October 13, 2017
Banks Pine for Loan Growth as Clients Wait on Trumps Promises
President Donald Trump’s pledges to overhaul taxes, trade, infrastructure and health care may thrill some corporate leaders, but it’s causing many to delay expansions. That’s bad for banks.
Lending growth probably decelerated for a fourth straight quarter in the three months ended Sept. 30 across more than a dozen of the biggest U.S. banks, according to Royal Bank of Canada analysts and Bloomberg calculations. Their total loans may have ticked up just 1.8 percent, the smallest increase in more than two years, as commercial and industrial customers held off on buying equipment and building plants.
Executives are “hesitant to borrow in the face of uncertainty,” said Jason Goldberg, an analyst at Barclays Plc. “Whether it’s potential tax reform, health-care uncertainties, or they’re unclear what infrastructure spending is going to look like, you’ve definitely seen corporates take a pause.”
Washington’s inaction has been frustrating bankers for months, a sentiment that may surface anew when they start posting quarterly results this week. During the last round in July, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon lashed out, saying, “There would be much stronger growth if there were more intelligent decisions and less gridlock.” In June, Bank of America Corp. Chief Operating Officer Thomas Montag said corporate clients need clarity to make big investment decisions.
Trump and his top economic adviser, Gary Cohn, have said they expect the financial industry to help fund growth. But instead, a dearth of progress on big legislation has stymied that business.
Congressional Republicans spent much of September trying to resurrect a failed health-care bill. Then Trump told lawmakers his $1 trillion infrastructure plan may not rely on public-private partnerships, potentially throwing a wrench into a key priority. The president also released a tax plan that many analysts consider unlikely to win support until designers can prove it won’t balloon the federal deficit.
For banks, the uncertainties are compounding challenges in lending, which also is being constrained by tighter regulation and slower-than-expected interest-rate hikes — factors that have crimped trading revenue too. Low yields have encouraged firms to issue bonds and use the proceeds to repay bank loans, said Alison Williams, an analyst at Bloomberg Intelligence. U.S. Bancorp CEO Andrew Cecere addressed the challenges at an investor conference last month.
“With the low yield curve, there was a lot of debt issuance, and that debt issuance was used to pay down some bank lending,” he said. In addition, “there was some more uncertainty that entered the market because of some of the slowdown in the perceived timing of tax policy and trade policy and regulation,” slowing companies’ capital expenditures.
‘Mental Signal’
Corporate executives’ outlook for the next six to 12 months deteriorated in July and August, with some respondents citing heightened policy uncertainty, the Federal Reserve Bank of Chicago said last month. The number of workers on U.S. payrolls declined in September for the first time since 2010, reflecting major disruptions from hurricanes Harvey and Irma.
For now, bank investors are willing to look beyond that. The 24-company KBW Bank Index surged more than 30 percent from the November election to early March on optimism that Trump’s administration will eventually ease bank regulation, reignite inflation and drive up interest rates. The rally resumed in September as attention shifted to taxes.
“People were underweight financials for a long time,” said Chris Whalen, an independent analyst and consultant. “When Trump got elected that was a mental signal for these guys that we should increase our allocation.”
Investors continue to see reasons for optimism. Trump’s plan to cut corporate tax rates would be particularly beneficial for banks, whose burdens are often elevated by a lack of deductions. The six largest U.S. banks could see net income rise $6.4 billion under the administration’s proposal. And lenders still produce big profits. JPMorgan generated $26.5 billion in the 12 months through June, a record for any U.S. bank.
Mortgage, Autos
Yet expectations for the third quarter are measured. JPMorgan, the nation’s largest bank, may say Oct. 12 that adjusted profit rose 2 percent to $5.89 billion, according to analysts surveyed by Bloomberg. At Citigroup Inc., set to report the same day, profit probably slipped 1 percent to $3.57 billion.
Wells Fargo & Co. and Bank of America report the following day and Goldman Sachs Group Inc. and Morgan Stanley release earnings next week.
There are other reasons for concern. While consumers are still borrowing more, there’s mounting evidence they’re becoming less reliable, potentially ending a period in which losses were low. Credit cards face heightened competition, while an overheated auto market has led some lenders like Wells Fargo to pull back.
