>>> JPMorgan Chase Earnings Preview

JPMorgan Chase Earnings Preview
J.P. Morgan (JPM) is set to report Q4 earnings tomorrow before the market opens with a conference call to follow at 8:30am ET. JPM is expected to report earnings at approx 7am although the results have tended to slip out before schedule. Current Capital IQ consensus stands at EPS of $1.69 on Revenue of $24.87 bln.
It will be an interesting round of reports for the banks. A strong global economy, lighter regulation, benign credit environment, and now favorable tax reform have all helped boost shares. That is not to say there are no headwinds for the group as trading revenue has remained under pressure. Also the tax reform, while a longer term benefit, will provide some noise to the headlines this quarter as adjustments to Deferred Tax Assets will have a negative impact on GAAP EPS as well as capital levels. Credit conditions have remained a non-event but, with an increase in credit, market participants continue to watch for any upticks in net charge offs as the pain of 2007-09 remains fresh despite being nearly a decade old.
Key Issues to watch
  • Trading Revenue- In early December at the Goldman Sachs Financial Services conference JPM said that it expected trading revenues in Q4 to be down approx 15% y/y. This was generally in line with the industry outlook. JPM said that Q4 was shaping up much like Q3 and Q2 and comps from a strong FY16 remain difficult.
  • Tax Reform- Naturally a hot topic for all companies this quarter and banks in particular. Banks racked up big losses during the financial crisis which allowed them to build high Deferred Tax Asset positions. When Congress passed the tax reform law it meant that these assets were valued at a lower rate. In addition, unremitted overseas earnings are also facing taxation. JPM has said that it expects a Q4 adjustment of 'as much as $2 bln' which is driven mainly by the overseas earnings. JPM's DTA is only $3.2 bln so the impact should be smaller than many of its peers. Over the long run though tax reform will benefit JPM which derives approximately 77% of its revenues domestically.
  • Net Interest Margin- The recent rally in the longer end of the curve has been beneficial for banks. The simple practice of borrowing short term and lending long term means that banks are more profitable when this spread steepens. The relationship between the 2 and 10 year yields is seeing a steepening over the past few days but it remained near multi-year lows for most of Q4. This may lead to some disappointment in NIM as investors continue to wait for rate hikes to work its way to bank sheet bottom lines. NIM was 2.37% in Q3 which was up 6 bps q/q.
  • Loan Growth- JPM forecast growth of approx 8% in Q4 which would be near the top for peers. Consumer lending has picked up with credit cards being the primary driver, replacing C&I loans which were viewed as expensive. This will be a key metric to watch in terms of JPM joining in on the global growth story.
  • Credit Conditions- As JPM has been expanding further into the credit card market it has been building its reserves to cover the balance sheet. In Q3, JPM had a provision for credit losses of $1.5 bln which was up $1.3 bln from the prior year driven primarily by reserves in credit cards. The Q2 provision was $1.2 bln. Total Reserves sit at $14.6 bln (Consumer $9.5 bln and Wholesale $5.1 bln). Net Charge Offs in Q3 were $1.21 bln or 1.10%, up 3 bps q/q.
  • Bitcoin- Just a side note as Jamie Dimon may certainly have an impact here. He has said in the past that he did not see any value in it and went so far as to say he would fire anyone who was trading it on the JPM desk. But he has recently stepped back from these comments saying he regrets calling bitcoin a fraud.
Outlook
  • Expect 2017 net interest income to be up ~$4B YoY, market dependent;
  • Expect 2017 adjusted expense to be ~$58B;
  • Expect 2017 net charge-offs to be ~$5B;
  • Expect 2017 average core loan growth to be ~8%.
Q3 Recap
  • Reported revenue of $25.3 billion; managed revenue of $26.2 billion;
  • Average core loans up 7% YoY and 2% QoQ;
  • RoE 11%; RoTCE 13%;
  • Common equity Tier 1 12.5%
  • Book value per share of $66.95, up 5%; tangible book value per share of $54.03, up 5%;
  • Net interest income was $13.1 billion, up 10%, primarily driven by the net impact of rising rates and loan growth, partially offset by declines in Markets net interest income;
  • Credit card sales volume and merchant processing volume each up 13%;
  • Banking revenue was $3.1 billion, up 5%. Investment Banking revenue was $1.7 billion, down 2%, driven by lower equity and debt underwriting fees, largely offset by higher advisory fees.
  • Fixed Income Markets revenue was down 27%, as lower revenue across all products was driven by sustained low volatility and tighter credit spreads, against a very strong prior year. Equity Markets revenue was down 4% compared to a strong prior year, reflecting lower revenue in derivatives predominantly offset by strength in Prime Services and Cash Equities.

