FT : US banks warn bonuses will not keep pace with profits

US banks warn bonuses will not keep pace with profits
Citigroup, JPMorgan Chase and Bank of America wary of big payouts after booking loan loss charges

Citigroup, JPMorgan Chase and Bank of America have warned staff their bonuses will not keep pace with blowout performances in areas such as fixed-income trading and debt and equity underwriting, setting the scene for a record gap between payouts and profits.

Senior investment bank executives at two of the banks told the Financial Times they were trying to “manage expectations” for 2020 bonuses by reminding staff that the wider businesses have booked huge loan loss charges to prepare for a surge in defaults as the pandemic ravages global economies.

At the third, a senior executive said the bonuses were a “huge issue that we are grappling with”, as the bank tries to balance paying people for results with their need to be “good citizens”. This is in an environment where regulators and politicians have curbed shareholder payouts so they will have a cushion for potential loan losses.

Investment banks walk a delicate line on pay every year, as executives try to balance the expectations of some bankers and traders with investors’ demands for cost control and public outrage about millionaire bankers getting richer.

Still, the challenges are greater than usual this year.

“This is the first time since the financial crisis that we’ve had such a dramatic difference between parts of the big banks,” said Alan Johnson, founder of New York-based pay consultancy Johnson & Associates, referring to the gulf in the performance of the banks’ retail business and their advisory and trading divisions.

The group-wide profits of Citigroup, JPMorgan and Bank of America were weighed down by a combined $48bn of loan loss charges in the first nine months of the year, more than three times as much as they set aside for souring loans in the first nine months of 2019.

At the same time, the three banks enjoyed big increases in revenues from parts of their investment banks. These included a 54 per cent rise in fixed-income revenues at JPMorgan Chase and a 42 per cent surge in fixed-income revenues at Citigroup. Equity underwriting and debt underwriting also enjoyed strong gains.

Mr Johnson said issues around pay would be less contentious at Morgan Stanley and Goldman Sachs since they did not have the same exposure to coronavirus-related loan losses as the big lending banks. Morgan Stanley and Goldman have collectively taken just $3.5bn in loan loss charges this year.

A person familiar with JPMorgan’s approach said that the firm would remain “highly competitive” on pay, but that it would be “foolish, short-term, non-disciplined thinking to pay oversized payouts when medium to longer-term expectations (about the broader economy) are still unclear”.

JPMorgan chief executive Jamie Dimon last week warned that his bank could be over-provisioned by $10bn if “better outcomes happened” or under-provisioned by $20bn if the US hit a double-dip recession.

At Citigroup, one executive said that bonus pools could be down in some areas where profits were up, but that the bank was conscious of not being out of step with peers. At Bank of America, an executive said final decisions on pay would not be made until later in the year, but that the bank had started “softening people up” for lower bonuses.

“It’s smart to message that (lower bonuses) now . . . If your income is up 50 per cent, probably bonuses will be up 25 per cent,” he said, adding that bonuses would probably be significantly up in fixed income, up by less in equities, and down in M&A, where fees are running below last year’s after deals dried up in the early months of the pandemic.

An executive at Goldman said the bank would pay for performance, as it did every year. An executive at Morgan Stanley said those who did well would be paid, but that the bank would differentiate between people who added value and those who enjoyed big rises in their revenues because of favourable markets. The Federal Reserve’s significant bond purchases led to a fee bonanza across Wall Street in some areas of fixed income.

European investment banks including Credit Suisse and Barclays are debating the same issues, with executives wary about signing off on larger bonus pools while there remains no guarantee regulators will allow them to restart shareholder payouts next year, people familiar with their thinking said.

“Seems simple to me, bonuses will be poor,” said one managing director in London. “If banks can’t pay dividends then big bonuses will be tough or impossible.”

Mr Johnson at Johnson & Associates said that while the “very best” who were unhappy with their packages could “absolutely” move to another bank or hedge fund, the “good and the average” would have few options in the current environment. The five banks declined to comment.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Most respondents in Barron’s Big Money Poll are bullish on US stocks for the next 12 months, with only a small percentage bearish.

