%.
“Avoid accounts that require stranding a balance to avoid [monthly service] fees when you can get a free checking account and move your excess funds into an online savings account at a time when yields exceed 5%,” McBride said. (Here are a few more competitive options worth considering.)
“Consumers can almost always avoid other account fees by using direct deposit, maintaining a minimum balance or limiting the use of ATMs that are not affiliated with their bank,” said Mike Townsend, a spokesperson for the American Bankers Association. “If you must use an ATM outside of your bank’s network, consider a larger withdrawal to avoid having to go back multiple times or using the free cash-back feature on debit card purchases.”
Some banking interest groups countered that offerings such as overdraft protection provide a much-needed safety net.
Without the option of overdraft protection, “people are more likely to turn to predatory lenders, hurting the same people the administration seeks to help,” Jim Nussle, president and CEO of the Credit Union National Association, said in a statement.
Despite all the changes in banking, at least one thing has stayed constant for decades: the desire of industry executives to plaster their institutions’ names on large event spaces.
“Every time you see our name associated with a sponsorship, you will find traces of participation,” said Francesco Lagutaine, chief marketing officer at M&T Bank, which has naming rights for the home stadium of the NFL’s Baltimore Ravens. “Participation in community rituals is how we measure our success.”
One thing that has changed over the last 25 years is the cost of stadium naming rights. Banks that inked deals in the late 1990s and early 2000s, including JPMorgan Chase and M&T Bank, locked in lower prices than financial institutions that are in the market for naming rights today.
Here are the 15 largest naming-rights agreements between banks and U.S. professional sports venues for which data is available, ranked by total deal value. American Banker reviewed lists of sports venues as well as press releases and news reports announcing the partnerships to determine the biggest deals sponsored by banks. The financial terms of some naming-rights deals have not been disclosed.
Baseball stadiums dominate the list, but a football stadium takes the top spot, and four basketball venues also make the top 15.
U.S. Bancorp CEO Andy Cecere is among the defendants in a shareholder suit filed this month in Delaware state court.
U.S. Bancorp is contending with the latest fallout from a 2022 regulatory settlement over unauthorized customer accounts: a shareholder lawsuit that names CEO Andy Cecere and various other top leaders as defendants.
The suit alleges that U.S. Bancorp executives and board members allowed compensation and incentive practices that led to the opening of fake accounts and profited from the concealment of the misconduct, keeping shareholders in the dark after the Consumer Financial Protection Bureau opened an investigation.
It also argues that U.S. Bancorp investors were misled when — in the wake of the Wells Fargo fake-accounts scandal — U.S. Bancorp officials touted the firm as a leader in corporate ethics.
“Little did unsuspecting customers and investors know,” the complaint alleges, “that U.S. Bank employed a strikingly similar scheme to Wells Fargo’s that incentivized and encouraged U.S. Bank employees to open unauthorized accounts to increase the company’s sales and revenues.”
A spokesperson for U.S. Bancorp, the parent company of U.S. Bank, denied the allegations, saying in an emailed statement that the lawsuit contains “inaccuracies.”
“Of the millions of accounts opened between 2010 and when additional sales practice controls were put into place in 2016, a very small number were confirmed as opened without authorization, and after 2016, that number decreased even further,” the statement read. “We deny the lawsuit’s allegations and intend to defend ourselves vigorously.”
Blake Bennett, a lawyer who represents the lawsuit’s plaintiff, a shareholder named P. Michael Read, did not respond to a request for comment.
In July 2022, the CFPB hit U.S. Bank with a $37.5 million fine after finding that bank employees opened unauthorized checking, savings and credit card accounts.
The lawsuit against top officials at the Minneapolis-based company, filed this month in Delaware state court, is an example of what’s known as a shareholder derivative suit. Such cases are brought by shareholders who are seeking to recover money not for themselves, but rather for the company in which they are part-owners.
Shareholder derivative suits can be filed when a company has a valid claim against corporate insiders but has refused to pursue it.
In addition to Cecere and nine other members of the U.S. Bancorp board, the lawsuit lists Chief Financial Officer Terry Dolan, Chief Risk Officer Jodi Richard and then-Chief Administrative Officer Kate Quinn as co-defendants.
The suit follows a securities class action case filed last year by investors in connection with the unauthorized accounts at U.S. Bancorp.
The most recent suit alleges that the defendants breached their fiduciary duties and unjustly enriched themselves.
Specifically with regard to Cecere, the lawsuit alleges that he sold nearly 350,000 shares of U.S. Bancorp stock for proceeds of $20.1 million between November 2019 and April 2021, which was after the CFPB opened its investigation but before penalties against the bank were announced.
The U.S. Bancorp spokesman said Friday that the lawsuit mischaracterizes Cecere’s stock transactions.