And for mortgage lending, a big driver for banks in the run-up to the 2008 financial crisis, new rules have made it more difficult to make money. Survivors have been buying loans from smaller “correspondent” lenders, a strategy that’s started to run out of room.
“You will see some pain this quarter,” Whalen said. “JPMorgan and Wells Fargo have been bidding aggressively.”
Trading Declines
Trading also is expected to be down, in part because the lack of congressional action has left clients with few reasons to buy or sell. Executives from JPMorgan, Citigroup and Bank of America told investors last month to expect declines ranging from 15 percent to 20 percent in the third quarter from the same period a year ago.
That may leave investors and analysts looking past this quarter’s results to the end of the year, when lawmakers may have more progress to show on tax policy and other priorities.
“Banks tend to be more optimistic looking out than they are in the current quarter, so we’ll see,” Barclays’s Goldberg said. “Pipelines are good. At the end of the day though, loan growth is a reflection of the economy and economic growth has been a little bit more subdued than desired.”
December 9, 2017
The Strange Case of the Look-Alike Credit Cards
by MeDaryl • Cars • Tags: A CAPITAL, Advertising, Banking, business, businessweek, california, CAPITAL ONE FINANCIAL CORP, Credit Cards, Debt, EXPERIAN PLC, Federal Reserve, Las Vegas, markets
First National Bank of Marin was a small Las Vegas lender with an image problem. Federal investigators accused it of issuing credit cards to strapped consumers, then piling on so many fees and obligations that some new clients couldn’t buy a sandwich without hitting their credit limit. But by 2006, it had settled the claims and was ready to expand. It changed its name to Credit One Bank and adopted a new logo, placing the company’s signature swoosh above its name, arcing leftward from the letter O.
If that looks familiar, there’s a good reason. In 2008, credit-card titan Capital One Financial Corp. unveiled an almost identical insignia, adding a swoosh that arced leftward from the letter O.
And so began the improbable story of how one of the top U.S. card lenders—admired in the industry for its innovative marketing—gave an accidental advertising boost to a then-obscure rival. That company would soon take off, reshaping the competitive landscape for subprime lending to U.S. consumers.
To outsiders, it looked like a classic branding trick: an underdog trying to mimic the look of an established company, hoping new customers wouldn’t notice. Except Credit One had adopted the logo first. “We had already invested heavily in the rebranding, and then their thing popped up,” says Sam Dommer, Credit One’s longtime chief marketing officer. “It would have been easier for them to change, but I think they were far down the road with their investment.” A Capital One spokesman declined to comment.
As the twin logos first emerged, lawyers on both sides bristled, according to people with knowledge of the situation. The companies let it be. In the years that followed, Capital One poured more than $13 billion into marketing, flooding televisions with its quirky “What’s in Your Wallet?” commercials, sponsoring music festivals and athletics, and stuffing mailboxes with enticements. Its business soared. And so did Credit One’s.
Nowadays, if you tarnish your FICO score and need an all-purpose credit card, chances are good that you’ll sign up with one of those two companies. By the end of last year, Capital One had issued more than 32 million cards to consumers with FICO scores below 660, according to data from the Nilson Report, an industry publication, and Capital One filings. Credit One, which largely caters to subprime borrowers, has issued 9.7 million, according to Nilson.
Subprime is such a big part of American lending that even among all types of issuers of Visa- and Mastercard-branded cards, Credit One now ranks ninth—up from 25th place in 2005. This year, J.D. Power and Associates decided the company is big enough to include in an annual customer-satisfaction ranking for the industry. It came in last.
Credit One attributes its growth to a data-driven approach to identifying and luring new customers. It also helped that many banks pulled back from subprime lending after the 2008 financial crisis, opening the way for a more aggressive pitch to win market share. So how important was a mere logo? Marketing consultants say the Vegas company hit the jackpot.
“Capital One has spent years building up a very powerful brand image behind that identity,” says Allen Adamson, founder of Brand Simple Consulting. “I suspect a majority of their customers are unclear that they’re not one and the same company.” The similar looks sometimes befuddle consumers, who vent online about mix-ups. “I called Capital One and they told me I didn’t have an account with them and to look at the card,” one person wrote on consumeraffairs.com, a consumer complaint website where dozens of Credit One users have said they thought they were signing up with the bigger lender.
