earnings

Remember Deutsche Bank’s rather poor earnings report a couple of months ago? Well, it turns out that things have gotten worse, because people and regulators continue to sue Frankfurt’s most downtrodden bank. Read more »

  • 31 Jan 2013 at 2:04 PM
  • Banks

Deutsche Bank Improved Its Balance Sheet By Losing A Lot Of Money

Bank earnings season is always a little surreal, I guess because there’s an inherent surrealism about banking. Deutsche Bank reported earnings today,1 and those earnings had an up-is-down quality that Bloomberg’s summary captured in this amazing sentence:2

Deutsche Bank AG, Europe’s biggest bank by assets, exceeded a goal for raising capital levels as co-Chief Executive Officer Anshu Jain focused on bolstering the firm’s finances rather than limiting losses.

So there’s one way of running a business where you bolster your finances by making money. And then there is global banking. Here is another, possibly even more astonishing line from the same article:

Deutsche Bank “took pain” in the quarter by booking a loss to boost its capital ratio without selling shares, Jain said.

Booking a loss to boost its capital ratio. Losing money, in the regular universe, should reduce your capital: capital is mostly retained earnings. Everything here is backwards.

Here is how Deutsche Bank boosted its capital ratios without (1) raising capital from the market or (2) making money: Read more »

Back in October when Mike Corbat was dragged from bed in the middle of the night to take over the top job at Citigroup after Vikram Pandit’s ouster, he did a hastily assembled damage-control conference call while still wearing his footie pajamas. On this call CLSA analyst Mike Mayo surprised Corbat by asking him a softball interview question, namely: tell me how you want your tenure as CEO to be measured in five years. Corbat’s response – and here I’m quoting from memory – was “Wait, I’m the CEO? Crap. Let me get back to you on that.”

Corbat may have forgotten that promise, but Mayo did not, and he asked the question again yesterday – on Corbat’s first earnings call as Citi CEO – and got in reply maybe the single best sentence a bank CEO has ever said:1

Mike Mayo – CLSA
And then for Mike, I asked this question when you first got the CEO job. If in five years from now you were to look back at your performance, what would you want to see to show that you were successful?

Mike Corbat – CEO
I think probably going back to your first line of questioning, we’ve got to get to a point where we stop destroying our shareholders’ capital. I would say that would certainly be at the top of the list, that we run a smart and efficient business that’s good at its allocation of its resources around its customer and client segments, that it’s continued to have the ability to lead in a company those clients around the world, that it served the social purpose. There’s several things in there.

This seems a little unfair! Read more »

  • 11 Jan 2013 at 1:32 PM
  • Banks

Wells Fargo Mostly Putting Deposits Into Gold Ingots These Days

Bank earnings season kicked off today with Wells Fargo’s announcement, and since I have nothing really to say about Wells Fargo earnings I figured the least I could do was put up some charts instead. Not on earnings – they’re up! net interest margin is down! on balance, gnash your teeth a little! – but on what Wells Fargo is doing with all the money it’s got.

This seems like a popular question to ponder, since it’s got rather a lot of money. So today brings the Journal‘s vividly headlined “Wads of Cash Squeeze Bank Margins”, and earlier we had Frank Partnoy and Jesse Eisinger’s attempt to find out where Wells is hiding all its fraud. The main thing is:

  • Banks have lots of deposits because everybody’s scared of everything so they put their money in the bank.1
  • Banks aren’t making lots of loans for some reason, with the reason ranging from “banks are a bunch of scumbags” to “you’re all a bunch of deadbeats.”
  • So they have money left over.
  • So they put it somewhere.

A natural question is “where is the somewhere?” and here is where Wells puts it:

That’s just various bits as a percentage of total deposits. You can see loans have decreased as a percentage of deposits since the crisis; other risky-type assets – trading assets and available-for-sale corporate and mortgage bonds, etc. – have increased a bit but not enough to make up for that drop: Read more »

  • 25 Oct 2012 at 4:28 PM
  • Banks

Banking Boring Again Even At Credit Suisse

One way to make a lot of money in banking is just to be really good at it. But this is not a very good way! There are lots of people who want to make a lot of money in banking, and all of them1 have at least considered the approach of “just be good at it,” so you have no real competitive edge if that’s your strategy. You need to be creative and think outside the box, as you might say, if you were not very good at banking, as the law of large numbers says you are not.

