Minimum Wages, Big Data Deals, Citi, Fintech, and More
The minimum wage, the LSE-Refinitiv deal, the Visa & Plaid merger, Citigroup, big bank earnings, and recent economic data
Today we will talk about: the minimum wage, the LSE-Refinitiv deal, the Visa & Plaid merger that was terminated, Citigroup consolidating its wealth management divisions, big bank earnings, and recent economic data
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Please read the disclaimer at the end before continuing.
The Week’s Briefing:
M&A
Visa & Plaid ‘mutually agreed’ to call off their merger and reached an agreement with the Department of Justice (DoJ) after Visa was sued by the DoJ to block the acquisition on antitrust grounds.
LSE’s $27bn bid for Refinitiv approved by EU regulators
Goldman Sachs agreed to take over General Motors’ credit-card business, Mastercard will continue to remain as the network for the firm. Terms of the deal weren’t disclosed.
NCR offered to buy ATM-operator, Cardtronics for $1.7bn - beating a bid from Apollo Global Management and a partner.
Banking, Insurance & Regulation
Walmart to create a Walmart-majority owned fintech startup in a partnership with Ribbit Capital.
Under Trump rules, U.S. banks are to delist 500 HK-listed structured products, as the President signed an executive order barring investment in companies with alleged links to China’s military widens.
Citi to consolidate its two wealth management units under one umbrella, into a single global division run by Jim O’Donnell. Citi Private Bank and Citi Personal Wealth Management will combine to form Citi Global Wealth
European fintech bank, Revolut applies for a banking license in the U.K
James Simons steps down as Chairman of Renaissance Technologies, he will remain on the board, but not in the chairman position, which will be taken over by current CEO Peter Brown.
Chairman of the holding company for the Franco-Swiss private bank and asset manager Edmond de Rothschild, Benjamin de Rothschild, died of a heart attack, at the age of 57
UBS lowers the threshold for charging negative rates to customers from 500,000 CHF to 250,000 CHF
Wells Fargo is establishing a new division to oversee the banks interactions with consumers, from providing advice on product pricing, to reviewing complaint data
Citizens Financial Group launches ‘Citizens Pay’ brand to boost its point of sale lending software.
Walgreens and Synchrony to launch a co-branded credit card
A top Israeli asset-manager, Migdal Insurance & Financial Holdings Ltd. (which has $97bn in AUM), announced plans to invest $2bn in the fintech space over the next 2 years.
Japanese firms Nomura and Sparx (an asset manager) team up to form a company to invest in unlisted companies as Nomura sees potential for growth in the private markets.
Mortgage software start-up, Blend, raises $300MM from Coatue and Tiger at a $3.3bn valuation, up from a $1.7bn valuation Blend raised funds at just 6 months ago.
Big-bank and Financials Earnings Summary:
JP Morgan Chase & Co. reported record quarterly profits in Q4 of $12bn (a 47% increase), on the back of record investment-banking, and strong equity/credit trading., lifting their 2020 full year profits to $29bn. They boosted guidance for 2021 net interest income to $55.5bn. They also released $2.9bn from their loan-loss reserves that they had built up during the the pandemic. Their lending ratio fell to 47%, down from 64% a year earlier. This was due to a huge growth in deposits, and less appetite for extending credit in such an extreme economic crisis. Their loans increased 2% to $1 trillion.
Wells Fargo’s stock fell 8% after reporting worse than expected revenues of $17.9bn, but just beat profit expectations, where they reported net income of $2.9bn.
Citi’s fixed income traders missed analyst’s estimates for the end of 2020, sending Citi shares down 7%. Their bond, currency and commodities trading revenues rose 7% YoY, its smallest jump since the start of the pandemic.
Blackrock’s quarterly profits rose 19% YoY, as assets rise to $8.7 trillion. They reported $1.5bn of profits in Q4, or $10.02 a share, up from $1.3bn last year, or $8.29 a share. They benefitted as bullish investors poured hundreds of billions into their funds during the year, as well as from a year-end broad markets rally on vaccine and election optimism.
