Goldman Sachs to open new technology office in Birmingham
Also: Ameriprise, bank earnings, HSBC and a Chinese bank with bad debt
The Week’s Briefing
M&A
Ameriprise to buy Bank of Montreal’s EMEA asset management unit for $847MM
Prudential explores sale of its retirement arm; could fetch as much as $2bn in a sale
Banking, Insurance & Regulation
HSBC relocates four top executives from London to Hong Kong
Citigroup to exit thirteen of its consumer businesses across Asia and Eastern Europe and put them up for sale
Vanguard to delist its Hong Kong ETFs next month
Morgan Stanley reports $911MM Archegos-related loss (a small amount in the context of their 1Q earnings, which they still beat)
Goldman Sachs to launch new office for its technology base in Birmingham, UK
Big-bank CEOs to testify before Congress in May on their response to the pandemic and on climate change and racial equity.
Huarong (one of China’s largest financial institutions)’s bond prices collapsed this week over concerns about the company’s solvency
JPMorgan sells $13 billion of bonds, which would have been the largest ever bank bond sale, until Bank of America announced just after of its $15 billion bond sale
Blackrock’s AUM surges to a record $9 trillion
General Atlantic borrows €300MM from Goldman Sachs to repay controversial Greensill Capital loan
Credit Suisse says it has $1.2bn of exposure to Sanjeev Gupta’s ‘GFG Alliance’
Economics & Markets
The US Treasury informally designates Taiwan as a currency manipulator, putting pressure on them to address their undervalued currency and large trade surplus
The US Treasury reversed the Trump administration’s designation of Switzerland and Vietnam as currency manipulators
US sanctions Russia over alleged election interference; expands restrictions on US banks trading in Russian government debt
Chinese economy output jumped 18.3% YoY (base affects is why the number is so big). On a quarter over quarter basis, China’s economy only grew 0.6%
London new home sales fell 39% to 3,703, the lowest level since 2012, although London is currently at the top of super-prime home (selling for more than £10MM) sales around the world, with $4bn being spent on luxury London homes, more than Hong Kong and New York .
London finance jobs jumped 70% YoY (this is from a low base last quarter )
Big Bank Earnings
Bank of America
BofA’s profit doubled to $8.05bn, this was partially due to $2.7bn of loan-loss reserve releases, as well as strong trading and investment banking profits. BofA was still one of the weakest when it came to trading and investment banking, with Goldman, Morgan Stanley and JPMorgan remaining best in class in that space.
Adjusted trading revenue rose 17% to $5.08bn, much less than the 47% at Goldman Sachs and 25% at JPMorgan.
BofA’s loan book continued to shrink, with total outstanding loans and leases dropping 14% to $903.01bn.
Goldman Sachs
Goldman reported earnings that were just amazing. They reported a ROE of 31%, with a leverage ratio of 13x, implying a ROA of 2.3%. This is the best ROA and nearly the best ROE ever since Goldman’s golden years before the 2008 financial crisis, along with nearly half the leverage (2006 leverage ratio was 23x).
Investment banking revenues rose 44% QoQ thanks to record Spac offerings and IPOs.
They also demonstrated strong risk controls, reporting no losses from Archegos (unlike Morgan Stanley).
JPMorgan
JPMorgan reported stellar investment bank earnings, with investment banking fees jumping 57%, boosting net income to $14.3bn for Q1 (a record), which was also helped by loan-loss reserve releases of $5.2bn. Dimon does not consider loan-loss reserve releases as “core or recurring profits.” Trading revenues jumped 25%; 45% increase in equities and 15% in fixed income.
They increased their FY21 adjusted expense outlook to $70bn from $69bn.
Jamie Dimon said he would rather invest excess capital in the business with acquisitions, but is instead buying back stock because their “cup runneth over,”
Dimon on repurchases & acquisitions:
“We’re earning a tremendous sum of money and we really have no option right now. But I think the door’s open to anything that makes sense.”
Net interest income was down 11%, loans fell 4% (driven by a 14% drop in credit card loans). They warned that loan demand remains “challenging”.
Morgan Stanley
Like Goldman Sachs, Morgan Stanley had a blockbuster quarter, reporting a Q1 profit of $4.1bn (or $2.19 a share) on revenue of $15.7bn. This was a huge surprise to the upside compared to analyst expectations, even with the unexpected Archegos loss of $911 million.
Their E*Trade acquisition went well, with a huge burst in retail trading in the quarter. Morgan Stanley’s retail-trading clients increased 7% from the end of 2020 to 7.2 million, and the average daily number of trades by them for the quarter was beyond 1.6 million.
Though the Archegos loss was just a small blemish on an otherwise stellar quarter, and likely a one-off event, it does say something to Morgan Stanley’s risk management, which undoubtedly is still as good as it was before, but also why the bank kept quiet for so long when all other US banks said they exited Archegos with no loss, and other banks that lost money opened up and said it before.
Morgan Stanley’s stock fell nearly 2.5% on Friday after the earnings report was released.
Biggest Stories of the Weak
Ameriprise to buy Bank of Montreal’s EMEA asset management unit for $847MM
Ameriprise agreed to buy BOM’s EMEA asset management unit for an equivalent of $847 million as Bank of Montreal’s CEO tries to streamline operations and trim non-core business segments.