In the wake of the fake-accounts scandal at Wells Fargo, onetime executives and board members at the San Francisco bank also faced a shareholder derivative lawsuit. That suit ultimately settled for $240 million.
The proceeds of the Wells Fargo settlement, which were paid by insurance companies, were split between the bank and the plaintiff’s lawyers.
Credit card lenders plan to stay in growth mode, saying they detect few causes for alarm in the consumer sector despite lingering recession fears.
To be sure, consumer credit quality has deteriorated. Late payments are rising again on credit cards and auto loans, and banks are being forced to charge off some loans. High interest rates are making it tougher for some consumers to pay back debt.
But the U.S. economy has so far continued to power forward, giving many consumers the ability to keep spending and stay current on their payments. Bank CEOs say consumers have remained resilient despite signs of stress, giving the industry the ability to keep growing credit card loans and avoid a broad contraction of credit.
“I’d say we’re seeing a more cautious consumer, but not necessarily a recessionary one,” Citigroup CEO Jane Fraser said on the bank’s second-quarter earnings call.
Citi, one of the country’s largest credit card issuers, had some $195 billion of loans in its U.S. personal banking division in the second quarter, up 13% from a year earlier. Credit card growth was strong at JPMorgan Chase, Bank of America and Capital One Financial.
Consumers remain in “reasonably good shape,” Capital One CEO Richard Fairbank said on Thursday.
“We have a very watchful eye on all those negatives,” Fairbank said, pointing to persistent worries that the economy will take a turn. But the McLean, Virginia-based lender thinks it’s “a good time to keep leaning in” and expanding its card business.
That’s not to say the environment is necessarily getting better. Capital One card loans that were 30 or more days late on their payments rose to 3.77% during the second quarter, up from 2.42% in the second quarter of 2022. The company expects some of those delinquencies to turn into actual losses that the bank will end up absorbing.
But Fairbank described that as part of “normalization,” adding that it’s “very natural” for credit quality to return to pre-pandemic trends.
Consumer lenders benefited from an unusually healthy credit environment during the pandemic. Many consumers had larger savings buffers — thanks to government stimulus and accumulated savings from staying at home — and used that money to pay down debt.
Delinquency figures at big banks’ credit card divisions are hovering around 2019 levels, and while charge-offs remain below pre-pandemic norms, they rose sharply in the second quarter, according to Moody’s Investors Service. Average credit card charge-offs were at 2.99% during the second quarter, up from 2.69% in the first quarter.
The quick pace of deterioration is somewhat troubling given that it’s happening even though the economy hasn’t faltered, said Moody’s Senior Vice President Warren Kornfeld. “I really would expect us to be in better shape,” he said.
Overall, consumer credit remains “solid,” Kornfeld said, but there are “absolutely pockets of consumers that are struggling financially.”
Lower-income consumers and those with subprime credit scores have been more likely to see stress. Fifth Third Bancorp has also seen a “divergence” among consumers, with homeowners who locked in low mortgage rates faring better than renters, Timothy Spence, CEO of the Cincinnati, Ohio-based regional bank, told analysts.
While higher-income cardholders are spending big and racking up reward points, others are having a tough time repaying their cards and their balances are swelling, said Greg McBride, chief financial analyst at Bankrate.com. That’s a costly proposition given that annual interest rates on credit cards are upwards of 20%.
“Nobody’s financing purchases at 20% because everything is just going swimmingly,” McBride said. “People are putting purchases on a credit card at 20% out of necessity, not choice.”
More signs of strain should emerge as the U.S. economy continues to grapple with the fastest pace of interest rate increases in decades, McBride said. Thus far, the country’s employers have continued to add jobs — so consumers are continuing to get the paychecks they need to pay their bills.
Optimism among investors that the U.S. will avoid a recession has increased in recent weeks, but a so-called “soft landing” is not yet assured.
Moody’s expects a modest recession could send credit card defaults to about 5% next year, up from 3.5% in 2019. While that would lead to losses at banks, the losses would be far less severe than the roughly 11% charge-off rate after the 2007-09 financial crisis, Kornfeld noted.
Though banks have tightened up their underwriting over the past year, Kornfeld said losses will likely be a bit higher if banks continue growing credit card loans at a strong pace.
“I don’t see significant weakness, but … there’s a level of concern,” Kornfeld said.
U.S. Bank said it would use the deal for Union Bank to to expand its presence in key California markets including Los Angeles, San Diego and San Francisco, where Union Bank had a strong foothold.
U.S. Bancorp in late May finished installing updated signage on the West Coast branches it inherited from Union Bank, but executives say their work to take full advantage of the acquisition is still under construction.
Improved cost savings and opportunities to meaningfully boost revenue should be evident in the third quarter, the first full one since U.S. Bank’s conversion of Union Bank, management said when reporting second-quarter results Wednesday.
