We had the pleasure of speaking with Marc Rubinstein, author of Net Interest, a financial sector newsletter, about his essay, Wells Fargo’s Rehabilitation .
Marc writes:
Over the past few days, the biggest banks in America all reported their first quarter earnings. It may have been their best quarter ever. In this week’s Net Interest, we look at some of the key trends that emerge. In particular, we take a close look at Wells Fargo which, for reasons we’ll get to, charted its own special course through the pandemic.
There’s no doubt we’ll look back on the first quarter of 2021 as a strange time. Perhaps that’s the result of the economy being so much better than we had anticipated it would be. Unemployment ended the quarter at a rate of 6.0% in the US but banks had been budgeting for a lot more; last summer, JPMorgan anticipated that unemployment would be ~9.0% right about now. This shift was reflected in their earnings as they were able to release much of the provisions they’d put away for that less desirable outcome. Over the course of 2020, JPMorgan bolstered its loan loss reserve by $12.2 billion; in the first quarter of 2021, it reversed $5.2 billion of that.
The precise mechanics of this reserve-and-reverse process was the subject of a Net Interest piece last July, What US Bank Results Tell Us About the State of the Economy. Banks consider a range of different futures and filter them into a single measure, capturing their relative probabilities and severities. In last July’s piece, I remarked that bank earnings have a Christmas Carol flavour to them, reflecting elements of the past (realised revenues), the present (unrealised trading gains) and the future (credit losses that haven’t yet been incurred). The first quarter was strong because the average of all the possible futures turned out not to be so bad. In fact, in some loan categories, performance turned out to be much better than expectations. Bank of America reported that early stage credit card delinquencies are at or near historic lows. In contrast to most behavioural predictions, consumers paid down debt and avoided default.
We’re not out of the woods yet, of course. Even after its reversals, JPMorgan is still carrying $7 billion more provisions than its base case warrants. Some of that may be quite sticky because the probability we’ll now place on a pandemic will likely remain higher than whatever assumption we used in the past (even though our severity assumption may be lower). But, for the first time, we’ve experienced a recession without an accompanying credit cycle and bank earnings reflect that release.
Read on or listen to our conversation (recorded on April 20, 2021):
About This Audio Series:
MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.
About Marc Rubinstein:
Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.
About Net Interest:
Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!
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