* Cover Story: In Barron’s latest Big Money Poll, 54 percent of respondents said they’re bullish on the prospects for US stocks during the next 12 months, roughly a third describe themselves as neutral, and the remaining 13 percent are bearish; Few Big Money managers would venture to call stocks undervalued—about 44 percent see the US market as overvalued, while 50 percent consider valuations fair; Bullish money managers expect the Dow Jones Industrial Average to end the year about even with its current level, at 28,433, and by mid-2021, they see it topping 30,000.

* Tech Trader: Handset makers and wireless carriers are betting billions of dollars that new 5G networks and phones that can take advantage of them will reinvigorate smartphone demand, but the hype is thick, and the situation demands a reality check; AAPL’s recently announced iPhone 12 models, the first of its 5G-enabled handsets, should sell well—analysts say there are lots of old models out there, and that the pandemic pushed replacement cycles well beyond four years.

* Trader: Wolfe Research strategist Chris Senyek says the market is too optimistic about everything from Covid-19 trends, economic data, and what a Biden win would mean, while monetary policy continues to favor growth and momentum stocks—his “renormalization” basket includes DIS, WYNN, and MTN.

* Interview: Steve Milunovich, who recently retired after many years at Wolfe Research, shares his views on technology—he says the current ability to generate free cash flow is a difference between today and the tech bubble, that Covid-19 has been a real accelerant to digital transformation, and that perhaps the most important thing in the last five to 10 years is the rise of the platform company.

* Profile: London-based Suzanne Hutchins, manager of the BNY Mellon Global Real Return fund, which can invest worldwide in stocks, bonds, commodities, and precious metals without weighting constraints; It can also hedge, typically buying put options in indexes such as the S&P 500 or the Euro Stoxx 50 to limit the downside (top 10 holdings: GRR Commodity Fund, LIN, S&P 500 Call Option, MSFT, AIA Group, Vivendi, MA, DEO, ES, BCS).

* Features: 1) Electric vehicles and special purpose acquisition companies have generated a large amount of hype this year, with shares of NKLA and HYLN soaring after they announced since-closed mergers with SPACs—but a host of problems should be a warning that investors need to handle the next round of EV-SPAC deals with caution; 2) Cautious on BAC, C, JPM: The banks’ third-quarter earnings largely surprised to the upside as robust trading activity helped offset lower net-income margins, and profits weren’t crimped by having to add billions to reserves to protect against bad loans—yet their stocks have lost ground because of a number of investor concerns; 3) Preferred stocks have enjoyed a strong rally since the market lows in March, reducing opportunities in the $350B sector, but investors can still find yields of four to eight percent on preferred shares and related securities from companies such as GE, WFC, COF, and Qurate Retail.

* European Trader: Positive on Bunzl: The London-based company has had a busy year transporting disposable gloves and masks to businesses seeking protection against coronavirus, with shares increasing by nearly 48 percent over the past six months—and they could have further to rise despite lower demand from retail and leisure customers hurt by the lockdown.

* Emerging Markets: Chinese stocks rallied in parallel with US equities through the spring, but since July they have pulled away, and while past China bull runs in 2015 and 2017 ended badly, the country’s economy and market governance may have outgrown the vulnerabilities that drove those crashes.

* Commodities: “The oil market has been preoccupied for months with concerns surrounding weaker demand driven by Covid-19 economic restrictions, but the presidential election has started to take center stage as traders weigh election-win scenarios and the potential outcomes for the energy sector.”

* Streetwise: “The long-awaited AAPL iPhone supercycle is here, but it’s no slamdunkercycle, judging by the disagreement among Wall Street forecasters,” says columnist Jack Hough, who adds that while the 5G-enabled iPhone 12 models are supposed to entice people to upgrade, there are two problems: The networks are mostly unprepared, and many of the users are stuck at home, on Wi-Fi.