Economics & Markets
Treasuries rally - after a sharp sell-off caused by the Democrats winning a senate majority - as investors piled into the U.S. Treasury’s monthly 10-year note auction on Tuesday. The 10Y yield ended the week at 108 bps, down from a high of 115 bps on Thursday. The auction yield was the highest since February at a 116.4 bps yield, nearly a basis point lower than the 117.2 bps yield, in when-issued trading just before the 1 p.m. bidding deadline (EST). This means that the demand exceeded the dealers’ expectations.
U.S. unemployment claims jumped to 1 million last week, it’s biggest weekly gain since the March lockdowns. Initial claims rose 181k to 965k, signalling renewed economic weakness as the virus worsens.
“We are a long way from maximum employment” - Federal Reserve Chairman, Jerome Powell.
Bank stocks sold off after JPM, WFC, PNC and Citi reported earnings Friday, with them down 1.8%, 8%, 3.5% and 7% respectively. Next week a number of financial firms are set to report earnings, including: BofA, Goldman Sachs, Morgan Stanley, US Bancorp, BNY Mellon, Travelers and State Street.
Joe Biden announced a $1.9 trillion stimulus plan, including a plan for $1,400 direct stimulus cheques.
U.S. industrial production rose 1.6% in December, U.S. retail sales fell 0.7%, its third straight month of declines, signalling weakness in consumer spending at restaurants, stores and online as virus cases remained high.
Inflation fell in December
Today’s discussion:
Quick summary of Biden’s $1.9 trillion stimulus program (remember that this is on top of the $900bn program passed in December, and $2 trillion in March) - which is, in itself, more than double the $800bn the American Recovery and Reinvestment Act of 2009 (during the GFC).
$1,400 direct-payment stimulus cheques
Unemployment insurance supplement of $400 a week
$440bn to help states and localities
$160bn for public health measures (vaccines, expanded testing etc.)
Potentially increasing the minimum wage to $15/hour
In this newsletter, I just want to talk about the last part: increasing the minimum wage. It’s a lot more complicated than this, but I think this gives a good summary.
Whilst from a humanitarian point of view, this sounds like a good idea, but it’s just not. This will not make anyone wealthier because food and other prices will simply increase at the same time, possibly even more (this is an oversimplified summary of the inflationary effects). But, inflation isn’t the only issue.
I’m totally in favour of people earnings minimum wages making more money - it’s hard to make a living earning so little, but I have concerns with the effects of making such large changes to it; from $7.25 (this is different/lower for tipped workers) to $15 because of the impact it will have on employment, especially at a time where the labor market is just recovering after unemployment levels spiked to the highest levels ever.
Take for example a sort of average minimum wage worker, e.g. an 18/19 year old person that works at an entry-level job at McDonalds, if this person continued to work for some time, they could scale up their role, move up the ranks, and eventually become a manager earning up to six figures a year. That motivates them to work hard and get that higher-salary job. Raising the minimum wage sort of, to an extent, eliminates that.
The problem with raising the minimum wage by 50-100% is that it becomes economical for companies to then spend money on innovation, and find a way to automate as much of the process as they can, because it will simply become economically inefficient to pay the entry-level kind of workers so much more. This is not just at McDonalds, this would be the case everywhere, where it would incentivize companies to streamline their operations by spending money on automating as much as they can, and letting go of the lowest-salary workers that make minimum wage, because it will hurt their bottom-line.
It’s hard to make a living on a minimum wage, but it’s even harder to live on a $0 wage.
This will cause a strain on the jobs market, potentially leading to higher unemployment rates for longer, which will be a drag on the economy, and a strong economic recovery. That would then feed off of itself, and would not benefit the lowest-wage workers in the long run.
