Encouraging 3Q09 results for a number of large banks

The following article in the latest edition of the Retail Banker International is worth reading:

While total third-quarter net earnings at 20 selected banking groups rose by almost $2.5 billion to $30 billion year-on-year, there was a marked geographic bias – with the strongest performing banks based in the US, France and China.

Strip out JPMorgan Chase’s sixfold rise of more than $3 billion in net earnings for the quarter to $3.56 billion – driven by strong investment banking and asset management figures but hammered by underperforming retail and card units – and net earnings at 20 of the biggest banks to report third-quarter results actually fell (some banks, including HSBC, Lloyds and Standard Chartered, do not publish earnings for the Q3 period).

A rise in net profits of around 20 percent was seen at Bank of China, Industrial and Commercial Bank of China and China Construction Bank, boosted by a lending boom in the first half – although the rate of increase slowed slightly in the third quarter.

In a generally positive assessment, China’s banks said that net interest margins had stabilised and, looking ahead, forecast that lending would remain buoyant into 2010.

Among banks in Europe, Société Générale more than doubled its quarterly earnings, easily beating analyst forecasts, boosted by strong French retail banking revenue growth, declining provisions and a sharper than expected cut in expenses. Though analysts said there remained some pockets of concern, such as future loan losses in its consumer finance arm and further deterioration of credit risk in its operations in Russia and Romania, the cost of risk at group level has stabilised at 120 basis points.

Santander’s quarterly earnings of €2.2 billion ($3.3 billion) was down by only 3 percent year-on-year, and in an upbeat assessment, the bank reiterated its full year earnings target of €9 billion. At Barclays, although third-quarter net earnings fell by more than 50 percent, largely on losses on the value of its own debt and other one-off items, underlying earnings for the first nine months of the year more than doubled.

In common with HSBC, which said only that its underlying third-quarter profits were “significantly ahead” of a year ago, Barclays indicated that bad debts may have peaked.

Among the more positive developments of the reporting season was a sharper than forecast increase in underlying banking earnings at ING (net earnings of €499 million compared with a loss of €477 million in the year ago period), boosted by lower-than-feared loan-loss charges, strong fees and commission income, and lower costs, notably at ING Direct.

Credit losses peaked?

As for the fourth quarter, Bank of America, which reported a net loss of $1 billion, indicated that credit losses may have peaked, though its outgoing CEO, Kenneth Lewis, told analysts results going forward “are expected to continue to be challenging as we close the year”.

But the most marked uplift in sentiment for the remainder of the year was expressed by HSBC’s chief executive, Michael Geoghegan, who had expressed fears of a W-shaped double dip recession earlier in the year.

Boosted by an improvement at its troubled US consumer finance business, where bad debts fell for the first time since 2006, he said: “the biggest jolt has now passed through the global economy” and predicted a two-speed recovery, driven by emerging markets.

RESULTS
Q3 group net earnings at 20 selected banks, ranked by year-on-year change
	Q309 ($bn)	% change
JPMorgan Chase	3.56	571.6
Société Générale	0.64	137.0
PNC	0.56	115.3
Wells Fargo	3.23	96.9
BNP Paribas	1.95	44.4
Bank of China	3.21	22.5
ICBC	4.95	19.9
China Construction Bank	4.44	18.7
US Bank	0.61	3.4
Intesa Sanpaolo	1.01	0.0
BBVA	2.23	0.0
Santander	3.23	-2.1
Crédit Agricole	0.58	-7.9
UniCredit	0.84	-19.2
Barclays	1.80	-53.7
Erste	0.34	-72.5
ING	0.75	n/m
Citigroup	0.10	n/m
Bank of America	-1.00	n/m
Royal Bank of Scotland	-3.01	n/m
n/m = not meaningful Source: RBI

Merry Christmas

Les Echos, the French business newspaper, announced today that champagne wine makers have more than 1,3 billion bottles in storage. Yes, billions!

In other words, more than 5 years worth of sales, up from 3,6 years worth of stock only a year ago.

Cash flow problems due to recession have tempted some of the champagne houses to reduce prices significantly to increase sales, and for the first time this year you can find champagne for less than €10 per bottle.

My guess is that we are heading for a magnificent, less expensive festive season for lovers of sparkling, wonderful champagne. For consumers, that is, and not for the wine makers having to discount their precious, bubbly wine.

Customers' trust in banks rock-bottom

Aite recently published a survey of US, UK and French customers' trust in banks, and the results should receive top attention in banks' boardrooms.

The results show that trust is dramatically low, and that financial turmoil, banks being bailed out by governments, while others still insist on paying huge bonuses to employees of mis-managed banks, have contributed to customers loosing faith in banks.

When only 6-7% of customers, or 1 in 20 customers, give or take a few, in France and the UK express very much trust in their primary bank provider, I would be worried if I were a board director. Even more so if you look at the data for general banking trust, where hardly anyone has very much trust in banks, and only one in three (US) to one in eight (UK) customers somewhat trust banks.

Banks have a long way to go in re-building trust with their customers to get up to decent levels again. A first step would be to avoid negative press by ensuring that salaries are kept at decent levels, and that bonuses are paid only when achieving objectives that contribute to build shareholder value and customer satisfaction.

The Amex Paradox as US Credit Card Issuers Crash Land

In a recent article in the New York Times, the major US credit card issuers have put on their safety belts and crash helmets, as they prepare for a major crash landing with their credit card portfolios. Credit card losses are soaring to unprecedented levels as unemployment rises, and cardholders struggle to make ends meet.

From credit card write offs in the region of 5,5% in 2008, write-offs have shot up to 8,5% in Q1 of this year, well above the previous credit card loss peak of 7,9% experienced after the technology bubble burst in 2001.