>>> Wells Fargo Fourth Quarter Earnings Preview

Wells Fargo Fourth Quarter Earnings Preview (63.29 +0.17)
  • WFC is scheduled to report fourth quarter earnings tomorrow before the open. There is a conference call scheduled for 10:00 AM ET (the company typically does not provide EPS or revenue guidance).
  • Q4 Capital IQ consensus calls for EPS of $1.03 (versus $1.04 last quarter) on revenue of $22.64 billion (+3.2% QoQ).
  • Aside from banking peers, C, BAC, USB, PNC, names to watch in the homebuilder space include: HOV, SPF, RYL, BZH, LEN, PHM, TOL, KBH, MDC, DHI, TPH, MTH, MHO. Finally, MSR names include: WAC, OCN, NSM.
  • With 97% of its revenue coming from the U.S., WFC is viewed as a great read on the pulse of the American economy. Investors will be paying close attention to the banks mortgage business.
  • Following passage of the tax reform law, investors will be looking toward banks such as WFC for any potential financial impacts. Deferred Tax Assets will be impacted by the change in tax laws. Some banks are already providing guidance on the topic with losses ranging from $1.25-$16 billion. WFC did not yet report what its impacts will be.
  • A Deferred Tax Asset refers to a situation where a company has overpaid taxes or paid taxes in advance on its balance sheet. Eventually these taxes are returned to the company but when the tax rate is lowered the value of the DTA is reduced. The reason why the banks have such high DTAs dates to the financial crisis when the group experienced massive losses.
Key Points from Last Quarter
  • Net interest margin was 2.87 percent, down 3 basis points from second quarter 2017.
  • Net interest income in third quarter 2017 was $12.5 billion, in line with second quarter 2017.
  • Total average loans were $952.3 billion in the third quarter, down $4.5 billion from the second quarter. Period-end loan balances were $951.9 billion at September 30, 2017, down $5.6 billion from June 30, 2017.
  • Mortgage banking noninterest income was $1.0 billion, compared with $1.1 billion in second quarter 2017. Residential mortgage loan originations were $59 billion in the third quarter, up from $56 billion in the second quarter. The production margin on residential held-for-sale mortgage loan originations was 1.24 percent, consistent with the second quarter. Mortgage servicing income was $309 million in the third quarter, down from $400 million in the second quarter, primarily due to higher unreimbursed servicing costs.
  • The efficiency ratio was 65.5 percent in third quarter 2017, which included a 456 basis point impact from the $1 billion litigation accrual. At a December Goldman Conference,
  • WFC said that it expects efficiency initiatives will reduce expenses by $2 billion annually by year end 2018 and that those savings support our investment in the business.
  • Guidance: Co continues to expect decline QoQ in auto loans. Co sees continued decline in personal credit lines. Efficiency ratio was higher than expected due to higher cyber related expenses. Goal is to below 59% on efficiency ratio next year; Q4 efficiency ratio will most likely be in the +/- 61% range.
Analyst Notes
  • Barclays said the biggest driver of the 2018 EPS increase is a reduction in the corporate tax rate, in addition to continued federal fund rate hikes. Still, the firm's estimates reflect double-digit EPS growth at the median bank prior to tax reform and over 25% growth with it. They look for continued EPS growth into 2019, assuming the consensus economic and rate forecasts pan out. Based on their revised forecasts, the median bank stock under coverage shows potential upside approaching 20%, plus a dividend yield over 2%. C and JPM stand out, while GS could play some catch-up near-term given it has significantly lagged its peers lately.
Options Activity
  • Based on WFC options, the current implied volatility stands at ~ 21%, which is 9% higher than historical volatility (over the past 30 days). Based on the weekly WFC Jan12 $55.5 straddle, the options market is currently pricing in a move of ~2% in either direction by weekly expiration (Friday).
Technical Perspective
  • WFC shares have underperformed the S&P over the last 52 weeks with WFC rising by 14% vs 20% gain in the index. WFC tends to have 2-4% reactions to earnings. On a positive report, look for resistance near the $63.30-63.75 area, while support sits near the $62.00-62.25 vicinity.

