Bank of England´s (BoE) Monetary Policy Summary September 2016

Unanimous support for current monetary policy to continue

“…the MPC voted unanimously to maintain Bank Rate at 0.25%.  The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases totalling up to £10 billion, financed by the issuance of central bank reserves.  The Committee also voted unanimously to continue with the programme of £60 billion of UK government bond purchases to take the total stock of these purchases to £435 billion, financed by the issuance of central bank reserves.”

The initial impact of the measures undertaken in August

“The package of measures announced by the Committee at its August meeting led to a greater than anticipated boost to UK asset prices.  Short and long-term market interest rates fell notably following the announcement; corporate bond spreads narrowed, and issuance was strong; and equity prices rose.  Since then, some of the falls in yields have reversed, driven by somewhat stronger-than-expected UK data and a generalised rise in global yields.”

The outlook for H2 2016

“The Committee now expect less of a slowing in UK GDP growth in the second half of 2016.”

There is room for further cuts of rates to a little above zero

“The Committee will assess that news, along with other forthcoming indicators, during its November forecast round.  If, in light of that full updated assessment, the outlook at that time is judged to be broadly consistent with the August Inflation Report projections, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of this year.  The MPC currently judges this bound to be close to, but a little above, zero.”

JPMorgan Chase (JPM) at Barclays Global Financial Services Conference Notes

Millennials are the single largest population in the United States at 76-78 million

I said I’d talk a little bit about millennials and their importance to the Company. And I think actually they’re important to all companies at this juncture…  between 76 million and 78 million but the most important takeaway is that they’re now the largest single population in the United States. Gordon Smith – CEO Chase, Consumer & Community Bank


Millenials spend much more time and money than other populations on travel, entertainment, and dining

Again consistent with some of the things that you will have read, they tend to spend much more time or much more money and obviously time on experiences and we see a little bit in our own data. So this is both credit and debit card data from Chase for 2015 and just simply compares the millennials against all of the other populations and you will see in the travel, entertainment and dining categories that they outspend. Gordon Smith – CEO Chase, Consumer & Community Bank


Gordon Smith points to employment and housing market as indicators of a strong economy

The general points that I would make on the economy overall is I think if we look at the employment situation which looks very strong and we look at the strength of the housing market, still take the economy as we move towards the back quarter of the year is looking particularly strong I think right now and there are different points of view out there. Gordon Smith – CEO Chase, Consumer & Community Bank


JPM has renewed credit card cobrand relationships with United, Southwest, and Amazon for an undisclosed period of years

And you can see from terrific brands like United, Southwest, and Amazon, we’ve had those businesses partnerships for 15 to 25 years and have recently renewed them for an undisclosed duration. That means don’t ask. Gordon Smith – CEO Chase, Consumer & Community Bank


Digital wallets have not yet significantly impacted consumer spending

And you can see here in terms of just on the left hand side of the page we took kind of Apple, Android and Samsung Pay and look for kind of away and it is in usage and again it just reiterates that yes customers are aware of it, but it hasn’t yet grown to be a meaningful component of consumer spending. But that does not mean that it will not be. Gordon Smith – CEO Chase, Consumer & Community Bank


Auto loan portfolio has improved since JPM decided to reduce subprime lending for auto finance; yet, 21% of originations have a loan to value ratio greater than 120.

Auto origination, so the percent of originations with FICO of less than 680, in 2008, we were at about 31%. The first half of 2016 we’re at 19% against the industry, which is at roughly 50%. So, in I think the first quarter of 2013 we made the decision that we would substantially pull out of the subprime lending space here for auto finance… you see a percentage of originations with a loan to value of greater than 120 and with very consistent with where we’ve been and substantially less than the industry at 21%. Gordon Smith – CEO Chase, Consumer & Community Bank

SK Additions:

Gordon Smith – CEO Chase, Consumer & Community Bank

Millenials start families much later

“They also tend to kind of start you know from research we’ve done, they tend to start families much later, they start owning a home later than certainly the baby boomers do. So there are some you know very real differences which are important as you think about kind of product design and targeting but some real differences that we see in our data.”

