HSBC exits US retail banking
Also: Goldman Sachs, Geico, "Loyalty Penalties", CLOs and Digital Currencies
The Week’s Briefing
Banking, Insurance & Regulation
HSBC sells nearly all of its retail banking network in the US, as it plans to fully withdraw from US retail banking, to Citizens Bank.
Geico will work with Tractable to use AI to speed up car repairs.
The Federal Reserve has told Deutsche Bank that its anti-money laundering compliance programs are not suitable, and that they are failing to adhere to deals it made with regulators over the past few years. DB may be fined as a result.
Goldman Sachs wins approval for its wealth management deal in China with ICBC
Deutsche Bank may drop EY as its auditor, just 2 years after replacing KPMG, as a result of the Wirecard scandal last year
Bank of Montreal reports strong earnings, but said they are concerned with the red-hot housing market in Canada, and as a result will add safeguards to their mortgage portfolio
Carl Icahn reveals $900 million stake in Allstate, which he purchased at $90/share. He said he supports the current management team’s plans to turnaround the business.
CNA Financial paid $40 million in ransom to regain control of its network after a ransomware attack last March
US Justice Department opens a probe into Archegos, seeking information from banks that acted as its counterparties
The FCA says it will end the “loyalty penalty” on consumers who renew their home or auto insurance policies in the UK, estimating it could save consumers £4.2bn over 10 years.
Nordea Bank’s largest shareholder, Sampo Oyj, sells 162 million shares at 8.5EUR (a 4% stake) for $1.7 billion, reducing its stake to 11.9%. Once Sampa’s stake drops below 10%, they will have to sell the remainder within 12 months.
Iceland says it will privatize Islandsbanki, which collapsed in 2008. The gvmt intends to sell at least a quarter of the bank next month through an IPO. Citi, JPMorgan and Islandsbanki are joint coordinators of the IPO.
Freddie Mac appoints former Wells Fargo executive, Michael DeVito as its new CEO, replacing Mark Grier.
AIG says Greg Cornell will replace Doug Dachille as the Chief Investment Officer of AIG to oversee an investment portfolio worth around $350bn.
Morgan Stanley’s prime brokerage head, Ed Keller, steps down for personal, health-related reasons, and will later return to MS in a new capacity.
Evercore appoints Mellet Brown - recently CFO at Fannie Mae - as their new CFO, its first female CFO ever
Head of Refinitiv, David Craig, will step down from the firm after it was acquired by the LSEG, and will be replaced by his deputy, Andrea Stone.
Biggest Stories of the Week
HSBC exits US retail banking
HSBC has sold 80% of its retail banking network in the US to Citizen Bank and Cathay Bank. They said that they will not generate a “significant gain or loss” from the sale, and will incur $100 million in transactional costs.
The bank makes most of its profits in Hong Kong and the UK, and has failed to make its US operations profitable, after entering the retail banking business 40 years ago in the US. They will however retain a “small network of physical locations” in the US after the disposal, and they will become “international wealth centers” for its private banking clients and wealth management customers, most of which are in Asia.
Last February, they said that they will invest $3.5 billion in its wealth management business in mainland China and Hong Kong, and hire 5000 advisors there as the bank focuses on becoming more profitable and efficient.
Noel Quinn, HSBCS’s CEO said they exited the US retail banking business because it “lacked the scale to compete” and that their continued presence in the US is key to their international network and an important contributor to their growth plans.
Citizen’s CEO said that acquiring HSBC’s East Coast branches and online-only bank was “great for our balance sheet, great for our physical footprint” and will accelerate the growth of their direct bank; it ‘ticks all the boxes’.
Goldman Sachs wins approval for its wealth management deal in China with ICBC
Regulatory authorities in China have granted Goldman Sachs approval for a wealth management joint venture with ICBC, one of China’s largest banks.
Goldman Sachs Asset Management will hold a 51% stake in the venture, and ICBC will own the rest.
Foreign asset managers and banks have recently rushed to gain access to China’s large savings pool, as the government relaxed rules for foreigners on its financial system.
Blackrock recently also received permission to launch a wealth management venture with China Construction Bank, and a few months ago, I wrote that JPMorgan was in talks to launch a similar venture with China Merchants Bank:
The opening of China’s $53 trillion financial industry has led global banks, such as JP Morgan, UBS Group and Goldman Sachs Group to expand their footprint there, adding staff, and expanding into everything from asset management to futures and brokers. The wealth management sector is set to grow the most, and is expected to double over the next few years.
Goldman Sachs’ global investment research division estimates that investible assets in Chinese households will grow to more than $70 trillion by 2030, half of which will be allocated to investment products such as mutual funds, securities and wealth management products.