>>> Forbes reports that Pres Trump's debt is over $1B, more than twice the amoun

Forbes reports that Pres Trump's debt is over $1B, more than twice the amount he admitted to during town hall this week

- Documents show Trump has loans from Deutsche Bank and at least 6 other financial institutions, though some of his loans are not fully transparent: "It’s still unclear to whom he owes an estimated $162 million against his skyscraper in San Francisco, for example."
- One of Trump's larger creditors appears to be Ladder Capital an internally-managed commercial real estate investment trust with over $6B of assets, specializing in underwriting commercial real estate
- Forbes estimates Trump's assets at $3.66B, making his net worth estimate $2.5B

>>> EuroFins : Viracor Eurofins Clinical Diagnostics Receives US FDA Emergency U

Viracor Eurofins Clinical Diagnostics Receives US FDA Emergency Use Authorization (EUA) for Viracor SARS-CoV-2 assay (originally issued 4/6/20)

Device: Viracor SARS-CoV-2 assay Company: Viracor Eurofins Clinical Diagnostics

Indication: This test is authorized for the following indications for use: Qualitative detection of SARS-CoV-2 viral ribonucleic acid (RNA) in nasopharyngeal swab, nasal swab, nasopharyngeal wash, nasal wash, oropharyngeal swab and bronchoalveolar lavage from individuals suspected of COVID-19 by their healthcare provider (HCP). This test is also authorized for use with the EmpowerDX At-Home COVID-19 PCR Test Kit for individuals to self-collect nasal swabs at home, when determined by a HCP to be appropriate based on the results of an online COVID-19 questionnaire. Qualitative detection of nucleic acid from the SARS-CoV-2 in pooled samples containing up to five individual nasopharyngeal swab specimens that are collected by a HCP using individual vials containing transport media, from individuals suspected of COVID19 by their HCP. Testing is limited to Viracor Eurofins Clinical Diagnostics, located at 1001 NW Technology Dr., Lee’s Summit, MO which is certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA), 42 U.S.C. § 263a, and meets the requirements to perform high complexity tests.

FT : PwC to quit as auditor to Boohoo on reputation concerns

PwC to quit as auditor to Boohoo on reputation concerns
Break with controversial client follows similar Deloitte move at EG

PwC is to resign as auditor of fashion retailer Boohoo on concerns about the risks of continuing to work for the online group, which is under scrutiny for suppliers paying workers below the minimum wage.

Two people familiar with the matter said PwC, auditor since before the company went public in 2014, had signalled its intention to resign within the last month.

Manchester-based Boohoo has been accused in recent weeks of tolerating widespread abuses of employment law in its UK supply chain.

A review by Alison Levitt, a senior lawyer, found that although the company did not profit from the abuses, it certainly knew about them and had not acted quickly enough.

Boohoo’s oversight of its supply chain had been “inadequate for many years” and its internal processes were “well below the standard which would be expected of a company of its size and status”, she said.

Several aspects of the company’s wider governance have also raised eyebrows. Earlier this year it acquired the remaining one-third of fashion brand Pretty Little Thing from Umar Kamani, the son of Boohoo co-founder and executive chairman Mahmud Kamani. It said the transaction did not require shareholder approval under rules on Aim where it is listed.

Executive pay has also caused controversy, with a third of shareholders opposing the remuneration report at the company’s last annual meeting. One incentive scheme could result in Boohoo chief executive John Lyttle being handed £50m if the market value reaches £5.6bn by 2023; it is currently valued at just under £4bn.

Another plan — also predicated solely on share price performance — could generate payouts of £150m for other executives including Mr Kamani, finance director Neil Catto and Carol Kane, the other co-founder.

Boohoo said that “a process has recently commenced to tender for a new provider of audit services”. PwC declined to comment.

Big Four accounting firms have been actively reviewing potentially controversial clients in recent years. Last year, Grant Thornton resigned as auditor to Sports Direct — now called Frasers Group — after the company revealed immediately before the release of annual results that it was under investigation by the Belgian tax authority.

Earlier this week Deloitte resigned as auditor at EG Group, the petrol station empire built up by Lancashire brothers Mohsin and Zuber Issa, because of concerns that its internal controls had not developed in line with increasing revenues and complexity.

That revelation came just as the brothers, along with private equity group TDR, were confirmed as the buyers of a majority stake in Asda, the UK’s third-largest supermarket.

FT : Europe’s second wave raises threat of double-dip recession

Europe’s second wave raises threat of double-dip recession
Economists warn that rising infections and new lockdown measures could stymie recovery

Europe’s economy is sliding towards a double-dip recession, with economists warning that rising coronavirus infections and fresh government restrictions on people’s movement are likely to cut short the region’s recent recovery.

