Economy

(Reuters) – The U.S. commercial property market has faced severe challenges since the pandemic due to lingering office vacancies, diminished retail activity and higher interest rates. That stress has caused banks and other lenders to tighten their standards for new loans and scrutinize existing ones. While regional banks carry the greatest exposure to the commercial real estate (CRE) sector, second quarter earnings show that a number of big banks have prepared for potential defaults, primarily on office loans.Here are the highlights across the sector:BANK OF AMERICA CORP:Chief Financial Officer Alastair Borthwick said the bank had $17 million in charge-offs, or debt owed to a bank that is unlikely to be recovered, on its office loan exposure during the second quarter versus $15 million in the first quarter. The value of assets under review for credit risk rose by $1.7 billion from the first quarter, due mainly to its CRE exposure. However, Borthwick noted the bank’s office CRE exposure was low relative to its overall loan portfolio, at 2%.GOLDMAN SACHS GROUP INCThe investment bank reported about $305 million in net losses within a private portfolio, driven by markdowns on office CRE, it said. The Wall Street giant also said its debt investment revenue of $197 million had declined year-on-year due primarily to “weaker performance” in its real estate investments. Goldman Sachs Group (NYSE:GS) CFO Denis Coleman said the bank’s provision for credit losses stood at $615 million in the second quarter. CRE loans represented just 15% of the bank’s overall lending book, while only 1% of the CRE loan portfolio was office-related.JPMORGAN CHASE & CO While its CRE revenue grew to $806 million in the second quarter from $642 million in the first, JPMorgan (NYSE:JPM) reported $1.1 billion in credit loss provisions driven by its office portfolio. While the portfolio was “quite small”, Chief Financial Officer Jeremy Barnum told investors the bank increased provisions “to what felt like a comfortable coverage ratio.”WELLS FARGOThe bank said it had a $949 million increase in its allowance for credit losses, primarily CRE office loans. At the same time, it saw a quarter-on-quarter rise in CRE revenue as a result of higher interest rates and loan balances. “While we haven’t seen significant losses in our office portfolio to-date, we are reserving for the weakness that we expect to play out,” CEO Charlie Scharf said.CITIZENS FINANCIAL SERVICES Citizens’ nonaccrual loans – those on which a payment hasn’t been made for 90 days – grew by $195 million to roughly $1.2 billion, while its net charge-offs increased by $19 million to $152 million. Both increases were driven largely by the bank’s CRE holdings.Citizens recorded a credit loss provision of $176 million in the second quarter. It increased its allowance for credit losses to $2.04 billion from $2.01 billion at the end of the first quarter, which included $41 million in connection with its general office portfolio. “We believe losses are manageable and readily absorbed by reserves,” Bruce Van Saun, Citizen’s CEO, told investors.EAST WEST BANCORP The bank highlighted that its CRE portfolio had a low average loan-to-value (LTV) ratio of 61%, a key metric used to determine the credit risk of a loan. East West’s office portfolio had a weighted average LTV of 52%. While almost three-quarters of the bank’s office loans are to borrowers in the troubled California market, it noted a “high percentage” of its CRE loans carry full recourse and personal guarantees from individuals with “substantial net worth.” “All of these characteristics help to keep this portfolio strong,” Dominic Ng, East West’s chairman and CEO, said.FIFTH THIRD BANCORPThe regional bank’s allowance for credit losses increased 0.09% from the first quarter to $2.53 billion, due in part to a 0.27% increased allowance for its commercial mortgage loans. Fifth Third’s nonperforming CRE loans declined to 0.13% in the second quarter from 0.29% in the first quarter. Its percentage of CRE loans at least 30 days delinquent grew to 0.29% from 0.04%.”We have limited office exposure,” Fifth Third CFO James Leonard told investors Thursday, noting the bank “had deemphasized office even before the pandemic.”MORGAN STANLEY The investment bank said provisions for credit losses in the second quarter amounted to $97 million versus $82 million the same period last year, primarily driven by deterioration in CRE. WEBSTER FINANCIAL CORPThe regional bank’s nonperforming CRE loans ticked up to $47.9 million last quarter from $35.8 million in the first quarter. Meanwhile, it divested $80 million in CRE loans last quarter, “the vast majority of which were secured by office properties,” resulting in $13 million in charge-offs, Webster CFO Glenn MacInnes told investors. The bank reduced its office exposure by 25% over the last four quarters with a “minimal hit to capital,” CEO John Ciulla said. More