WIWO : Prosecutor's office investigates against former BMW manager

Prosecutor's office investigates against former BMW manager

A former manager of BMW is in the focus of the Munich public prosecutor. There is the initial suspicion on "bribes in the millions range".

The prosecution Munich I investigates against a former manager of BMW and eight other defendants. The initial suspicion of bribery, corruption in business dealings, infidelity and tax evasion, confirmed the authority of WirtschaftsWoche.

The then executive from the development department was able to influence development jobs at BMW according to information from WirtschaftsWoche. According to investigators, the man is said to have demanded bribes for orders from BMW service providers for years. The prosecution confirmed "bribes in the millions range". According to an insider, the manager should have collected at least 4.2 million euros within eight years. The BMW manager is said to have cashed the money, according to the insider on bogus bills for alleged engineering services of his own company. The service providers should have paid without consideration, because the man should have given them for BMW orders.


The public prosecutor's office says that it initiated the case after summoning another authority in the summer of 2016 and has already searched it several times. BMW confirmed the WirtschaftsWoche a search in-house. In addition, BMW said that the car maker dismissed the affected employees at the end of 2017. In addition, BMW did not want to comment on the case due to ongoing investigations.

REuters - Saudi state taking control of Binladin construction giant - sources

Saudi state taking control of Binladin construction giant - sources

RIYADH/DUBAI (Reuters) - Saudi Arabia is taking managerial control of Saudi Binladin Group and discussing a possible transfer of some of the giant construction group’s assets to the state while its chairman and other family members are in detention, sources told Reuters.

Binladin, which had over 100,000 employees at its height, is the biggest builder in the country and important to Riyadh’s plans for large real estate, industrial and tourism projects to help diversify the economy beyond oil.

However, the group has been hurt financially in the past couple of years by a slump in the construction industry and a temporary exclusion from new state contracts after a crane accident killed 107 people at Mecca’s Grand Mosque in 2015. It was forced to lay off thousands of employees.

Riyadh’s move to take control appears aimed at ensuring the group can continue to serve Saudi Arabia’s development plans, said banking and industry sources, who declined to be named due to the political and commercial sensitivity of the matter.

The government detained scores of senior officials and businessmen in October as part of a sweeping crackdown on corruption. The Binladin group’s chairman Bakr Bin Laden and several family members have been held, the sources said.

Saudi officials are trying to negotiate settlements with detainees, saying they aim to claw back some $100 billion of funds that rightfully belong to the state. The talks on Binladin’s future are part of this effort, the sources said.

Since the detention of Bin Laden family members, the finance ministry has formed a five-member committee, including three government representatives, to oversee the group’s business and handle relations with suppliers and contractors, the sources said.

Binladin executives did not respond to phone calls seeking comment. Finance ministry officials and the government media office also did not respond to requests for comment.

SETTING A PRECEDENT?
Although ownership of Binladin currently remains with the family, the group is in negotiations with the government about the potential transfer of some assets to the state, or possibly reducing or eliminating the government’s outstanding debts to Binladin, the sources said.

One banking source with detailed knowledge of the group said the debt might total around $30 billion - the legacy of a period about 18 months ago when the government held off from settling many of its debts as its finances were hurt by low oil prices.

It is not clear whether the government’s handling of Binladin may set a precedent for the cases of other businessmen detained in the corruption purge.

They include one of the kingdom’s most prominent businessmen, Prince Alwaleed bin Talal, who is chairman and owner of global investment firm Kingdom Holding 4280.SE.

Because of Binladin’s strategic importance to the construction industry and development projects, as well as its financial struggle, it may be treated differently from the assets of other detained suspects.

The new management committee’s government representatives include Abdulrehman al-Harkan, a former chief executive of Saudi property company Dar Al Arkan, and Khaled Nahas, a board member of petrochemical producer Saudi Basic Industries Corp, the sources said. There are also two family members on the committee: Yehia Bin Laden and Abdullah Bin Laden.

Previously, the family was in total control of the group, with Bakr Bin Laden taking most decisions, the sources said.

Although Osama Bin Laden, the founder of al-Qaeda who was killed by U.S. forces in 2011, was part of the same family, the company did not have any ties to him.