Germany, France, the UK, Italy, Spain and the Netherlands have all announced measures in the past week to contain the second wave of Covid-19 infections. On Saturday, a night time curfew was introduced for Paris and a number of other French cities, while the Italian government is expected to announce new curbs on Sunday.

A number of European countries reported record new daily infection figures over the weekend.

“I can’t believe how fast the second wave has hit,” said Katharina Utermöhl, senior economist at Allianz. “We now see growth turning negative in several countries in the fourth quarter — another recession is absolutely possible.”


While third-quarter figures are expected to show record growth in eurozone gross domestic product when they are published at the end of this month, a rising number of economists are already cutting their fourth-quarter forecasts into negative territory.

“The shape of the virus resurgence and ensuing business lockdowns and confidence shocks make a double-dip recession the central scenario,” said Lena Komileva, chief economist at G+ Economics, adding that Brexit disruption would “further amplify” the economic downturn.

These predictions that the eurozone economy will slide back into recession — albeit a much shallower one than earlier this year — are bad news for the European Central Bank, which only last month forecast fourth-quarter growth of over 3 per cent. Another setback would imperil the ECB’s belief that the eurozone economy will return to its pre-pandemic size by 2022.

Klaas Knot, the Dutch central bank governor and ECB governing council member, said last week: “Many countries are now experiencing a second wave of infections . . . this means recovery now seems further away than we had hoped for. And the economic impact is deepening.”

Most analysts expect the ECB to react to a flagging economy that recently slid into deflation by adding an extra €500bn to its emergency bond-buying programme in December. 

In a further sign that more monetary easing is likely, Robert Holzmann, the normally conservative head of the Austrian central bank and ECB council member, said: “More durable, extensive or strict containment measures will likely require more monetary and fiscal accommodation in the short run.”

The EU’s planned €750bn recovery fund is still being debated and so is unlikely to start distributing money for almost a year. In the meantime, national governments “need to bridge the gap”, said Nadia Gharbi, economist at Pictet Wealth Management.


Political leaders still hope to avoid the kind of strict lockdowns that caused a record postwar recession in the second quarter. “Politicians have learnt their lessons from the first wave,” said Jörg Krämer, chief economist at German lender Commerzbank. “A second undifferentiated lockdown is not to be expected because of the immense economic costs.”

Yet with daily infection levels in many countries rising above the previous peak of the pandemic in March and April and hospital beds filling up again, governments may have little choice but to tighten restrictions even further.

Even without full-scale lockdowns, economists say the mere fact that the coronavirus infection rate is shooting up is likely to hit consumer activity, prompting more people to stay home and spend less money — just as they did when the pandemic first hit. 

“If people get scared and stay at home, then precautionary savings will go up again and that could push us into another negative quarter of GDP,” said Erik Nielsen, chief economist at UniCredit. “With these types of shocks it hardly takes anything to push us into negative territory.”

A recent FT analysis of Google community mobile data found that after rising for months, footfall in cafés, restaurants, retail and leisure venues started in early October to decline again in many European cities, including Paris, London, Amsterdam, Berlin and Madrid.

Central bankers are watching this high-frequency data closely for signs of how the second wave of infections is affecting the economy. “Demand effects are dominating at the moment, and labour-intensive service sectors are being very badly affected,” said an ECB governing council member. “A double-dip is possible.”

That spells trouble for countries like France, Spain and Portugal, which have large service sectors requiring a high level of social interaction — such as tourism and leisure. Allianz last week slashed its Spanish and French economic forecasts, predicting that instead of growth they would contract by 1.3 per cent and 1.1 per cent in the fourth quarter, respectively. 

Some weakness was already evident in last month’s IHS Markit survey of purchasing managers, which found for the first time since May that a majority of eurozone services businesses were reporting a sharp drop in activity from the previous month. 

On a brighter note, the same survey found activity had improved in the manufacturing sector — boosted by a rebound in global trade, particularly in exports to China. In another upbeat sign, German factory orders outstripped expectations by rising 4.5 per cent in August. 

Carsten Brzeski, chief eurozone economist at ING, said some German manufacturing companies were privately boasting they expected to have “the best quarter for some time” in the final three months of this year. “This could just be enough to avoid a double-dip,” he said.