“We are well positioned as a national bank with greater scale,” said U.S. Bank CEO Andy Cecere.
Revenue and net interest income were lower than expected in the second quarter, but strong fee income and lower expenses helped improve the Minneapolis bank’s bottom line. The quarter also reflected one-time conversion items.
“This was a noisy quarter, which reflected mixed trends,” David Rochester, director of research at Compass Point Research, wrote in a note.
The $680 billion-asset bank completed its conversion of the Union Bank system in the second quarter, marking one of the final steps in the $8 billion acquisition that yielded hundreds of new branches and millions of new customers. U.S. Bank said it would use the deal in part to expand its presence in key California markets including Los Angeles, San Diego and San Francisco, where Union Bank had a strong foothold.
U.S. Bank said it has seen more new customers than expected engage with the bank, making use of its app and other online banking services. The bank has boosted its advertising budget to get on the radar of new customers and potential new customers in target markets, executives said.
The deal should deliver as much as $900 million in cost savings delivered through, plus a breadth of opportunities for revenue growth, U.S. Bank said.
In the second quarter, U.S. Bank faced similar challenges to those of banks across the industry, whose net interest income generally shrank amid greater competition in deposit pricing. U.S. Bank said it expects lower net interest income in the third quarter.
U.S. Bank set aside $821 million for credit losses in the second quarter, up from $427 million in the first quarter. Large and small banks alike put aside substantial amounts of reserves early on in the pandemic in case the economic fallout prevented consumers and businesses from making payments on their bank loans.
“Credit quality metrics remained strong versus pre-pandemic levels but are normalizing as expected,” Cecere said on the company’s earnings call Wednesday. “This quarter, we strengthened our balance sheet by increasing the loan-loss reserve, reflective of our prudent approach to credit risk management.”
The bank cited growing credit card balances and continued economic uncertainty as reasons for boosting reserves. Average credit card loans increased 14.5% in the second quarter from the same quarter last year, while average total loans grew 19.9% in the second quarter.
“Consumers are now starting to rely more on credit card debt as a way of paying for their lifestyles,” said U.S. Bank Chief Financial Officer Terry Dolan.
Banks have likely seen the final positive impacts of higher interest rates, Dolan said. U.S. Bank’s noninterest income growth of 7% in the second quarter, driven by higher core fee income, exceeded analysts’ expectations.
U.S. Bank reported a profit of $1.8 billion in the second quarter, in line with expectations. Revenue totaled $7.2 billion, slightly above forecasts.
The bank said its common equity Tier 1 capital ratio increased to 9.1% in the second quarter, up from 8.5% in the first quarter. Capital ratios have been under the spotlight across the industry this year and specifically at U.S. Bank. The bank’s capital level faced scrutiny this spring, when a research report argued the bank wasn’t holding enough capital for a bank of its size.
An executive with the Federal Home Loan Bank of Chicago pushes back on a BankThink article criticizing the Mortgage Partnership Finance program.
Andrii – stock.adobe.com
The Federal Home Loan Bank System was created to provide a reliable and readily accessible flow of liquidity to member financial institutions more than 90 years ago. One way we do this is through products such as the Mortgage Partnership Finance (MPF) program, which is currently used by six Home Loan banks fulfilling our housing finance mission as we celebrated our 26th anniversary last week.
A recent BankThink article “The Federal Home Loan banks and the disappearing American dream” inaccurately describes our products and the role of the Home Loan banks in the mortgage markets. We are very proud of the MPF program’s success in enabling millions of American families in every U.S. state and territory to buy a new home or lower the cost of their existing homes in furtherance of our statutory mission. For example, the MPF program provides more than 700 community lenders across the nation with a competitive secondary mortgage market option to sell their fixed-rate residential mortgage loans. In 2022, Home Loan bank members used various MPF products to sell more than 33,500 mortgages totaling $8.1 billion. Over 80% of the MPF participants are small community lenders with assets under $1.5 billion that otherwise would not have the ability to offer mortgage loans to their customers, or do so competitively. Additionally, more than one third of the mortgage loans purchased by Home Loan banks through the MPF program for investment or securitized through our MPF products were made to low- or very low-income borrowers or made to borrowers in low-income areas.
The MPF program serves a critical need in the current mortgage landscape, particularly for small lenders that lack direct access to the broader secondary mortgage market. The program supports the mission of the Home Loan banks, and often it is the best way for participating community lenders to provide traditional fixed-rate, freely prepayable mortgages that their customers expect.
“The MPF program keeps us competitive in the markets we serve through their unique mortgage products. The fact that we are able to retain servicing is an important feature that allows us to keep that ‘small town bank’ feel as we continue to develop customer relationships,” said Joni Jorgenson, VP, Mortgage Lender at Western Nebraska Bank.