Credit card and auto delinquencies migrating slightly higher but not cause for concern

“Term repeat to credit trends, I know that’s an area that’s all of your focused on and we’re too and always have been, credit card net charge off rate and the 30 plus delinquency rate migrating very slightly higher, but nothing in any of the delinquencies that I see as a concern at this stage. We said that we would target plus or minus 4.25 on a net charge-off basis for credit cards. Everything looks to be consistent with all the expectations that we set and as loans continue to grow and we continue to penetrate with more acquisition we would expect to see the lost numbers begin to slowly rise overtime. Auto migrating a little faster back to more pre-recessionary rates if you like, but still looks very strong entirely consistent with our expectations and our expectations are consistent with all the return targets that we have set for you overtime”

Added 1m new credit card accounts with Freedom unlimited card

“If we go now to Page 21, we recently launched Freedom Unlimited, well I guess we launched it at the end of the first quarter now, so reasonably recently. But from the first quarter through the end of August, we acquired more than a 1 million new customers with the new product. So, we had originally slated this particular release for later in 2016 we could see there was a gap in the market and in our product lineup, so we accelerated it. And as we say have added 1 million new accounts since its launch.”

We feel confident in the business that we’re bringing in

“So, why aren’t we scared, we take those numbers apart in intense detail. So, we take every single vintage that we have and we look at this every quarter and other people look at it almost on a daily basis. But I think each vintage every quarter we break each vintage into deciles. We look at the performance of the worst deciles particularly the bottom two or three deciles and compare those to prior vintages and all of that data suggests that we’re bringing in really good quality customers. So if any of that was to change, I’d be here telling you that we were not growing as quickly as we are, but we feel confident with the quality of the business that we’re building.”

Bank of England (BoE) Monetary Policy Summary Aug 2016

A package of measures released

“…the MPC voted for a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the target. This package comprises: a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion…”

Inflation is expected to rise above target in the near term

“The fall in sterling is likely to push up on CPI inflation in the near term, hastening its return to the 2% target and probably causing it to rise above the target in the latter part of the MPC’s forecast period, before the exchange rate effect dissipates thereafter. ”

Flat GDP growth expected in H2

“…recent surveys of business activity,confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.”

The stimulus meant to to reduce spare capacity

“Given the extent of the likely weakness in demand relative to supply, the MPC judges it appropriate to provide additional stimulus to the economy, thereby reducing the amount of spare capacity at the cost of a temporary period of above-target inflation.”

The near-zero interest rates limit the effectiveness of a further cut in interest rates

“The cut in Bank Rate will lower borrowing costs for households and businesses.  However, as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.  In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate.”

Expanded asset purchase programme intended to lower yields and stimulate “risk on” attitude

“The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that are used to determine the cost of borrowing for households and businesses.  It is also likely to trigger portfolio rebalancing into riskier assets by current.”

Expect further cuts

“If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.”

Joint Press Release on the ‘1+6’ Round Table July 22nd 2016

Participants: Premier Li Keqiang, World Bank Group President Jim Yong Kim, IMF Managing Director Christine Lagarde,  WTO Director-General Roberto Azevedo, ILO (International Labor Organization) Director-General Guy Ryder,  OECD Secretary-General Angel Gurria  and FSB (Financial Stability Board) Chairman Mark Carney

Sluggish global growth, significant risks persist

The global economy is sluggish and faced with downside risks and uncertainties…We recognize that aggregate demand will remain weak in the short run, and it will take time for supply-side policies to show effects, so a comprehensive package of policies are needed to strike a good balance between short-term and long-term goals…Notwithstanding the improvement in resilience brought about by post-crisis financial reforms, the global financial system faces pronounced risks, which could be amplified by the slow-down in global growth.

Monetary, Fiscal and and Structural tools to be used and communicated effectively

Strong, combined and coordinated efforts are needed, including use of all policy tools – monetary, fiscal and structural – to deal with risks and uncertainties in the world economy, safeguard financial stability and support economic growth. …Well-calibrated and effective communication of policy stances will help to boost confidence, enhance policy effectiveness, and limit negative spillovers.

China continues to play a key role in recovery

China has taken the initiative to adapt to and guide the economic New Normal. While supporting aggregate demand, China continues to strengthen the structural reform, especially the structural reform on the supply-side, break a path for growth, accelerate the shift of growth models from emphasizing size and speed to quality and efficiency, and boost sustained driving forces for growth

Shared directions of structural reforms to play a key role in fostering global economic growth  

While country circumstances differ, there are shared directions of reform in general terms, including deregulation, enhancing competition, encouraging innovation, promoting fiscal reform, promoting trade and investment, strengthening the financial system, advancing labor market reform, improving infrastructure, enhancing environmental sustainability and promoting inclusive growth.

Mixed global employment outlook

The current global outlook for jobs is mixed with slower growth leading to weaker prospects for employment and wages in many countries. Rising inequality and the risk of setbacks to the global drive to reduce poverty, make policy initiatives to increase opportunities for decent work a priority.

