In case you didn’t see last night’s interview of the Obamas by Charlie Rose, Michelle Obama made a nice point about how it is important for her husband to lead through inspiration.
“There’s still hope out there,” she said.
All rhetoric aside, I would suggest that there is still hope out there in banking, too. True, you won’t find it in JP Morgan Chase’s Chief Investment Office or at Barclay’s, but it is out there. The harsh truth of banking today is that it has forever changed, and there are subtle signs of that change even beyond Goldman Sachs’s decision today to try to play the consumer (albeit supremely high net worth consumer) banking game. Here’s my list of four reasons why banking has changed forever:
1. Global Credit Performance Ain’t Much Different from US Credit Performance. Citigroup in its second quarter earnings call this week made it clear that it is placing its casino chips on emerging markets and not the US. Interestingly, Citi’s credit performance outside of the US is remarkably similar to what it sees in the US. For example, Citi’s international consumer credit trend “generally remains stable to improving in the second quarter,” according to company officials. In Asia, the (net credit loss) NCL rate remained below 1%, and 90-plus-day delinquencies were flat at around 50 basis points. In Latin America, the NCL rate continue to improve to 4.1%, while delinquencies were fairly stable. There is a certain homogenization of credit performance. A borrow in, say, Bangkok is not much different than a borrower in Bangor, and that has interesting long-term implications. To wit, an interchange between Citi’s CFO and a noted Wall Street analyst:
Q: …Hi, John, could you talk a little bit about whether the credit or revenue trends that you’re seeing in the consumer bank in Asia and Latin America kind of are consistent with the local markets …, are there any where they are weaker, can you just talk about how you see them kind of competitively positioned? …
John C. Gerspach: Well … don’t forget, we have are very specific target market in that region. And we’re focused for the most part on, what we would say is a very highly creditworthy customer base. And we’re also very cautious as far as how we extend credit cards, as well as even with secured lending that we do on mortgage, we actually benefit from a lot of the regulatory rules in those countries, which insist on, very, very low loan to value type of requirement. So we think that the – certainly from an Asia point of view, again, we’ve got some extraordinary performance at this point in time, but we think that it is running in line with what we would anticipate from the market segments that we choose to serve.
That “focus” is not much different from how lenders extend credit in the US. In other words, globalization comes to lending.
2. Cross-selling Is Officially and Forever No Longer a Myth. Buried in Wells Fargo’s 2Q12 earnings was the unbelievable fact that retail banking cross-sell reached a record six products per household for the entire community bank consumer base at the San Francisco company. Yes, you read that right — an average of six products per household! That is a high bar Wells has hit and it deserves loud kudos. Its accomplishment also puts to bed the notion that banks can’t cross sell. They can and they will forever more.
3. Mortgage Banking Is a “Volatile” Business. Timothy Sloan, chief financial officer and senior executive vice president of Wells Fargo, has branded mortgage finance — yes, mortgage finance — a “volatile business,” and the truth is he is right. It certainly wasn’t a volatile business 10 or 15 years ago, but it is now, and it appears as though it will stay that way. Here’s how Sloan explained it during this week’s Wells earnings call:
We could always have an “oh no!” quarter. This is a volatile business that we’re in, for sure. I think that when you’re looking at the history of the company, we’ve had a profitable mortgage business for decades. But within that profitability, we’ve had a lot of cycles. We understand that the mortgage business is a very cyclical business, particularly when you look at the refi cycles that we’ve had over the past few years. And I would just point to the fact that while I can’t promise this is going to be the case, while we’ve printed 10 consecutive quarters of earnings growth, we’ve had ups and downs in the mortgage business. And I think what that reflects is the benefit of the fact that we’ve got a very diversified business model, all right?
This is the same Wells Fargo that this week shut its correspondent mortgage business, which accounted for fully 5% of the bank’s mortgage production, because of regulatory and legal issues. You want to get into the mortgage business? Better wear a helmet.
4. New Products Work. JPM revealed this week that its three new card products — Freedom, Sapphire and Ink — are going gangbusters. New product sales volume for Freedom, Sapphire and Ink are up 20% year-on-year, and bank officials said “we continue to believe we’re gaining market share in the card business” on the heels of that growth. This is a good sign for the future of banking. If JPM can catch sparks with three new products, other banks can be emboldened to try new innovation ventures.