“For most people, purchasing a home or piece of real estate is one of the biggest transactions they’ll ever do,” said Nick Brooks, IAA Credit Union’s vice president of lending. “Since we now maintain control over the whole lending process, we can ease the anxiety that our members may have, and it gives them confidence in a transaction that’s new to them.”
The BankThink article infers that the Home Loan banks are partially responsible for “tens of millions of Americans who have been unfairly denied homeownership,” which is inaccurate. We do not impose technology on our ecosystem of lenders, nor are we “hamstrung by decades-old, loan underwriting technology.” In fact, quite the opposite. Unlike other secondary market entities, the traditional MPF products do not use proprietary underwriting software to underwrite loans and do not approve or reject the origination of loans. Rather, participating lenders use their own origination systems to submit loans into our systems.
We allow members to use Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Product Advisor Automated Underwriting Systems in submitting loans to us, but those are not our systems. Additionally, we do not mandate what technology must be used by members to underwrite loans. Some members choose to underwrite loans manually.
Regarding the real issues raised in the article, one is the statistical basis and appropriateness of FICO scores as opposed to more big-data driven types of statistical analyses — a concept we don’t oppose, but one to address with the mortgage marketplace in general, rather than the Federal Home Loan banks. Home Loan banks directly purchase mortgage loans from our member financial institutions. This gives them a liquidity alternative to the traditional government-sponsored enterprise securitization channels. The article’s implication that members in the MPF program would necessarily turn down loans to borrowers with low FICO scores because of the program is also incorrect, because the FICO score is just one of the data points used in assessing the credit quality of the loans. Loans can be sold into the MPF program in certain cases without FICO scores.
Another issue the authors raise is the racial homeownership gap, an issue that the Home Loan banks fully acknowledge and are committed to improve through different measures and programs. One example of such a program is the Home Loan Bank of Chicago’s Community First Housing Counseling Resource Program. Investment in education, training and additional resources are critical in assisting first-time homebuyers. We are working with housing counseling agencies to assist in expanding support to minority and low- and moderate-income homebuyers in need. Another example is the Home Loan Bank of Boston’s Lift Up Homeownership program, which provides down payment and closing-cost assistance to people of color purchasing their first home.
For 26 years, the Mortgage Partnership Finance program has provided community lenders with an innovative way to share mortgage risk as they originate loans to borrowers in their communities. We are always looking for new technology, better ways to serve communities across the country and to do our part in creating equitable solutions for all our members and their communities. We appreciate and share the concerns on the broader societal issues facing homeownership in America, but felt it appropriate to set the record straight on the scope of the MPF program.
While strong revenue growth in Citigroup’s giant credit card portfolio helped the New York bank to overcome headwinds in wealth management and investment banking during the second quarter, the script could flip going forward.
Chief Financial Officer Mark Mason spoke Friday about a number of encouraging signs in the wealth business — and even a few modest “green shoots” in the hard-pressed investment banking sector. At the same time, he predicted that card-related losses will continue to creep up toward their historical norms.
Citi reported quarterly credit card revenue of just under $4 billion, up a strong 15% year over year, on card loans of $153 billion.
Meanwhile, the net credit loss rate in the bank’s branded cards business stood at 2.47% as of June 30. For its retail services unit, which offers store-branded credit cards, the same metric was 4.46%. While both numbers have been ticking up, they remain substantially below their historical averages.
But if you fast forward six months, that will likely no longer be the case. Historically in Citi’s branded cards business, the average net credit loss rate ranged from 3%-3.15%, while in its retail services business, the average loss rate ranged from 5%-5.5%.
“We still expect for both portfolios to hit those normal levels some time at the end of the year,” Mason said on a conference call with investment analysts.
To date, the most significant downdraft has come from borrowers with lower FICO scores. “We don’t have a large number…in our portfolio, but that is where we’re seeing more of the normalization happening on the payment rates,” CEO Jane Fraser said on the conference call.
Meanwhile, headwinds in the broader economy slowed the bank’s wealth and investment banking business lines during the second quarter.
Citi’s wealth business generated revenues of $1.8 billion, down 5% year over year. An effort unveiled by Citi in 2022 to generate more income from its wealth unit has yet to yield fruit; in the first quarter, global wealth management revenues declined by 9%.
But Fraser pointed to a number of positive indicators, including increased activity in Asia. The U.S. retail banking network generated 25,000 wealth referrals between January and May — up 18% over the same period in 2022 — she noted.
“That gives us the opportunity to do more with those clients,” Mason said, adding that he believes Citi’s wealth business has “positive prospects for the balance of the year and through the medium term.”
Investment banking remains a significant drag on Citi’s overall numbers, with second-quarter revenue declining 24% year over year to $612 million. “The long-awaited rebound in investment banking has yet to materialize,” Fraser said. She called the results “disappointing.”
