Financials Overview: Week of July 17–21, 2017
Banks call for relaxed regulations
According to Bloomberg, the ten largest banks in the US including JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) reported a combined profit of $30 billion in 2Q17—very close to the record in 2Q07. Amid rising profits, banks have been consistently calling for relaxed regulations in order to curb their risk-taking abilities. Banks blame regulations for discouraging lending to consumers and companies. Recently, JPMorgan Chase’s CEO, Jamie Dimon, said that banks would have made $2 trillion in excess loans in the past five years if the rules weren’t as stringent.
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Lending is still slower than the pre-crisis level
Banks’ lending has increased in the past six years. However, the growth rate is much slower compared to the pre-crisis level. According to data from Federal Deposit Insurance, between 2011 and 1Q17, net lending by banks increased 31%—compared to 54% growth recorded between 2001 and 2007.
Weak mortgage income hurts US regional lenders
Weak refinancing due to higher interest rates led to more than a 10% fall in mortgage banking income for most regional banks. U.S. Bancorp (USB), the largest regional bank, posted an 11% fall in revenue from mortgage banking, while BB&T (BBT) reported a 15% decline. JPMorgan Chase, PNC Financial Services (PNC), and Citigroup (C) reported a 33%–41% fall in mortgage banking revenue.
Weakness in bank stocks continued
Weakness in banking stocks continued last week with more banks posting mixed results. The S&P Financial Sector Index fell 0.3%—compared to a 0.5% gain in the broader S&P 500 Index (SPX-INDEX). Goldman Sachs (GS) fell 3.7% after the bank reported a 40% fall in FICC (Fixed Income, Currencies and Commodities) revenue. On the other hand, Morgan Stanley (MS) rose 3.1%—it managed its trading income relatively well with just a 4% drop in FICC revenue. Morgan Stanley’s return on equity rose from 6.2% in early 2016 to 9.1% in 2Q17.
The Financial Select Sector SPDR ETF (XLF) fell 0.48%, while the SPDR S&P Regional Bank ETF (KRE) and the SPDR S&P Bank ETF (KBE) fell 1.40% and 1.3%, respectively. The S&P Insurance Select Industry Index (SPSIINS) rose 1.4% last week.
Fixed-income ETFs are investors’ favorite
ETFs continued to witness strong inflows this week. According to Factset, the US-listed ETFs had $6.67 billion in inflows during the week, which takes the year-to-date inflows to $267.5 billion. US fixed income continued to be in favor with inflows worth $5.86 billion, while international equities had $3.11 billion.
The inflows were led by the iShares Core S&P 500 ETF (IVV) with net additions of $2.63 billion. The SPDR Bloomberg Barclays High Yield Bond ETF (JNK) had net additions of $999 million and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) had net additions of $937.3 million.
US equity had outflows worth $1.11 billion during the week. The outflows were led by the SPDR S&P 500 ETF Trust (SPY), the iShares Russell 2000 ETF (IWM), and the SPDR Gold Trust (GLD) with redemptions of $3.62 billion, $1.42 billion, and $645 million, respectively.
According to a Bank of America Merrill Lynch survey of 207 money managers, global fund managers’ allocation to US equities fell to net 20% underweight in July—the lowest level since January 2008.
This week, preliminary second quarter GDP figures will be released for the US and the United Kingdom. On Wednesday, the Fed will issue a policy statement. Existing and new home sales data for June will also be announced this week. The Eurozone will report its manufacturing and services PMI index, which is expected to show an improvement from the previous level.