>>> US Close Dow +0.39% S&P +0.01% Nasdaq -0.36% Russell -0.31%

Closing Stock Market Summary

The S&P 500 (+0.01%) finished little changed on Friday after being up as much as 0.9% early in the day. The Dow Jones Industrial Average outperformed with a 0.4% gain, while the Nasdaq Composite (-0.4%) and Russell 2000 (-0.3%) slipped into negative territory as selling picked up into the close on no specific news. 

The strong start was mainly attributed to news that Pfizer (PFE 37.96, +1.41, +3.9%) may file for emergency use authorization for its COVID-19 vaccine by the end of November, and retail sales increasing 1.9% m/m in September (Briefing.com consensus +0.6%). The retail sales data had overshadowed an unexpected 0.6% decline in industrial production for September (Briefing.com consensus +0.6%). 

Fittingly, the health care sector (+1.0%) was among today's sector leaders, right behind utilities (+1.1%). The consumer discretionary sector (-1.0%), however, really took a hit during the last hour of trading amid broad-based selling, joining the information technology (-0.3%) and real estate (-0.4%) sectors in the red. 

The energy sector (-2.3%) and Dow Jones Transportation Average (-1.3%) were consistent laggards today amid disappointing reactions to mixed earnings reports from Schlumberger (SLB 14.97, -1.45, -8.8%), J.B. Hunt Transport (JBHT 128.04, -13.80, -9.7%), and Kansas City Southern (KSU 179.01, -5.00, -2.7%). 

The weakness in the transportation space was mitigated in the industrials sector (+0.7%) by nice gains in Boeing (BA 167.35, +3.11, +1.9%) and Caterpillar (CAT 168.75, +3.71, +2.3%). Boeing's 737 MAX was deemed safe to fly by EU regulators, and CAT was upgraded to Overweight from Equal Weight at Wells Fargo.

Evidently, the session was mixed with conflicting trading narratives that made it hard to identify a clear theme. It was a stock picker's kind of day and certainly one for options traders amid monthly options expiration activity. 

U.S. Treasuries finished the session on a lower note. The 2-yr yield increased two basis points to 0.15%, and the 10-yr yield increased one basis point to 0.74%. The U.S. Dollar Index declined 0.2% to 93.71. WTI crude futures declined 0.3%, or $0.11, to $40.85/bbl. 

Reviewing Friday's economic data, which featured Retail Sales for September:

  • Total retail sales increased 1.9% m/m in September (Briefing.com consensus +0.6%). Excluding autos, retail sales were up 1.5% m/m (Briefing.com consensus +0.3%). On a yr/yr basis, total retail sales were up 5.4%. Excluding autos, they were up 4.0%.
    • The key takeaway from the report is that the sales gains were broad based and driven by increases in discretionary categories, which will validate expectations for a huge rebound in GDP growth in the third quarter.
  • Industrial production declined 0.6% m/m in September, which was well below expectations (consensus +0.6%). Total capacity utilization of 71.5% also disappointed (consensus 71.9%).
    • The key takeaway from the report is that it defied the rebound momentum that had been building in the third quarter. It was the first decline in five months, but despite the September decline, industrial production increased at an annual rate of 39.8% for the third quarter.
  • The preliminary University of Michigan's Index of Consumer Sentiment for October checked in at 81.2 (consensus 82.0). That was a bit weaker than expected, but an improvement from the final September reading of 80.4.
    • The key takeaway from the report is that concerns about current conditions, which were linked to slowing employment growth, a pickup in COVID-19 infections, and the lack of additional stimulus, were offset mostly by an improvement in attitudes about prospects for the year ahead.
  • The Treasury Budget showed a $200.1 bln deficit in August. The budget data is not seasonally adjusted, so the August deficit cannot be compared to the July deficit of $63.0 bln. The deficit in August 2019 was $200.3 bln.
    • The key takeaway from the report is that while outlays and receipts showed little yr/yr change in August, the year-to-date deficit climbed above $3 trillion.
  • Business inventories increased 0.1% in August (consensus 0.4%) following a 0.1% increase in July.

Looking ahead, investors will receive the NAHB Housing Market Index for October on Monday.

  • Nasdaq Composite +30.1% YTD
  • S&P 500 +7.8% YTD
  • Dow Jones Industrial Average +0.2% YTD
  • Russell 2000 -2.1% YTD