The drop-off prompted the $2.4 trillion-asset company to scale back the size of its investment banking operation, which led to $120 million in severance expenses. Still, amidst the general gloom in investment banking, revenue generated by debt capital markets rose 6%, Mason said.
Overall, Citigroup reported quarterly net income totaling $2.9 billion, which worked out to $1.33 a share, three cents above analysts’ consensus expectations. Likewise, total revenues of $19.4 billion edged past analysts’ $19.3 billion forecast.
Gerard Cassidy, an analyst at RBC Capital Markets who covers Citi, said that improved asset quality was a primary factor in the company’s stronger than expected earnings.
Nonperforming assets totaled 0.76% of loans, which was better than Cassidy’s 0.89% estimate. And the company’s second-quarter provision of $1.82 billion was significantly below the consensus estimate of $2 billion, he said.
Citi’s provision was also down from the first-quarter level of $1.975 billion. That positive trend set Citi apart from fellow industry titans JPMorgan Chase and Wells Fargo, both of whichadded to their reserves, citing concerns about commercial real estate loans.
Peter Nerby, a senior vice president at Moody’s Investors Service, took a generally positive view of Citi’s second quarter results, highlighting its strong capital levels and solid asset quality ratios.
“These factors remain key pillars underpinning Citi’s creditworthiness as it continues to transform into a simpler, sounder bank,” Nerby said in a statement.
Junk fees are additional, often hidden, charges that can come from a range of lenders. They are not typically included in the initial price of a transaction but are tacked on at the time of payment.
“Consumers are encountering these ‘surprise’ charges more often than they might expect, in everything from concert ticket surcharges to airline seat selection fees, credit card late fees, bank overdraft fees, hotel resort fees and more,” according to Ted Rossman, senior industry analyst at Bankrate.
Yet even if these fees were capped or even banned entirely, it’s unlikely that consumers would save money as a result, he said.
Overdraft fees are a good example of a ‘game of whack-a-mole’ when it comes to fees.
Ted Rossman
senior industry analyst at Bankrate
“Overdraft fees are a good example of a ‘game of whack-a-mole’ when it comes to fees,” Rossman said.
When many financial institutions lowered their overdraft and non-sufficient funds fees or eliminated them altogether, the average overdraft fee fell while ATM surcharges jumped to a record high, Bankrate found.
In most cases, even with more transparency, the all-in cost to consumers would likely remain the same, according to Rossman.
President Joe Biden has said his administration would crack down on junk fees — including those from banks, as well as hotels, airlines and other service providers.
“Junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in, like many of you did,” Biden said in his State of the Union address earlier this year. “They add up to hundreds of dollars a month.”
Biden also called on Congress to pass the Junk Fee Prevention Act, which will reduce unexpected charges, such as airline booking fees; service fees for concert tickets; early termination fees for TV, phone and internet services; “resort fees” at hotels; and “excessive” credit card late fees.
Last year, the CFPB said it was scrutinizing certain fees that catch customers by surprise — and are “likely unfair and unlawful,” according to the agency.
The consumer watchdog proposed a new rule prohibiting banks from charging surprise overdraft fees on debit transactions and reducing typical late fees from roughly $30 to $8, saving consumers as much as $9 billion a year, according to the White House.
“Despite recent progress in addressing overdraft fees, the job is far from complete,” Nadine Chabrier, the Center for Responsible Lending’s senior policy counsel, said in a statement.
“The Consumer Financial Protection Bureau took a big step by banning surprise overdraft fees,” she said. “We are encouraged that the consumer bureau announced it will take additional steps, and we urge the bureau to place strong limits on the size and frequency of these fees.”
More than a quarter of checking account holders, or 27%, are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year, according to a another survey from Bankrate.
The average overdraft fee costs $29.80, Bankrate’s research found, while the average nonsufficient funds fee is $26.58.
Some banking interest groups countered that offerings such as overdraft protection provide a much-needed safety net.
“The president’s use of the term ‘junk fee’ is overly broad and ignores the needs of low-income and middle-income consumers who depend on these services to resolve short-term financial difficulties,” Jim Nussle, president and CEO of the Credit Union National Association, said in a statement.
“It does not consider the costs involved in providing needed financial services that consumers depend on.”
Without the option of overdraft protection, “people are more likely to turn to predatory lenders, hurting the same people the administration seeks to help,” Nussle said.
Total credit rose $7.2 billion, the smallest advance since November 2020, Federal Reserve data showed Monday.
Brent Lewin/Bloomberg
U.S. consumer borrowing slowed to a more than two-year low in May, reflecting the first decline in nonrevolving credit since the onset of the pandemic.
Total credit rose $7.2 billion, the smallest advance since November 2020, Federal Reserve data showed Monday. The figure, which isn’t adjusted for inflation, was lower than all forecasts in a Bloomberg survey of economists.
