Weekly News Digest 17 July 2020

US: Second-quarter earnings revealed

It is that time of year again and second-quarter results have started to roll in for the big US banks. JPMorgan posted a profit of $4.69 billion, exceeding analysts' expectations by $0.23 per share thanks to record trading revenue. Wells Fargo posted its first quarterly loss in over a decade- a loss of $2.4 billion compared to 2019 2Q profit of $6.2 billion. The disappointing results have forced it to lower dividends by 80 per cent to just $0.10 per share. Citigroup reported a profit fall of 73 per cent as net income reached just $1.3 billion compared to 2019 2Q net income of $4.8 billion. While lower earnings across the board have certainly been expected, what proves interesting is the amounts being put aside to cover potential losses. JP Morgan, Wells Fargo and CitiGroup made loan loss provisions of $10.47, $9.5 and $7.9 billion respectively, signalling that all three are bracing for big loan defaults down the road.

Nordics: Earnings better than expected

European analysts who were forecasting the worst have been pleasantly surprised by the second quarter earnings reported by the big Nordic banks. Sweden's Handelsbanken reported good credit quality with net profit falling to $436 million from $461 million a year earlier. SEB also reported a less than expected fall with net profit falling to $382 million from $535 million a year earlier. In Norway, DNB's share price rose after reporting that net profit had fallen to $505 million from $624 million a year ago. Talking of a year ago, who could have predicted we would be celebrating huge falls in net profit simply because it is not as bad as we thought it might be?

China: Credit card debt-fuelled by illicit cash-out services

As China struggles to come to grips with its worsening credit card debt, one illicit business practise known as 'cash-out services' is coming under scrutiny again. The service, practised in China but pioneered in India, sees duplicitous third-party payment companies and merchants tap credit cards for cash advances at the far lower fees associated with purchases rather than borrowing. Chinese bankers are becoming concerned that cardholders who use such services may fail to repay the debt, thus contributing to the growing rates of delinquency banks are seeing. Payment companies argue that the credit card business is so unprofitable, thanks to the rise of mobile payments and the duopoly of Alipay and WeChat Pay, that running a purely legitimate, profitable payment business has become an impossibility. The People's Bank of China (PBOC) remains unmoved by these pleas and is drafting new regulation to combat illegal credit card transactions.

UK: FCA tightens guidelines for payment firms

The immediate move by the Financial Conduct Authority (FCA) to suspend the operations of Wirecard's UK subsidiary – Wirecard Card Solutions – to prevent customers' funds being transferred out of the UK has been followed up with permanent measures to safeguard users of payment cards and digital apps. New guidance means that payment firms will have to maintain up-to-date records of funds received, keep separate accounts for customer money and be more prudent when selecting third-party service providers. The new guidelines had been in the works prior to the pandemic but their introduction was accelerated on the back of concerns over the impact of the coronavirus on consumers. This move by the FCA evidences how previously low-profile payment firms have become systemically important players and thus can expect to be in the regulatory spotlight a lot more moving forward.

Thailand: Bank of Thailand's digital currency development plan

As our new market report for Thailand points out, the central bank and bankers' association are leading a strategic plan with the goal of creating a modern and inclusive digital society. Thus the Bank of Thailand has been exploring the possibility of expanding its central bank digital currency (CBDC) to retailers. The digital currency has already been successfully tested with corporate transactions and cross-border payments in collaboration with the Hong Kong Monetary Authority. Further testing will be conducted throughout 2020 with a cautious fourth phase expansion into retail payments in 2021. With a very forward-facing perspective, the Bank of Thailand has also held discussions with Facebook regarding its digital currency, Libra, but admits that the existing stringent regulations will have to be reexamined to allow for such digital currencies.

To end, links to some other stories of interest this week...

Africa: GSMA launches mobile money interoperability test platform
Hong Kong: Banks grade clients at risk of US sanctions
Philippines: Digital payment increase observed
UK: Big banks block fintech funding
US: Banks warned not to use Covid-19 to close branches
US: Visa launches instalment pilot