Assuming that doesn’t happen, an even bigger problem would be inflation. If wages rise 50% and living costs rise with it, what would be the benefit to increasing the minimum wage? That would make it even harder to live for the lower wage workers, whilst the wealthiest people would be protected by assets such as real estate, gold, and even art.
Simply, what I’m saying is that either way, the benefit for the lowest wage workers will be little compared to the potential negative effects, and so I do not think that it would be a good idea to increase minimum wages by such a large amount.
Biggest Stories of the Week:
Visa and Plaid ‘mutually’ call off their merger, ending DoJ litigation
Visa and Plaid called off the $5.3bn merger that was announced on Jan. 13th 2020. The DoJ was concerned that Visa was potentially seeking to eliminate its potential competitors by purchasing Plaid, although Visa denied those claims, and said that Plaid would have been “complimentary” to Visa’s business.
The concern was that Visa would be eliminating competition deriving from Plaid's ability to develop payment apps and collect and decipher data - two things Visa also wants to emphasize.
CEO Al Kelly said the merger was called off due to"protracted and complex litigation will likely take substantial time to fully resolve.”
However, Kelly also added that Visa still has room to grow without Plaid:
“We are focused on accelerating our business by advancing our broader strategy and continuing to drive Visa’s three growth pillars: consumer payments, new flows, and value added services,"
However, Plaid CEO Zach Perret said that Visa would still be a key partner and investor in their business, despite the merger not happening:
"While Plaid and Visa would have been a great combination, we have decided to instead work with Visa as an investor and partner so we can fully focus on building the infrastructure to support fintech."
Walmart announces a Walmart-majority owned Fintech startup, in partnership with Ribbit Capital
The $430 billion retailer announced plans for their own bank this week, 14 years after they abandoned plans for a bank in 2007. It will be in partnership with VC firm Ribbit Capital, which invests in early stage fintech startups, including Robinhood and Credit Karma.
The timing of the announcement comes just after the Federal Deposit Insurance Corp (FDIC), which backs bank deposits, approved new rules that will make it easier for non-banks to get into banking.
Last year, Walmart reported $400 billion in sales from its 5300+ stores across the U.S.. This shows the scale of its huge customer and employee base, which they can leverage to sell high-margin financial products, especially to those that do not have access to traditional banking services. They also have access to lots of information about its customers finances, using products like debit/credit cards, offered by third-party partners. They also have 1500 Walmart MoneyCentres across the U.S., which is double that of Citibank branches.
Walmart said that it anticipates growth for the new venture through partnerships and acquisitions with leading fintech companies.
In 2007, Walmart abandoned its plans to create a bank, withdrawing its application for an ‘industrial bank charter’, which would have allowed it to lend money and deposits with a government guarantee. They faced opposition from credit unions and banks, which claimed that a Walmart bank could pose systemic risks in the financial sector.
During JP Morgan’s earnings call, Friday, Jamie Dimon cited Walmart as an example of a potential competitor as he spoke about what the bank was doing to face off competition from fintech startups.
LSE-Refinitiv deal given the green light by EU regulators
The 300-year old London Stock Exchange Group, Plc cleared the last major hurdle to its $27bn purchase of data-provider Refinitiv, on Wednesday.
LSE said in a statement that the transaction still needed a “small number” of regulatory approvals, and should be completed in the first quarter of this year.
The $27bn transaction gives the LSE group global scale, as demand surges for data and analytics in an increasingly computerized financial markets. The deal is also a boost for London’s financial sector, as the city’s role on the world stage is set to be disrupted by Brexit.
Regulators had issues with the company’s market share in European government bond trading, trading and clearing of interest-rate derivatives, real-time data feeds and index licensing, saying that LSE’s rivals could be blocked from accessing important information provided by Refinitiv.
The European Commissioner said on Wednesday that the LSE Group made “commitments that will ensure that the markets will remain open and competitive and the acquisition will not lead to higher prices or less choice and innovation,”
To gain EU approval, LSE had to divest certain assets, and will sell Borsa Italiana, including its government bond trading platform MTS, to Euronext NV, and two Italian banks.