Nonrevolving credit, such as loans for school tuition and vehicle purchases, decreased $1.3 billion, the first decline since April 2020.
Five-year lending rates for new-vehicle purchases reached 7.81% in May, the highest since 2006, the Fed data showed. Auto sales cooled during the month, according to industry figures.
Revolving credit outstanding, which includes credit cards, rose $8.5 billion — representing a slowdown after sharp gains in the previous two months. Credit cards issued by commercial banks carried a 20.68% rate in May, a record in Fed data back to 1972.
While low unemployment and steady wage gains have provided many consumers the wherewithal to keep spending, persistently high prices have led others to dig into savings or rely on credit cards to keep up. Adjusted for inflation, consumer spending has largely stalled after surging at the start of the year. Delinquency rates, meanwhile, are ticking up.
Looking ahead, the finances of households with student debt are poised to be strained further. More than 40 million Americans will resume student-loan payments this fall after a three-year pause.
“The economy is not doing well, and there’s a flood of shaky issuers that are going out of business” in the auto market, says John Kerschner, head of U.S. securitized products at Janus Henderson.
Michael E. Shake/Michael Shake – stock.adobe.com
The collapse of two U.S. auto dealers and a growing pile of delinquent car loans are threatening to deliver losses in a corner of Wall Street that, until now, has been a sea of calm: the asset-backed securities market.
Bonds backed by car loans made by U.S. Auto Sales and American Car Center, two used-car dealers that shut their doors earlier this year, have been veering into distress in recent weeks. Borrowers have been falling behind on payments, and Citigroup believes that some of the riskiest parts of three different asset-backed deals could fail to return principal to investors.
Any lost principal would be a rare event in the ABS market, where subprime auto bonds haven’t failed to return investors’ money since the 1990s, Citigroup said. Prices on a bond issued by U.S. Auto Sales, owned by the private equity firm Milestone Partners, have dropped to distressed levels, trading at a little over 18 cents on the dollar on June 26, according to Trace data.
The disruption is a major test for the subprime auto ABS market, where issuance grew by more than 70% to $40.5 billion in the five years through 2021, according to data compiled by Bloomberg News.
“The economy is not doing well, and there’s a flood of shaky issuers that are going out of business” in the auto market, John Kerschner, head of U.S. securitized products at Janus Henderson, said in an interview. When lenders do fail, “it’s hard to get borrowers to pay back their debt, especially because sometimes it’s not clear where to send the payments.”
Milestone Partners didn’t reply to a request for comment, while a spokesperson for York Capital, which backed ACC before the bankruptcy filing, declined to comment.
As the Federal Reserve ends quantitative easing and tightens the money supply, credit is harder to come by across the economy. Consumers, meanwhile, are burning through their pandemic-era savings.
The deterioration of the bonds issued by ACC and U.S. Auto Sales comes months after both companies announced they were closing their dealerships. Both firms transferred the collection of payments on their loans, known as servicing, to Westlake Portfolio Management after going bust. A spokesperson for Westlake declined to comment.
“The bonds are deteriorating in part” because it takes a few months to transfer the servicing of the loans “and meanwhile consumers may cease making payments,” Eugene Belostotsky, a securitized products strategist at Citi, said in an interview. “The lenders went under because borrowers were not paying back the debt, now that’s just accelerating.”
Moody’s Investors Service further downgraded some of U.S. Auto Sales ABS in late June, for moving the E note of the 2022 deal to a C rating. The ratings firm noted that there are shortfalls in the pools of money available to pay bondholders because dealerships haven’t fully reimbursed trusts for items like unearned vehicle service contract payments.
One of the reasons auto ABS losses are almost unheard of is the use of investor protections known as overcollateralization. That means the amount of loans backing the bonds exceeds the size of the principal on the bonds, allowing at least some borrowers to default without any losses for bondholders.
But for the two subprime issuers that ran into difficulties this year, those protections have waned dramatically on some securities. The overcollateralization for the 2022 U.S. Auto bond has fallen to just 5.5%, compared with a target of 35%, according to a Citigroup report dated June 30.
Not all bonds in these ABS deals will be impaired, money managers who are monitoring the bonds say, but investors who hold the riskiest portions of the deals could be wiped out.
“We are going to see more securities getting hit going forward,” said Dan Zwirn, chief investment officer at Arena Investors, in an interview. “Subprime lenders are in for a reckoning.”
— With assistance from Charles Williams and Scott Carpenter
Preparation is key to acing a job interview, writes Darlene Pasquill. You should demonstrate your knowledge of the firm and express why you’re the right fit for the position.
Zivica Kerkez/kerkezz – stock.adobe.com
Millions of smart, driven students are graduating from college this year, and many are heading to Wall Street to land their dream job. First, though, they have to make it through the job interview.