Geico will work with Tractable to use AI to speed up car repairs
Berkshire Hathaway-owned Geico - the second largest auto insurer in the US with a 13.6% market share - says it will work with London-based tech firm Tractable Ltd. to speed up body-shop damage estimates using AI.
They will try to speed up vehicle repairs for its policyholders by running photographs of the damaged vehicles through artificial intelligence software, with the help of machine learning.
Todd Combs, Geico’s CEO said that Tractable’s technology is a way for them to obtain accurate estimates for its policyholders get repairs done, and get them back on the road faster.
With Tractable, an auto-body shop would send photos of the damaged vehicle to Geico with its repair estimate, and then algorithms would analyze the severity of the damage and the necessary repairs, which it would have learned from reviewing millions of historical estimates from photos used before. Then, the repair estimate could be estimated in just a few minutes.
If the AI has an issue, it could be referred to a human Geico employee, who can review the damage themselves. Repairs can be started immediately if the estimate is confirmed.
Tractable also works with Hartford Financial Services Group, and its technology is used around the world.
At the Berkshire Hathaway annual meeting not long ago, Berkshire’s Vice Chairman, and head of insurance operations, Ajit Jain said that Geico was behind technology wise, and said they will make improvements:
“Geico had clearly missed the bus and were late in terms of appreciating the value of telematics [and it has a] number of initiatives, and hopefully they will see the light of day before not too long.”
The FCA says it will end the “loyalty penalty” on consumers in the UK
The FCA said it will end the so-called “loyalty penalty” that UK consumers pay to renew their home or auto insurance policies, and estimates that it will save consumers £4.2 billion over 10 years.
Starting January 2022, insurance companies will have to offer their current customers a price no higher than what they would quote new customers, making it difficult for them to raise costs for existing customers over time.
However, concerns have been raised that consumers will lose out over time regardless, as insurance companies would likely just increase their initial pricing to make up for the loss in revenues over time, and may take away the opportunity for customers to price shop and try and get a cheaper price for their insurance.
The FCA also found that ‘non-reconciliation’ clauses, where price comparison websites agree with insurers not to contact customers around the time of their first renewal, were anti-competitive.
They also said that certain incentives offered to new customers by insurers, like retail vouchers or getting one month free, must be reflected in renewal pricing, as cash discounts and other incentives, like loyalty points, retail vouchers and cashbacks, “significantly undermined participants’ ability to select the best insurance deal and correctly assess policy premiums”.
The global CLO market is now approaching $1 trillion
JPMorgan says that the amount of CLO bonds outstanding, globally, is now approaching $1 trillion, and that they still offer relative value to investors across all ratings tiers.
CLO’s (not to be confused with CDO’s) are structured securities that are backed by pools of loans (usually junk-rated leveraged loans) made to highly-levered companies. They are sliced into tranches that offer varying levels of risks for different yields/returns. Most CLO’s are collateralized, and have historically had very low default rates, and no AAA-rated CLO (by S&P Global Ratings) has ever defaulted.
U.S. new-issue CLO sales are projected by BofA to hit a record $140 billion this year, and have reached more than $62bn YTD.
CLOs have become more attractive because they have been tested through multiple downturns and offer attractive returns relative to risk. They are becoming more widely adopted and appearing in more institutional, and diversified fixed-income portfolios (according to Onex Credit Partners).
Amazon is not yet big enough to launch its own digital currency - Federal Reserve Bank of Richmond
According to a research note by the Federal Reserve Bank of Richmond, the costs of launching a digital currency, by a company like Amazon, may be too great for it to be economically viable for the company, and may not be optimal for society, as it would be focused on the company’s profits and less on consumers.
Platforms may issue digital currencies because it can build loyalty among large user bases, harvest transactional data and minimize settlement risk.
However, the costs of running a currency, especially creating a new one, are huge, from R&D to developing a new payments system and cybersecurity. The currency may also have to be backed by large amounts of risk-free assets such as U.S, Treasuries, and sovereign bonds - which offer very low yields, lowering their potential seigniorage revenue.
They estimate Amazon has a 6% retail share in the U.S., and for it to be profitable for them to issue a currency, it would need to only accept its currency, interest rates would need to be higher than 11% - for inflation and other reasons detailed in the report - and Amazon’s market share would need to be much greater. Alibaba’s Alipay has much greater scale in China, higher interest rates and benefits from lower cost regulatory issues there, and would be able to issue its own digital currency.
Also: Exxon Mobil loses a climate proxy battle, and two board seats, to a tiny activist hedge fund who owned just $50 million of their stock, former Goldman Sachs executive Sumit Rajpal launches a new buyout firm, US jobless claims fall to a new pandemic-era low and US regulators signal bigger role in cryptocurrencies market.
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