J.P. Morgan: What’s Even Scarier Than Oil?
Superlow interest rates remain the biggest threat to banks
Things that lurk in the shadows, especially when they involve crashing oil prices, are pretty scary for bank investors. Amid all the hand-wringing over murky energy exposures, though, it is the monster investors can see that is scariest of all.
As J.P. Morgan Chase highlighted during its annual investor day Tuesday, the biggest threat to future earnings isn’t low oil prices, it is superlow interest rates. And that ogre isn’t going anywhere anytime soon.
Granted, energy is a worry. J.P. Morgan said in its presentation that it expects to add around $500 million this quarter to reserves against losses on the energy book. And should oil stay around $25 a barrel for 18 months, it could require an additional $1.5 billion of reserves. That spooked investors who drove the shares down sharply.
But suppressed interest rates are far more damaging to long-run profitability. An interest-rate-scenario chart accompanying finance chief Marianne Lake’s presentation showed just how much the bank has to lose. Given nose-diving yields so far in 2016, it ain’t pretty.
Assume, for example, that the Federal Reserve sticks to the pace of tightening implied by its latest forecasts for where short-term rates are likely to end up in coming years. As of December, these projected four rate increases in 2016 and more afterward, bringing the federal-funds rate to around 3.25% at the end of 2018 from 0.375% now.
In that blue-sky scenario, J.P. Morgan would earn an additional $10 billion or so of net interest income in 2018.
Unfortunately for banks, the Fed’s projections looks increasingly divorced from reality. The market now expects a much more gradual pace—perhaps no increases this year and just a one quarter-point increase per year in 2017 and 2018. Under this “dovish Fed” scenario, J.P. Morgan estimates that it would reap $6 billion of additional net interest income in 2018. This could help to boost net profit by around almost one-third.
Consider, though, if the Fed stays on hold through 2018, an unlikely, but not outlandish, scenario. J.P. Morgan said it could still increase net-interest income by, for example, adjusting the mix of its assets. But it would only gain about $3.5 billion in additional income.
Granted, that is better than interest income falling. It isn’t enough, though, to get investors excited about bank stocks, and certainly not enough to justify a rerating of its valuation.
So until the prospects for Fed movement brighten, bank stocks will be stuck cowering under the covers.
Deutsche Boerse, LSE in merger talks - sources - RTRS
23-FEB-2016 14:17:37
FRANKFURT, Feb 23 (Reuters) - Deutsche Boerse DB1Gn.DE and the London Stock Exchange LSE.L are exploring a possible merger, company and financial sector sources said on Tuesday.
The talks are at an early stage, a person familiar with the matter said.
The LSE declined to comment. Deutsche Boerse was not immediately available for comment.
Shares in both exchange operators turned positive on the news, with Deutsche Boerse shares up around 3 percent and LSE trading almost 6 percent higher at 1315 GMT.
(Reporting by Ludwig Burger, Andreas Kroener and Jonathan Gould in Frankfurt and Noor Zainab Hussain in London; Editing by Maria Sheahan)
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Standard Chartered boss says has begun Brexit contingency plans
23-Feb-2016 09:53:23
LONDON, Feb 23 (Reuters) - Standard Chartered STAN.L has begun contingency planning for Britain's potential exit from the European Union, Chief Executive Bill Winters said on Tuesday.
Winters, speaking to reporters on a conference call, said Britain's vote in June on whether to stay in the EU or leave it should not have a huge impact on the bank one way or the other.
But he said: "We think Britain is best placed in Europe."
The bank's chief executive for Greater China, Benjamin Hung, told a news conference in Hong Kong that he expected the bank would resume paying a dividend "next year".