The stakes feel high for jobseekers — because they are. With so many recent graduates vying for highly competitive positions, it’s critical that your interview helps you stand out and demonstrates that you are the right fit for these performance-driven companies.
I’ve interviewed more than 1,000 job candidates over my 25-year career, which means I’ve pretty much seen it all. There have been a few stumbles that immediately sent a candidate’s resume to the bottom of the pile after an interview, but more often I see good candidates who just needed a little extra something to make a lasting, positive impression.
Whether you’re a new college graduate or an experienced professional making a career transition, there are key things that stick out to me during the interview process. Candidates who display these traits aren’t just what Wall Street banks are looking for. I believe they are key to success in just about any job.
In a competitive environment like finance, you need to demonstrate how you are a difference maker. For example, at Mizuho we’re looking for entrepreneurial candidates who have a growth mindset and are focused on making positive changes in their companies. Prepare in advance for questions like these: What do you bring to the table, and why should a firm want to hire you? What distinguishes your candidacy? What will you do differently than other candidates to create value for the firm?
Keeping up in a fast-paced, change-making culture requires excellent communication skills, and an interview is a great chance to put those skills on display. The candidates that make a lasting impression on me are ones who can clearly articulate their work ethic and accomplishments, and can back those up with specific examples. It also helps when candidates let their personalities shine through during an interview and are able to share with me what past work has made them passionate.
Don’t let the formal interview setting make you stiff and self-conscious, but rather let your passion and personality shine. Interviewers look for candidates with a passion for the work they’re pursuing and the energy to achieve their goals. Make sure your best personality traits are on display and describe how those traits align with the company’s culture. For example, at Mizuho, I look for high-energy candidates who are collaborative and growth motivated. These qualities are just as important to establishing the right cultural fit as the background on their resume.
It’s important to highlight your unique perspective. It’s been said that “great minds think alike,” but I would rather have a team of great minds that think differently. Groupthink can stifle creativity and prevent individuals from sharing different perspectives that are often sorely needed. We want hires who can enhance our growth culture by bringing in diverse life experiences, viewpoints and expertise.
To highlight these traits in an interview, point to a time when you held a contrarian view that shifted a team’s approach to addressing a problem. Even if your interviewer doesn’t frame a question this way, try to pivot to an example in your answers when possible. You can also use your resume to emphasize experiences that show your commitment to continual growth and learning. These could include life experiences, how you’ve invested in yourself and how you’ve been thoughtful in your approach to schoolwork, internships and networking. Prior to your interview, you should be brainstorming these examples so you’re ready with several options when your interviewer poses a question.
Preparation is key to acing a job interview. You should demonstrate your knowledge of the firm and express why you’re the right fit for the position. It shows that you’re serious about the role and the company and that you’ll be a conscientious employee. Even better, it can help keep you calm and confident during the conversation.
With so much information at your fingertips, there’s no excuse for a lack of preparation. Speak to others who work at the firm, check LinkedIn to see who you might know that works there and review the company’s mission statement, social feeds, latest news coverage and press releases.
You need to be ready to answer the “why here?” question. Nothing disappoints me more in an interview than when I ask a candidate why they want to work at Mizuho, and they tell me the job description sounds like a great fit. That, to me, says “I don’t want this job, I want any job that fits this description.” What I’m really looking for are candidates who understand and are enthusiastic about our firm’s mission and what they can bring to the table. I also appreciate candidates that take the time to reflect on our interview and send a meaningful follow-up highlighting what was discussed.
Your work doesn’t end when the job interview is over. Sending a thoughtful, strategic thank-you note or email is your chance to remind the interviewer that you’re the right person for the job and to reiterate your interest in the company.
Generic notes that could apply to any interview won’t stand out. Instead, bring up specific points raised by the interviewer. For example, “I was especially interested in [the project] you spoke about and believe my experience in [this internship] and [these skills] would be a great contribution.” Also look for opportunities to take another swing at any questions that you feel you could have answered better, such as adding more examples of your experience in a certain area.
I wish success and happiness to all the new college graduates and current professionals looking for the next step in their careers. Remember that the biggest factor in reaching your potential is you. Companies are looking for your passion, enthusiasm and perspective. It’s up to you to showcase those traits and demonstrate how they make you the right candidate. Finding a company that appreciates your talent and allows you to grow can start a great career trajectory. Enjoy the journey.
A pedestrian in the Lagos Island district of Lagos, Nigeria, on Monday, Nov. 14, 2022.
Bloomberg | Bloomberg | Getty Images
SoLo Funds, a community lending platform created to offer credit to the underbanked and American consumers long shut out of the financial services sector due to pervasive discrimination in the loan process, is expanding for the first time overseas, to Nigeria.