Banks are doing their best to limit losses by tightening application approval criteria, cancelling unused card accounts, and reducing available credit limits. At the current rate, credit lines will probably be reduced by a staggering $2,7 trillion by next year, or - to put it in perspective - cut in half compared to the available card credits only two years ago.

Credit card losses have historically correlated quite well with unemployment rates, which indicate that banks are heading for more trouble as the US unemloyment rate threatens to break the 10% barrier. Even more so when Citigroup recently reported that its 10,2% charge-off rate in Q1 for the first time had broken the "historic correlation with unemployment".

American Express is one of the banks trying to limit its exposure, as stress tests of the portfolio indicate that it may face losses of up to 20% of card balances over the next year or two.

So why are they sending out direct mail to recruit new cardholders in France for its Optima credit card? A paradox, to say the least.

New, Innovative News Bulletin on the Nordic Card Market

When information is abundant, and time is scarce, news bulletins that take a fresh and innovative approach to providing insight are most welcome. MACAW research has recently launch a Card Bulletin focused on the Nordic card markets, and the first two issues are promising.

The bi-weekly newsletter aims at giving card professionals in the Nordic region, and others interested in that part of the world, "ideas, inspiration and timely insights" on the industry.

Judge for yourself. There are a couple of free bulletins available on MACAW's web site here. Most interesting.

Leveraging the bank's ATM network for cardless money transfer

For some time I have been intrigued by banks' lack of interest in, or inability to leverage their ATM networks to gain a competitive edge. Traditionally used for cash advances and balance enquiries, ATMs have turned into more of a multimedia kiosk capable of providing a wide range of services. One area of particular interest, in my mind, is money transfer, a high-margin banking service largely dominated by two non-banks, notably Western Union and MoneyGram.

I was therefore pleasantly surprised to discover a solution at the recent Cartes Afrique conference in Tunis that exploits a bank's ATM network for such purposes. A Tunisian bank proposes a simple, innovative, cost-effective service for local money transfer. In simple terms, it works as follows:

• The sender initiates the transaction in the bank branch, in the online bank, or at the ATM. In the branch, the sender may pay by cash or card, in the two other channels the sender uses a card (any bank card) to pay for the transfer.
• At the point of interaction, the sender selects a unique PIN code for the transaction, and registers the recipient's mobile phone number as part of the money transfer transaction.
• The sender then contacts the recipient (typically by phone) to communicate that a money transfer has been initiated, and the PIN code for the transaction.
• To receive the money, the receiver simply goes to one of the bank's ATM, and keys in his mobile phone number and the PIN code for the transaction. The information is then verified by the bank system, and if correct, initiates a call to the mobile phone. The customer is asked to accept the call and place the phone in proximity of the ATM's loud speaker. The ATM then sends an encrypted signal to the mobile phone to authenticate the mobile phone.
• Upon verification, the cash is dispensed to the receiver as a regular cash advance.

The advantages of this solution are several:

• The bank may leverage its existing infrastructure to propose a new service, and generate additional income.
• The service may be proposed to non-bank customers, as even customers without a card or bank account may utilize the service. All you need is cash and a mobile phone. It can even be leveraged as an acquisition channel for new customers, and you already know their phone number, so it is easy to make contact.
• The service is secured using two factor authentication at point of reception. The receiver can only access the money if (s)he is in possession of something(s)he knows (the PIN), and something (s)he owns (the mobile phone).

One area to look into in more detail is how the model stacks up against the relevant market's anti-money laundering (AML) regulations. However, I personally don't see too many barriers in this regard. The sender is known, as the transfer will have been paid using a card (online or in ATM), and thus traceable, or over the counter in the bank branch, with the possibility to ask the sender to provide identification. On the receiver side, the receiver's phone number is known, and the user may thus be known. However, there are of course ways to obtain an anonymous, prepaid mobile phone number. Some additional measures should however mitigate the risk of large scale money laundering.

Such measures would include setting transaction limits on each money transfer transaction, monitoring velocity, and track abnormal transaction activity on both the sending and receiving side of the transaction. Excessive use of the service by a sender or a receiver may subsequently be suspended or blocked. Limiting the service to small amounts –the average money transfer transaction from France to African destinations is in the €200-300 range, as an example – combined with the need to be physically present at the ATM with a mobile phone to receive the funds, would make the service unpractical for money laundering of large sums of money.

But the service would still be highly attractive for customers in the target segments wishing to transfer funds to friends and family.

Card conference in Tunisia

I recently decided to take a look at what's going on in the cards industry in some of the French speaking countries of Western Africa. The Cartes Afrique conference, which takes place in Tunis over the next two days, is thus a good opportunity to meet people, and find out what's on the local banks' mind and to-do list.

In preparing for the trip, I had a look at card statistics in both Morocco and Tunisia, and I found at least a couple of issues that should be on their minds (and on the conference agenda as well, for that matter). One is card issuing, full stop, and the other is card usage.

The card industry in both countries seem to be suffering from the same problem as quite a few markets in the world, namely consumers' preference for cash and checks. Not only is card payments a minuscule part of the overall use of payment tools (0,2% of total payments in Morocco, for example), but even when a card is used, 9 out of 10 times it is to withdraw cash.

It leads me to believe that the local banks probably should focus even harder on getting more cards out in the market in the first place, and secondly, driving cardholders to pay with cards for purchases instead of using cash. And there is probably also opportunities to increase card acceptance significantly as well, although I haven't gotten to that piece of the puzzle yet.

And what about the corporate market? I would guess that there is a large number of companies that would need a card solution to pay for travel and other business expenses, similar to what we see in other markets across the world? I would not be the least surprised.

There is work to be done in this part of the world as well, in other words.

I will keep you posted!