Refinitiv’s key competitors are Bloomberg, with the Bloomberg Terminal, S&P Global, which recently announced a $39bn deal to merge with IHS Markit, and Factset.
The merged company will become a financial powerhouse across fixed income, currencies, derivatives and equity trading. 70% of the company’s revenues will be generated from data, up from LSE’s current 40% (according to Bloomberg Intelligence).
The deal, which was announced in 2019, helped spur consolidation among the industry’s biggest data providers. Just last November, S&P Global Inc. agreed tp purchase IHS Markit Ltd. for $39bn, and that same month, Deutsche Boerse AG bought a mojority stake in corporate-governance adviser, Institutional Shareholder Services Inc.
Citigroup is to consolidate its two wealth management units under one umbrella
Citi will consolidate its two wealth management units into a single global division to form Citi Global Wealth, by combining Citi Private Bank and Citi Personal Wealth Management.
The reorganization will bring its wealth-management services for UHNW clients under the same umbrella as services that serve substantially less wealthy consumers.
Citi Private Bank focuses on clients who have an average net worth of over $100MM, and Citi PWM has Citigold, which is open to customers with an average monthly account balances of over $200,000 or more in deposit, investment and retirement accounts.
“We are going to put the full force of the firm behind this effort to create a single, integrated platform that will serve clients from the affluent level all the way through to ultra-high net worth individuals and households,”
- Michael Corbat, Citigroup’s current CEO that’s set to leave, and incoming CEO Jane Fraser in an internal memo sent out on Wednesday
This comes at a difficult time for Citigroup, which has been struggling since it was bailed out during the GFC, and they have recently been under scrutiny by regulators for corporate governance errors, such as accidentally transferring nearly a billion dollars to some firms, some of which are refusing to give back the money.
Current CEO, Michael Corbat announced a few months ago that he was stepping down after 8-years at the firm as its CEO. Citi’s stock has been flat since 2013.
It is expected that incoming CEO, Jane Fraser will streamline Citi’s operations, and resolve basic corporate governance errors such as the one above.
General market and economic observations
Economic summary:
The U.S. economic recovery stalled in December, with adjusted retail sales falling 0.7%, and continuing claims rising to 5.27 million, initial claims jumping from 784,000 to nearly a million, and thee U.S. also lost 140,000 payroll positions (as we looked at last week). The recovery’s slowdown also included weakness in household spending.
The jobs outlook by the ABA shows that a full jobs market recovery will take a long time. The chart here shows the U.S. unemployment rate forecast per quarter.
Despite it being holiday season, U.S. consumers cut back on spending at restaurants, stores and online, which declined 0.7% in December, its third consecutive monthly decline. This is compared to the prior year, where holiday sales rose 8.3% over the same period.
One bright spot in the data was industrial production, which rose 1.6% in December, building on strength in new orders and manufacturing PMI’s (which we looked at last week). This was boosted by the utilities sector, which rose 6.2% as demand for heating picked up after November. Manufacturing output rose 0.9%, ending the year down 2.8%
(Preliminary) consumer sentiment data slipped, a little, to 79.2, and inflation ended the year at around 1%, with core-CPI (ex food and energy) rising 0.1% in December.
Some other interesting articles this week that you may want to read:
American Banker: “Are Commerical RE foreclosures on the horizon?”
FT: “US equities: broken signal” - a stock that went up 4600% over just a day after Elon Musk mention the name of a company with a similar name in a tweet.
WSJ: “TikTok and Discord Are the New Wall Street Trading Desks”
Bloomberg: “Index-Fund Trillions Are Distorting Prices in the S&P 500”
Bloomberg: A record 1 Trillion Shares were traded last year, mainly due to easy OTC market accessibility by so-called ‘Robinhood’ investors
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