Reuters - South Korea plans to ban cryptocurrency trading, rattles market

South Korea plans to ban cryptocurrency trading, rattles market

SEOUL (Reuters) - South Korea’s government said on Thursday it plans to ban cryptocurrency trading, sending bitcoin prices plummeting and throwing the virtual coin market into turmoil as the nation’s police and tax authorities raided local exchanges on alleged tax evasion.

The clampdown in South Korea, a crucial source of global demand for cryptocurrency, came as policymakers around the world struggled to regulate an asset whose value has skyrocketed over the last year.

Justice minister Park Sang-ki said the government was preparing a bill to ban trading of the virtual currency on domestic exchanges.

“There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges,” Park told a news conference, according to the ministry’s press office.

After the market’s sharp reaction to the announcement, the nation’s Presidential office hours later said a ban on the country’s virtual coin exchanges had not yet been finalised while it was one of the measures being considered.

A press official at the justice ministry said the proposed ban on cryptocurrency trading was announced after “enough discussion” with other government agencies, including the nation’s finance ministry and financial regulators.

Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.

The government’s tough stance triggered a selloff of the cryptocurrency on both local and offshore exchanges.

The local price of bitcoin plunged as much as 21 percent in midday trade to 18.3 million won (12,730.35 pounds) after the minister’s comments. It still trades at around a 30 percent premium compared to other countries.

Bitcoin BTC=BTSP was down more than 10 percent on the Luxembourg-based Bitstamp at $13,199, after earlier dropping as low as $13,120, its weakest since Jan. 2.

South Korea’s cryptocurrency-related shares were also hammered. Vidente (121800.KQ) and Omnitel (057680.KQ), which are stakeholders of Bithumb, skidded by the daily trading limit of 30 percent each.

Once enforced, South Korea’s ban “will make trading difficult here, but not impossible,” said Mun Chong-hyun, chief analyst at EST Security.

“Keen traders, especially hackers, will find it tough to cash out their gains from virtual coin investments in Korea but they can go overseas, for example Japan,” Mun said.

Park Nok-sun, a cryptocurrency analyst at NH Investment & Securities, said the herd behaviour in South Korea’s virtual coin market has raised concerns.

Indeed, bitcoin's BTC=BTSP 1,500 percent surge last year has stoked huge demand for cryptocurency in South Korea, drawing college students to housewives and sparking worries of a gambling addiction.

“Some officials are pushing for stronger and stronger regulations because they only see more (investors) jumping in, not out,” Park said.

By Thursday afternoon, the Justice Ministry’s announcement had prompted more than 55,000 South Koreans to join a petition asking the presidential Blue House to halt the crackdown on the virtual currency, making the Blue House website intermittently unavailable due to heavy traffic, the website showed.

REGULATORY CONUNDRUM
There are more than a dozen cryptocurrency exchanges in South Korea, according to Korea Blockchain Industry Association.

The proliferation of the virtual currency and the accompanying trading frenzy have raised eyebrows among regulators globally, though many central banks have refrained from supervising cryptocurrencies themselves.

The news of South Korea’s proposed ban came as authorities tightened their grip on some cryptocurrency exchanges.

The nation’s largest cryptocurrency exchanges such as Coinone and Bithumb were raided by police and tax agencies this week for alleged tax evasion. The raids follow moves by the finance ministry to identify ways to tax the market that has become as big as the nation’s small-cap Kosdaq index in terms of daily trading volume.

Some investors appeared to have taken preemptive action.

“I have already cashed most of mine (virtual coins) as I was aware that something was coming up in a couple of days,” said Eoh Kyung-hoon, a 23-year old investor.

Bitcoin sank on Monday after website CoinMarketCap removed prices from South Korean exchanges, because coins were trading at a premium of about 30 percent in Asia’s fourth-largest economy. That created confusion and triggered a broad selloff among investors.

An official at Coinone told Reuters that a few officials from the National Tax Service raided the company’s office this week. The official, who spoke on condition of anonymity, said that Coinone was cooperating with the investigation.

Bithumb, the second largest virtual currency operator in South Korea, was also raided by the tax authorities on Wednesday.

“We were asked by the tax officials to disclose paperwork,” an official at Bithumb said, requesting anonymity due to the sensitivity of the issue.

The nation’s tax office and police declined to confirm whether they raided the local exchanges.

South Korean financial authorities had previously said they are inspecting six local banks that offer virtual currency accounts to institutions, amid concerns the increasing use of such assets could lead to a surge in crime.