Bank of America Q2 2016 Earnings Calls Notes

Bank of America Q2 2016 Earnings Calls Notes

Net interest income shows stable growth despite low interest rates

“in summary, adjusted for market-related changes in both last year’s second quarter and this year’s second quarter, we grew NII by 400 million or 4% year-over-year. And that took place while the 10-year Treasury yield fell 86 basis points from last year on a spot basis. Going forward in a stable interest rate environment, we believe we can maintain NII around the second quarter 2016 level based on the current loan and deposit growth we see. And if rates rise, we would expect NII to grow.” Brian Moynihan – Chairman and Chief Executive Officer


Investment banking and sales and trading segments are not in need of change

“question is often asked how we need to change this business, especially the FICC area as many of our customers have. I want to hit this head on. First of all, fixed income a good business for us here at Bank of America. It is a business which benefits not only by its core activities but by being coupled with our massive global banking franchise that has leadership positions across the globe. Combined together, they generate a pretty steady billion dollars or so of quarterly investment banking fees.” Brian Moynihan – Chairman and Chief Executive Officer


Management is focused on reducing expenses

In the trailing four quarters the total expense base was $56.3 billion. As we look out from the second – the third quarter of 2016 through the next six quarters into 2018, we believe that with our SIM efforts and the continued work we’re doing across the board on expenses, we’re targeting an annual expense number of around $53 billion in total expenses for the year 2018. Brian Moynihan – Chairman and Chief Executive Officer


And on restructuring operations

“I want to point out another important milestone for our company in quarter. This quarter we changed our reporting to eliminate the legacy assets in the servicing segment. This completes transformation.” Brian Moynihan – Chairman and Chief Executive Officer


Credit performance improves and BAC reduces exposure to energy

“the question we often get is, is credit deteriorating? As you can see, we remain very pleased with both consumer and commercial credit performance. Not only have net charge-offs not gotten worse, but they have improved in the most recent quarter moving back below $1 billion. Provision expense is and will remain roughly equivalent to net charge-offs. Even our energy portfolio we have seen lower exposures improve losses.” Paul Donofrio – Chief Financial Officer


Management believes BAC can perform in current economic conditions

While growth concerns persist in many countries, the U.S. economy continues to steadily improve, albeit at a less than optimum pace. The diversity and strength of our franchise makes us more relevant to clients and customers during times such as these, and you can see that in our results. Paul Donofrio – Chief Financial Officer


We’re excited to announce that Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.


Netflix CEO Reed Hastings believes the business is significantly under penetrated in international markets

“For most global Internet firms, the U.S. is 20%-35% of usage and revenue; we’re not anywhere close to that yet but we’re continuing to invest in international.” 

Netflix Chief Content Officer Ted Sarandos says the company is seeing the highest returns of its capital in its own original content 

“What we’re seeing is that dollars invested in our original programming are more efficient in that for every dollar spent, we get more bang for the buck in terms of hours viewed. and hours viewed leads to higher retention, more word of mouth, and more brand halo.”



Bank of America CEO Brian Moynihan says the bank has been laying off employees in various departments to drive efficiencies but the bank has also been adding headcount in sales and relationship-focused bankers

“We continued to reinvest in sales capacity. So just in our consumer business, headcount is down year-over-year but we have a thousand more sales people roughly out there selling. And so the idea is to continue to drive sales people into the businesses.”



Intercontinental Exchange CEO Jeff Sprecher on how they’ve grown different verticals of the business over the years

“Well, we have our historical data business that we grew organically, which was all commodities data set. And when we acquired the New York Stock Exchange, we acquired along with it obviously the data from trading U.S. equities and equity options. And then we acquired the Liffe Exchange, which gave us really an interest rate data footprint. We’ve built a new company called ICE Benchmark Administration, which is the company that took over the LIBOR administration, the Gold Fix and the ISDAFIX.  So we’ve got this new footprint of what are really regulated benchmarks going forward, very global, very important regulated benchmarks.  But what you’ve seen is the evolution of my company from trading into clearing and now increasingly into data and indices.”

Intercontinental Exchange CEO Jeff Sprecher sees growth in the derivatives business coming from Asia 

“We’re betting that Singapore is that nexus for all of Asia, which would include China, Japan and these growth areas of Malaysia, Indonesia and, Vietnam.”

Intercontinental Exchange CEO Jeff Sprecher sees significant operating leverage inherent in the data intensive business model of the stock listings and benchmark listings business

“There is also a very big footprint in our business that’s no longer volumetric.  Things like over-the-counter clearing where daily volumes are not reported but are growing tremendously, and then we’ve ended up with a very large data and listings business. But basically recurring revenue business that is growing against a relatively fixed cost. So, similar model to when the business went from analog to digital on trading, which the allure of that was this fixed technology cost against growing volumes.”