The sale will allow some US clients to move to Ameriprise’s Columbia Threadneadle Investment unit if they want, and will also give Bank of Montreals’s NA wealth management clients access to a range of Columbia Threadneedle investment products.
Bank of Montreal said the deal won’t have a large affect on its future earnings, but will improve its efficiency ratio, ROE and common equity Tier 1 capital ratio.
The acquisition will add to Ameriprise’s total assets under management in Europe by $124 billion, totaling $1.2 trillion once the deal closes in the fourth quarter.
Goldman Sachs to open technology office in Birmingham, UK
Goldman Sachs said it will open its biggest UK office outside of London in Birmingham, the UK’s second largest city, creating hundreds of jobs as it decides to expand and diversify out of London, opening up to a new pool of talent.
Goldman Sachs is not the first bank to expand into Birmingham, HSBC recently moved its headquarters there and Deutsche Bank has a large division there with 1,000 employees. Goldman will hire data analysts, software engineers and data scientists when the office opens later in the year.
Goldman Sachs International CEO Richard Gnodde, said:
“Establishing a new office in Birmingham will diversify our UK footprint and give us access to a broad and deep talent pool in the local area. We see tremendous opportunity to enhance our UK presence and continue delivering for our global clients.”
Universities around Birmingham produce 16,000 science, math and technology graduates a year, who would normally have left for London but due to high housing prices and cost of living would rather stay in the Midlands.
There are more than 122 fintech companies in the region employing some 7,000 people.
HSBC relocates four top executives from London to Hong Kong
HSBC said it will relocate four of its top executives from London to Hong Kong as the bank focuses on expanding in Asia.
The CEO said the bank’s co-head of global banking and markets, chief executive of wealth and personal banking, and chief executive of global commercial banking and head of asset management will relocate to Hong Kong in the second half of the year.
HSBC also has a very difficult geopolitical position, where it operates between the UK, Hong Kong and the United States. It has had to then pick sides, and it seems to have backed Beijing.
The CEO had promised investors that it will focus on growth in Asia and profitability.
“An important part of our global strategy is to base more of our leadership population in Asia.”
This however does not mean that they are exiting the UK, where the bank has deep roots, and Quinn underscored the importance of London, which will remain its headquarters and a key market.
“We expect that some roles that work directly with Barry, Greg and Nuno will relocate with them to Hong Kong, but most will remain where they are currently based, beyond that, we are not planning any large-scale movement of jobs from London to Hong Kong.
We remain fully committed to the UK, both in terms of our domicile and our significant businesses and client base in the country, these moves have no impact on the location of our headquarters”
Huarung’s bond prices collapse, falling to the lowest levels ever
China Huarong Asset Management Co. was created in the 1990’s as one of four of China’s largest banks designated to clean up China’s debt-ridden financial system. Since the, it has become a more broad financial holding company and accumulated a total debt load of $162.24 billion. Bondholder’s of Huarong are owed $42bn overseas and abroad, with $22bn of that coming due before 2022.
A few weeks ago, its Dollar bonds maturing in June yielded around 1.8% on April 1, those same bonds now yield over 40% as the bond prices collapsed. Before they collapsed, Moody’s and Fitch had rated he bonds A3 and A. Some of Huarong’s bonds plunged to 52 cents on the dollar
Huarong failed to publish its first quarter 2021 results last month, which caused investors to fear just how much the company is backed by the state.
Huarong paid $9.43 billion in cash interest alone for the year ending June 2020, putting into context just how huge its debt load is - which is not uncommon for financial companies in China, which is littered with companies carrying huge debt loads and pursing high growth rates with acquisitions and expansion into new segments just to stay solvent.
The distressed-debt manager borrowed $23.2bn from overseas, it is unknown whether the Chinese government will step in and stop overseas investors from such losses. If China does not step in and Huarong defaults, it would cast doubt in over whether the assumed backing of state-owned enterprises is actually there, which is a key part of investing in China for many.
Some Other Stuff
An important take-away from the latest round of bank earnings is that loan demand remains very weak.
The loan to deposit ratio for all US commercial banks continued to fall as stimulus checks remain in bank accounts; savings levels continue to remain elevated, and loan demand continues to be weak due to low interest rates driving bond issuances over loans, and even consumers paying off credit card bills and preferring debit cards to spend over credit.
This has weighed on regional bank earnings, and large banks such as Bank of America who are more dependent on lending over investment banking, and will continue to be a drag on earnings in the future.
Bill Demchak, CEO of PNC Financial Services Group is not optimistic that loan demand will return this year, unlike a number of other bank executives.
“We could sit here and tell you.…and I watched some of these calls…..that the back half of the year is going to be great, everything will be wonderful — I hope they're right. And if they're right, we'll do really well, but I can't promise you that specific time…...by the way, nobody else can either.”
Also: Coinbase had its ISO (initial stock offering) as it went public via a direct listing this week at an eye-popping $100 billion valuation, it has fallen slightly since then but at its high was nearly worth as much as Goldman Sachs. It is still worth more than all stock exchange operators in the world, and likely the most expensive. But I guess, it’s a great business where you can charge extortionate fees for crypto trading and people will still go to you because there are few other reputable exchanges out there.
What we’re reading
Bloomberg: In Venezuela Bond Market, Gunmen and Bags of Cash Are Required
FT: Global savers’ $5.4tn stockpile offers hope for post-Covid spending
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