Reuters Insider - Trading at Noon: Dow, S&P 500 hit fresh highs
15/07/2016 07:08
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Description: Strong earnings from JP Morgan help push stocks to
fresh highs.
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JPMorgan kicking off bank earnings this morning. Here to break down that report,
Antony Currie of Reuters Breakingviews. Antony, thanks so much for coming on and
talking to me today. My pleasure. The stock up better than 2%. Yeah. What do you
make of the numbers? Well, I think the numbers are just fine considering what
was expected, right? So they- the bank beat earnings estimates by a pretty handy
$0.12- I think $1.55 a share they reported. They've got a few one-offs in there
that taxes were quite high, but then they- actually, would you believe this? A
financial institution actually got a benefit from legal cost. They actually made
money on legal costs- got money back, which is just unheard of, right? Right.
And you say: "This is not- what is going to happen?" Those two basically at war.
It's just a couple of things in there. But basically, what's reported is some
pretty good numbers based on what we were expecting. And actually if you look at
some of the business lines, you're looking at some really, really good numbers.
So fixed income trading, which is a real problem for the industry in the first
quarter - actually, it hasn't been great for the past few years - that was up
over a third from the same period last year, and even higher than the first
quarter, which is normally the best quarter of the year. So that was great, and
it would be great for some of the other investment banks. You'd think especially
Goldman Sachs, which is more heavily exposed to fixed income than the mega banks
like Citi and JPMorgan, whichever the business is. And the other thing that
reached it out was that loans were up- core loans are up 16% compared to the
same period last year. When you look at those two things, along with the fact
that JPMorgan also continues to cut costs, even if you forget about this
wonderful boost from legal, you'd think this is great- this got to be great for
everyone, but return on equity- 10%. Now, I've probably bored the hell out of
you guys with this beforehand. 10% is roughly where you start as a big bank
covering your cost of capital. So JPMorgan is basically breaking even. So in
that sense, it ain't great. But that's really a problem for the industry, and
JPMorgan is well-ahead of many others on that. Now, you touched on fixed income
there being a bright spot- got a little boost from Brexit? Yeah, a little bit.
Actually, JPMorgan was saying that we've got a nice big boost. I think- I forget
what I said the numbers were. I think 30%- I think I actually saw it in a
mid-20%s increase year-on-year. At the beginning of June, Marianne Lake, the
CFO, said at conference: "We're probably looking at a mid- teens increase." So I
was thinking- others were thinking this has got to be Brexit, right? And she
said this morning: "Actually, most of it came from clients being more active
than we thought than run up to Brexit." And then, yes, Brexit- high volatility,
high volume- it helped a bit but not as much as you might think given the
disparity from what she said earlier in the month.
On the topic of Brexit- any comments on plans to make adjustments to its
business in London? Not yet. They've been pretty good about this in the past,
saying: "Look, who knows, we may have to move stuff." And Jamie Dimon came on
with a terrible, terrible voice. He doesn't sound particularly well- I mean,
purely in a- having a cold or sense, nothing worse, like he had beforehand. And
he was saying: "Look, we're looking at years here before this get sorted out."
And if you looking at what's happening with the new government under Theresa
May, her new Chancellor of the Exchequer - or the Head of the Treasury as you
call it over here - is saying basically: "We might need- not even have Brexit
until 2022." So, I mean, it might happen quicker than that; it might not happen,
but who knows. But at the moment, banks are basically saying: "We don't know
what's happening. We've got plans in place. We may have to move people. But
right now, it's not up to us. It's up to the politicians." Now, as I mentioned,
the stock up more than 2%. Other big banks - Citi, Wells,
Morgan Stanley, Goldman Sachs - all moving higher today and helping to boost
markets. Citi and Wells out tomorrow. What can we expect there? Well, I think as
long as they track what JPMorgan's doing, people feel relatively comfortable.
Don't forget that most banks do have to think, okay, longer term. We've got this
problem with not covering our cost of capital, so we should look at more
technology, cutting more costs- even though many of them are now quite
efficient, below 60% efficiency ratio- that being 60% of what you earn you spent
on keeping the business going. A lot of them are down below that now.
So JPMorgan is 56%, Citi is in the mid-50%s as well- so you want to see a bit
more traction on loans as well. But really, the big thing for these guys longer
term is you got to cut cost and technology will probably help. The interesting
thing on Wells I think is, is it going to continue with its return on equity
dropping slightly? Now, it's got sort of 13%-nish return on equity- so a lot
better than most of the others. But that has been gradually dropping over the
past few quarters. And if they can show that they've stemmed that somewhat, I
think banks will be a lot more- or investments will be a lot more keen to invest
in them and other banks. If you look at the disparity since the turn of the
banks when they hit their bottom in February, when Dimon said: "I'm going to buy
shares in JPMorgan," banks shot up. JPMorgan's up 20% or so since then. Wells
Fargo is only up 7% or so. So investors are concerned I think that it's not
doing quite as well to stem this relative drop. Although, its course still with
that return on equity at 13%-ish- one of the best ones in the industry. And of
course, the lingering concern for the banks' low interest rates- Forever- yeah,
I mean, this is just an ongoing issue, which is why a 16% boost in core loans at
JPMorgan doesn't actually translate into great deal of extra revenue because
they might still be making money for you but at 25 basis points interest rates
at the Fed, you ain't making a lot of money. And who knows when we'll see the
next rate hike here in the US. Anyone's guess.
Antony Currie, thanks so much for coming and talking to us. My pleasure. I'm
sure we'll hear from you in the coming days. Let's move on and take a check of
the markets, because strength in financials helping to push the Dow and the S&P
500 to far highs today- all three indexes up roughly 0.5% this hour. Now, that
is despite a surprise from the Bank of England. The central bank cut rates
unchanged but investors were hoping to see the first cut in more than seven
years. The BoE though did signal however that there will be a stimulus program
in August. And before we move on, let's check in on oil prices because they are
rebounding today, rising better than 2%, after a bearish US inventory data,
increased concerns about a global glut. And we do have some stocks on the move
this hour. First up, Yum! Brands, the owner of KFC and Pizza Hut, shares up 3%
this hour. That is after the company said its business in China was gaining
strength after a series of issues, including food safety scares. We've heard a
lot about that. The second quarter sales in the region met Wall Street estimates
and that helping to lay worries over the fundamentals of a business which Yum!
is looking to spin off in the fall.
And moving onto a high-profile tech IPO, with shares of Japanese message app
operator, Line, jumping almost 30% this hour. Take a look at that chart there.
Shares climbed as much as 36% in their debut on the New York Stock Exchange,
priced well-above the expected range at $32.84. Now, Line, which is the seventh
most used messenger app globally, said it would use the funds to expand outside
of Japan and Southeast Asia. Now, Line
will list its stock on the Tokyo Stock Exchange on Friday. And lastly, shares of
casino operator, Wynn Resorts moving lower, down by about 4%. That is after
JPMorgan downgraded the stock to 'neutral' from 'overweight'. JPMorgan also cut
its price target on that stock to $94 from $101. And that's it for Trading at
Noon on this Thursday. I'm Leah Duncan. This is Reuters