Intercontinental Exchange CEO Jeff Sprecher on the recurring nature of the NYSE listings business model=

“The listings franchise on the New York Stock Exchanges is a business that has been growing. There’s been a lot of IPOs in the last year or so.  And that is a massively recurring business with at least 2,500 listed companies, lots of ETFs and other things that are providing annuity revenue against a very fixed cost base.  So, you take all that together and about 40% of our business is in a form that is much more recurring than it used to be in the past.”



Wells Fargo CEO John Stumpf said that physical banking branches will remain a key part of how they intend on serving customers even though consumers are adopting mobile banking on a massive scale

“We’re in the information business as much as on the retail we’re in the financial services business, so this is really about connecting all the channels, not about trying to drive customers into what’s cheaper for us. That’s not how we think about that. We think about what’s best for the customers, and branches still remain an enormously important part in that.”

Wells Fargo CEO on John Stump discussed the firm’s recent bolstering of its investment banking unit

“The way we think about business here is around relationships, relationships with team members. My 11 direct reports have an average of 28 years with the company. We think of relationships with our customers, our communities, our shareholders. Buffett’s been an owner of ours for 25 years. We love long-term things, so as it gets to investment banking activities, we think of that as another solution, another product, another service.  Most of the revenue that comes from that business is from existing customers who have been doing business for a long, long time.  I only care that we do the right thing for customers.”



JP Morgan CFO Marianne Lake said a number of macroeconomic events occurred which helped JP Morgan’s transactional revenue

“A number of macro events occurred in the quarter including central bank actions, the Swiss Bank decoupling, stronger dollar and oil price volatility which supported market performance broadly and currencies, emerging markets, rates, commodities and equity.”

JP Morgan CFO Marianne Lake said loan performance in the bank’s energy exposure weakened during the quarter as a result of lower oil prices

“This quarter’s reserve build was at downgrade in the E&P portfolio and if the current price environment continues, it’s reasonable to expect some further reserve builds during 2015 but relatively modest.”



CSX CEO Michael Ward sees a robust pricing environment for transportation companies who are moving large physical goods

“We still see capacity as been very tight.  If you notice our minerals business was I think around 11% or so based on a lot of highway infrastructure, projects going on particularly in the region and country that we serve, so we’re seeing truck capacity staying relatively tight. Coast wise barges have been very strong and strong demand, so we still see capacity fairly tight and we still see a strong need for transportation, pricing does seem to be very robust if you look at the spot truck load market it is remaining fairly strong. So we see that it’s still a very strong, robust pricing environment.”

US Banking System Posts 2nd Highest Annual Profit Ever

The FDIC released its Quarterly Bank report today and it showed that US Banks had their 2nd most profitable year ever last year.  It was the most profitable since before the financial crisis.  In 2009, 2010 and even 2011 there were many who argued that the banking system would never reach its former level of profitability.  While returns on capital are still low because leverage has come down, return on assets is near old levels and last year’s nominal profit number should provide some indication that banks are recovering nicely.

Annual Income of US Banking System

USB Management on Fiscal Cliff

US Bank management thoughts on consumer credit impact of the fiscal cliff, from 3Q Earnings call:

P. W. Parker – Chief Credit Officer and Executive Vice President

Well, if the worst case happened on the fiscal cliff, I think it’s fair to say we’d probably reenter a recession. And that would be then you’d see unemployment go up, and that would have an impact on consumer portfolio. I’m hopeful that they come to some kind of resolution, and I think the fiscal cliff was designed in such a way that it’s so severe. I think it’s unlikely that there won’t be some political solution that cuts the middle ground and mitigates that risk.

Q3 Bank Earnings Preview

JPM will kick off earnings season for financials tomorrow, and the whispers seem to be that the quarter is going to be pretty good.  Hopefully JPM will show signs that the banking system is continuing to heal and that profitability is returning.  Whereas a couple of years ago investors would have had a laser like focus on capital and asset quality metrics, this quarter the metrics that I’ll be paying close attention to are (among others): Return on Equity, Loan Growth and NIM.  Below are charts of how these have trended for the banking system over the last decade.

While asset quality has gotten a lot better for the aggregate portfolios and charge offs have slowed to pre-recession levels, banks are still holding a lot of non-accrual assets in their residential books.  It will be important to see if the system is taking the opportunity provided by improving housing prices to finally clean their books completely.  This will have major implications for future lending.

Regions Financial Loan Line Utilization

More from the Barclays Financial Services conference…a slide from Regions Financial, a southern regional bank with +$100B in assets which had a lot of trouble with credit quality during the crisis.  The slide below shows loan line utilization improving.  It’s a big step forward for this bank just to not have to focus on credit quality, the fact that they are focusing on loan growth shows how far the banking sector has come since ’09.

RF Line Utilization