Credit One is taking some steps to differentiate itself. Last year, it unveiled the Credit One Nascar credit card—its first nationwide co-branding deal. In November, it became the main sponsor for driver Kyle Larson, one of the sport’s rising young stars. The company is also moving out of its longtime home, a low-profile building tucked between Las Vegas’s main airport and Interstate 215. This month, it’s opening a new 152,000-square-foot headquarters eight miles to the west, with sweeping views of the Red Rock Canyon mountains. The new offices take cues from Silicon Valley, with conference tables resembling ping pong tables.
The building also will house the company’s data center, one of the largest in the Southwest. Credit One says it pores over information on its cardholders and their transactions to identify new groups of people likely to respond to its ads and pay their bills. Several times a week, it applies those models to Experian Plc’s database of 220 million U.S. consumers, scoring potential customers. Then the mailers go out. “When we engage in a direct-mail campaign or any kind of marketing initiative, we’re not crossing our fingers, hoping it works,” Dommer says. “All these are based on statistical certainties.”
Last year, Credit One’s outstanding credit-card loans jumped 29 percent to $4.8 billion, making it the fastest-growing card provider among the nation’s 15 largest, according to the Nilson Report. Because the company is privately owned, it isn’t required to report how much it earns, and regulatory documents provide only a partial picture. A filing to the Federal Reserve, for example, shows it generated $427 million in income from fees including servicing and credit-protection charges during this year’s first nine months. It is hard to compare this with what the company earns on interest: The form lists only $1.2 million in interest income because the firm holds many loans outside its banking unit. A spokeswoman did not elaborate.
Credit One is owned by Sherman Financial Group, which also runs one of the largest consumer-debt buyers in the country. When Credit One borrowers don’t pay their balances, the company sells those obligations at discounted prices to Sherman and other debt collectors.
The company has a history of getting into trouble over fees. Once owned by car dealer Kjell Qvale, Bank of Marin moved from California to Vegas in the late 1990s. In 2001, to settle an investigation by the U.S. Office of the Comptroller of the Currency, the company promised to set aside $4 million to repay customers who cancelled their cards after realizing fees and a security deposit would leave them with little or no credit to make purchases. In 2004, it agreed to set aside $10 million for allegedly encouraging people to charge security deposits to new cards, leaving some with less than $3 in available credit. In both cases, the bank didn't admit wrongdoing.
Consumers still hate the lender’s fees, often citing them in forums. Others grumble about waiting on hold, only to reach customer-service agents who aren’t prepared to help resolve issues. While fees can vary among cards, one of the company’s Platinum Visa cards comes with an annual membership fee of $75 for the first year, billed upfront, even on cards that come with credit limits of a couple hundred dollars. On some cards, the company offers no grace period, meaning that as soon as a purchase posts to a cardholder’s account, it begins accruing interest.
Jim Miller, senior director of the banking practice at J.D. Power, says Credit One’s poor showing in this year’s survey wasn’t a surprise, given that it works with people at the bottom of the credit spectrum. He says lenders in that market charge heftier fees and rates to offset potential losses. “Customers are less satisfied when they pay interest and don’t accrue much in rewards,” no matter who the issuer is, Miller says. “So if you have more of those customers in your portfolio, you would tend to have lower satisfaction.” And the fees and rates that Credit One charges aren’t “really unusual in the subprime category for an unsecured card,” says Beverly Harzog, a consumer advocate who’s written a book on paying off credit-card balances. “This is pretty much what you need to expect.”
Dommer says Credit One’s own surveys show it has above-average net-promoter scores—a measure of how willing clients are to recommend its products to other people. The company also points to reviews of its mobile app, which outrank those of American Express Co., the leader of this year’s J.D. Power rankings. Credit One is dedicated to improving, Dommer says. Whenever clients point out a problem, managers take note, meet, and figure out how to prevent it from happening again. “Your card-member relationship is everything,” he says. “And if we screw that up, then we’re in big trouble.”
Read more: http://www.bloomberg.com/news/articles/2017-12-05/the-strange-case-of-the-look-alike-credit-cards