I love me some Credit Suisse; they think outside the box. Then they sell the box to themselves in a roundabout fashion that magically removes it from their balance sheet. So when I saw this

“As we continue to reduce costs, continue to optimize our capital and we continue to have momentum on the client side we think we will be able to improve our return on equity toward that 15 percent target,” Dougan said in an interview with Bloomberg Television. “That’s something that’s achievable.”

I had so much hope! I mean, “reduce costs” is boring and sad, and “momentum on the client side” is just like “be good bankers” which whatever, but “optimize our capital” could mean all sorts of devious things.

It probably does but I couldn’t find them. I mean, other than the usual devious things, which start with “Basel II.5 core tier 1 ratio increased by 2.2 percentage points to 14.7%, total capital ratio increased by 1.0 percentage point to 21.2″ and segue right along into this funding stack: Read more »

  • 18 Oct 2012 at 1:15 PM
  • Banks

Morgan Stanley Now 23% Safer

A value-at-risk model basically works like this. You have some stuff, which is worth X today. Tomorrow it will be worth X + Y, where Y ranges from more or less negative infinity to positive infinity. Y is a function of a bunch of correlated random variables, rates and credit and stock prices and general whatnot. You look at a distribution of moves in those variables and take (usually) a 2-standard deviation daily move; if 95% of the time rates move by -10 to +10 basis points, your VaR model will assume a -10bp or +10bp move, whichever is bad for you. You take the 95%-worst-case, taking into account correlation etc., and tot up how much you’d lose in that case. Then you write that number down and feel a bit better, since you’ve sort of implicitly replaced “we have $X today and will have some number between negative and positive infinity tomorrow” with “we have $X today and will have some number between ($X – VaR) and positive infinity tomorrow,” though of course the first statement is true but unhelpful and the second is not true and also unhelpful.

But that aside! You get your VaR from a distribution of your variables, but the obvious question is what distribution. A good answer would be like “the distribution of those variables over the next three months,” say, for quarterly reporting, but of course that is only a good answer because it begs the question; if you knew what would happen over the next three months you would, one assume, always end those three months with more than $X and this VaR thing would be moot or moot-ish.1

So instead you look at things that you think will allow you to predict that future distribution as accurately as possible, which is epistemically troubling since VaR is a measure of how inaccurate your predictions might turn out to be. Anyway! You pick a distribution of variables based on the sort of stuff that you always use to estimate future distributions in your future-distribution-estimating business, which could mean distributions implied by market prices (e.g. option implied vol) but which seems to mostly mean historical distributions. You look at the last N days of data and assume that the world will be similarly distributed in the following M days, because really what else is there to do.

Picking the number of days to use is hard because, one, this is in some strict sense a nonsense endeavor, but also two, the world changes over time, so looking back one year is for instance rather different from looking back four years. Here is how different: Read more »

  • 15 Oct 2012 at 2:10 PM
  • Banks

Citi Has An Excellent 88% Decrease In Profit

I don’t have much insight into Citi’s earnings but I do enjoy the reporting of them. When a car or Facebook company reports earnings you basically ask questions like “how many cars or Facebooks did it sell?” and “how much money did it make on each one?” and those questions are kind of answerable and their answers give you a sense of how you should feel in your heart about the company. When a bank – like, a bank bank – reports earnings you can ask “how many mortgages did it sell?” and “how much money did it make on each one?” and those answers will be useful to you too, though there will be murky liquidity and valuation overhangs that will reduce their usefulness.

If you asked those questions of Citi, you might or might not get answers that might or might not be useful, but you’d be hard pressed to translate them into the headlines on Citi’s earnings. Big banks are not primarily engines for selling products and collecting a margin on them; they are bundles of accounting decisions, and this is never more apparent than at earnings time. This is pretty far removed from economic activity in the world:

Citigroup Inc.’s third-quarter profit fell 88% as the bank took charges tied to the value of its debt and the sale of a stake in its brokerage joint venture …

Others chose to emphasize economic activity in the world, at the cost of, y’know, GAAP: Read more »