Founded by Rodney Williams and Travis Holoway (CEO) in 2018, SoLo Funds has grown to over one million users, the vast majority (82%) of which are from underserved zip codes in America. The company has issued over $200 million in loans and a total of $400 million in transaction volume through a fintech offering that caters to communities that have historically been economically disenfranchised.
Expansion to Nigeria, Williams said, is a first step on the path to further international growth.
“It is the test case. It is the template. It is the first,” Williams said in an interview with CNBC after revealing the Nigeria plans during a session at the Aspen Ideas Festival earlier this week. “We are not stopping with Nigeria – we look at Nigeria as the gateway to the continent,” he said.
Nigeria has both the largest economy in Africa and the fastest-growing middle class. The economic profile of the nation was an important factor in SoLo’s decision, which sees its product as an important tool for empowering the middle class, giving them a chance to both make ends meet during times of financial hardship and make a return when they have a bit more of a reliable cash flow.
Nigeria’s existing fintech ecosystem was also a plus. “For us to do what we do, we have to partner,” Williams said. “We have to leverage many partners to deliver our solution and those partners have to be in market and be successful in market. And in Nigeria, we saw many examples of that.”
Opay and Flutterwave, which made the 2021 CNBC Disruptor 50 list, are two examples of the various fintech unicorns that have found immense success in the country.
Williams is one of only two founders (the other being Elon Musk) to have two companies make the annual list. Williams, who came from an executive background at Procter & Gamble, first founded Lisnr, whose investors include Visa, Intel, and Synchrony Financial, and has deals in eight countries for its secure digital data transfer technology.
Rodney Williams, SoLo Funds co-founder
Siobhan Webb
In Nigeria, SoLo Funds has already connected with Paga, a mobile payment company, Platform Capital, an African investing firm based in Nigeria, and Endeavor, an entrepreneurial community network.
Williams said the lack of investment opportunities that currently exist in Nigeria is part of the market opportunity for the company. The bank rate offerings for savings in Nigeria are far below the level of inflation.
“The average Nigerian consumer with savings is not growing in any capacity. And that’s a characteristic of many developing nations, not just Nigeria. So what that ultimately means is that it has a very, very attractive group of citizens that want to grow their money,” Williams said.
SoLo Funds users have the opportunity to lend small amounts of money, ranging from $50-$1,000, to peers on the platform. Borrowers lay out the terms of their loan, including if they want to tip the lender. Through these tips, lenders are able to generate a return. Approximately 99% of users choose to tip their lenders, according to the company.
“We believe SoLo is the evolution of microfinance and community finance,” Williams said. “We are building a financial product for the masses, and not just the people who have money.”
That mission has not come without controversy, and allegations that SoLo Funds is creating a new form of predatory short-term lending. Williams referred to the controversy that has trailed the company himself during the Aspen talk, telling attendees, “Go to Google Search.”
A case brought by banking regulators in Connecticut was recently settled, following resolution to cases in California and Washington, D.C. SoLo Funds has added several lawyers to its staff with experience in the banking, fintech, and regulatory sectors. Williams has argued throughout the controversies that policymakers fail to consider the needs of “everyday Americans” when making their decisions.
“Every day I wake up,” he said, “and I can see a single mom or a dad put food on the table. And I can also see a single dad or a mom make a return. And that return can pay for taking their kids out to the movies this weekend, just as much as it can pay to keep someone’s lights on. That’s what makes me know that I’m doing the right thing. And what excites me about Nigeria, and anywhere else in the world we go, is that we’re gonna do it for more people in more places than I think I ever thought we could.”
Many startups that have expanded internationally have had to pull back, especially as venture funding has dried up and the growth-at-all-costs startup strategy that dominated for a decade has been replaced by a focus on a quicker path to profits.
The risks of expanding to a middle class market on an international scale, Williams says, are very similar to those in America.
“I was just looking at a Twitter post, and it mentioned that banks don’t serve [the middle class] because they have said that it’s too expensive to serve. And they have said that this consumer is not credit worthy and that’s why banks don’t build products for them. Well, that’s the risk of building a product for mass market,” Williams said. “We face the same conclusion or the same challenge of why build products for everyone, when, you know, you could build products for the top 10% and be a billion-dollar company?” he added.
Williams said that he plans to address international risk the same way that he addressed risk in the United States – with data, testing, and partnerships with ecosystem leaders. The complexity of lending regulation in the U.S. on a state-by-state basis has prepared SoLo Funds for the equally complex international launch. “Even though international expansion sounds like a massive undertaking, when we have analyzed it, it’s very similar to introducing new products in the United States on a state-by-state basis,” he said.
The company has plans for additional international markets over the next 12-18 months across multiple continents, starting with key entry countries.
“We’ve identified that country in Latin America as well. We’ve also identified that country in Southeast Asia,” Williams said.
NBCUniversal News Group, of which CNBC is a part, is the media partner of the Aspen Ideas Festival.
