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In a day of extraordinary action in the markets, perhaps the most noteworthy move yesterday was a 20% plunge in the share price of Bank of America. Despite rallying today, the bank, America’s largest by assets, has seen its shares lose around 30% of their value so far this month (and nearly 50% so far this year).
Bank of America now trades at a wince-inducing 32% of its book value. This puts it at the bottom of the price-to-book league table for domestic banks. But there are banks in Europe that trade at similar discounts; many of these remain part-nationalised (RBS, Dexia) or face severe sovereign-related stress (UniCredit, Alpha Bank). For Bank of America, a major mortgage lender, this is is not the best neighbourhood to be in.
After a brief growth spurt, bank lending in the US shrank in April and May, according to the latest data from the Federal Reserve. As Bloomberg points out, banks’ appetite for government bonds has remained relatively robust since the onset of the financial crisis. American banks now hold almost US$1.7trn in treasuries and related government debt, with holdings growing by an 11-12% annual clip so far this year, despite miserly yields.
The situation at Japanese banks looks eerily similar. Funds are being recycled into government bonds instead of loans, with year-on-year credit in a seemingly permanent state of contraction. The Economist Intelligence Unit does not expect America to experience a protracted slump like the one that has dogged Japan since its spectacular asset-price bubble burst in early 1990s. Still, there are enough similarities in some metrics to cause discomfort.
Encouragingly, deposits at American and Japanese banks are at or near record highs. This will please regulators, who are urging banks to avoid flightier wholesale sources of funding. But until these funds are put to more productive use than stockpiling low-yielding government bonds, nobody will be truly happy.
On June 3rd, Atlantic Bank and Trust of Charleston, South Carolina became the 45th bank in the US to fail this year. After a brief period in receivership under the control of the Federal Deposit Insurance Corporation, the lender’s assets—worth US$208m—were transferred to First Citizens Bank and Trust.
This is not an unusual occurrence: 367 banks have failed since 2008. But the pace of failures so far this year is slower than in 2010. And only five banks failed in May, which some see as an “encouraging milestone”. Recall, however, that three banks failed in March, promptly followed by 13 in April, the highest monthly tally since last spring.
More encouraging is that the size of failed banks so far this year is significantly smaller than last year—an average of US$430m in assets per bank through May this year, versus US$867m over the same period in 2010.
The number of reports of suspected mortgage fraud in America rose by 5% last year, to a record annual high, according to the Treasury Department. But a new study by the LexisNexis Mortgage Asset Research Institute, which collects its own data on mortgage fraud, claims that cases of “verified, material misrepresentation” in the mortgage origination process fell by 41% over the same period.
A stricter definition of fraud explains some of the difference with the Treasury’s figures, as does a general decline in mortgage lending, LexisNexis says. More worryingly, the company notes that “fraud has become more complex and harder to verify using traditional methods.” More than 90% of the fraud submissions received in 2010 dealt with loans written in prior years; with time, more fraud perpetrated in 2010 will likely come to light. Among the cases reported to LexisNexis last year, Florida saw three times as many submissions as its share of the national mortgage market. Fraud volume in New York and California was more than twice those states’ share of overall mortgage originations.
Today, Wells Fargo reported record quarterly earnings of US$3.8bn, up nearly 50% on the same quarter last year. JPMorgan kicked off the reporting season last week with quarterly net profit growth of 67%. The country’s other banking giants—Bank of America, Citigroup and Goldman Sachs—shared less encouraging news, with first-quarter profits down on last year.
What all of these banks have in common, however, is falling revenues. From racy investment banks to retail-focused lenders, America’s largest banks are still shrinking. Releasing provisions and cutting costs can only go so far; a true recovery will begin when top lines start to grow again.
As Bernanke and company gather in Washington today and tomorrow to assess the strength of the US economy, there is some encouraging news from the country’s banks. Business lending grew at almost an 8% annualised clip in December, according to recent data. This, however, is unlikely to affect the Fed’s policy stance, with no change expected to the US$600bn asset-purchase programme or near-zero policy rates.
What’s more, the month-on-month annualised jump in business loans in December doesn’t tell the entire story. Year on year, the stock of commercial and industrial lending fell for the twentieth consecutive month in December. The ratio of banks’ cash to business loans, although down from recent all-time highs, remains elevated in historical terms.
Recent data on lending, spending and—later this week—overall economic growth in the fourth quarter will give some comfort to American policymakers. However, the recovery has much longer to run. A Fed rate hike is unlikely before the second half of 2012.
At the parent site, we recently published a review of Emily Lambert’s book “The Futures”, which traces the colourful history of Chicago’s futures exchanges. The city’s two main trading venues, The Chicago Mercantile Exchange and the Chicago Board of Trade, merged in 2007 to create the CME Group. Yesterday, the group reported its full-year contract volumes.
As the world’s largest futures exchange operator, the data provides a useful guide to trends in global derivatives trading. Average daily contract volume at the CME rose by 19% in 2010, reversing a 20% decline the year before. The volume of foreign-exchange futures jumped by 47%, making it the group’s fastest-growing category (see related post). Interest rate futures, which account for nearly half of the exchange operator’s daily volume, grew by 30%.
Our latest monthly forecast is published today (free registration required). The most noteworthy change is a significant upgrade to US GDP growth in 2011, from 1.5% to 2.2%. This pushes our outlook for world growth next year up slightly, from 3.7% to 3.8%.
The extension of the Bush-era tax cuts and unemployment benefits will boost demand in the US by half a percentage point in 2011. However, growth will remain subdued compared with what is normal for this stage of a recovery, and short of the pace needed to reduce the stubbornly high unemployment rate.
Although the new stimulus is the result of a welcome outbreak of bipartisanship, it is only a bipartisan agreement on how to spend borrowed money. With a fiscal deficit estimated at 8.9% this year, the continued lack of clarity on bringing government finances back onto a sustainable path could, eventually, lead to global financial markets questioning the security of US Treasury bonds.
In the US, corporate profits set a record (in nominal terms) in the third quarter. In relation to GDP, profits were the healthiest they have been since 2006. But not all industries are participating equally.
An article at the parent site digs into the details and finds important differences in the shape of the profit recovery for non-financial companies and financial firms. More specifically, banks do not appear to be participating in the upturn with the same zeal as non-bank financials or non-financial corporates. Could this mark the beginning of a steady decline in the importance of banks to the broader economy?
A series of big, bold charts accompanies the latest report on consumer debt in the US by the New York Fed (via Alea, also discussed here). The report contains plenty of interesting data about the ongoing deleveraging of American households. As of the end of September, total indebtedness is down by 7.4% from its peak value two years earlier. The distaste for new debt is underscored by trends in mortgage originations, which are running at 50% of their 2003-07 average, and credit cards, which have seen a net 120m accounts—one hundred and twenty million—closed since mid-2008.