The writer, a former member of the Bank of England’s Monetary Policy Committee, is now a distinguished fellow at Chatham HouseThe latest data showing UK inflation at 7.9 per cent in the year to June was a welcome break from the past seven months and a potential turning point in taming the cost of living crisis. Yes, inflation had been falling from its peak of 11 per cent last October but too slowly to prevent the rise in mortgage rates or to be sure that policy was on track. While the Bank of England is likely to increase its rate somewhat further, the latest figures suggest that inflation is now firmly on a downward track. The probability of a soft landing, rather than a recession, has risen. The good news goes beyond the headline consumer rate, which itself is the lowest since March 2022. Producer input prices actually fell by 2.7 per cent since June of last year, mainly due to the fall in oil prices, which affects manufacturing and transport costs. Even imported food prices fell by 4 percentage points in June compared with May. It takes time for input prices to feed through to consumer prices but this is now happening and becoming more widespread. On a month-to-month basis, producer prices have been falling since March and the consumer price index has been slowing since April. Beyond energy and food, the core CPI is an indication of how embedded inflation has become in the rest of the consumer’s market basket. The annual rate of core CPI fell from 7.1 per cent in May to 6.9 per cent in June. This is still too high for the BoE to relax but at least core CPI has finally turned a corner. Another measure watched by the BoE is services annual CPI, where most jobs are found and where wage costs are most significant. This, too, fell from 7.4 per cent in May to 7.2 per cent in June. Of course, monthly data can be erratic. Moreover, new shocks threaten, with Russia again blocking grain exports from the Black Sea and heatwaves in southern Europe damaging fruit and vegetable crops. One swallow does not make a summer, of course, but these latest inflation figures arguably show at least a small flock arriving. With inflation on the decline, two related questions become pressing. First, how much higher will rates need to be to maintain downward pressure on inflation? And, second, how resilient will the economy be to interest rates that remain higher for longer? Both questions present a challenge to the BoE’s forecasting model, which last November predicted a lengthy recession and a rapid fall in inflation. Neither has happened and, indeed, BoE governor Andrew Bailey has told the Treasury select committee that there are “very big lessons to learn” about relying on their forecasting model in setting policy. In this transition period, while the economy is adjusting to a higher interest rate environment, it is right that policymakers rely more on current data developments than on an analytical forecasting model. This should also apply to the BoE’s communications strategy. Consumer confidence and business investment can take unwarranted hits from misplaced emphases.The problem is that the model’s parameters are derived largely from the abnormal period since the global financial crisis, when real interest rates were negative and quantitative easing distorted normal market signals. Even rates rapidly rising from their near-zero levels since 2009 have had less impact than expected on inflation and the real economy because they started from such a low base with the markets awash with liquidity. And even now, with inflation at 7.9 per cent, a Bank rate of 5 per cent is negative in real terms. The two-year gilt rate is hovering around 5 per cent. Given the uncertainty around how fast inflation will fall, a guiding objective for the BoE should be to aim for positive real rates at the two-year horizon until inflation is back to target. On current assumptions, this might imply a plateau of about 5.5 per cent in the Bank rate that lasts for an extended time. Could the UK economy withstand such rates without a long recession? The historical evidence is encouraging.

Consider the decade before the triple shocks of the financial crisis, the Covid-19 pandemic and the war in Ukraine. Between 1997 and 2007, the Bank rate averaged 5.4 per cent, while gross domestic product grew at an average annual rate of between 2.8 and 2.9 per cent. Inflation averaged 1.8 per cent. Households could enjoy positive real returns on simple savings products and business investment was strong, rising by 4 percentage points per year in real terms. While economic growth depends on many factors, and no two decades are alike, the combination of moderately higher interest rates with significantly lower inflation may make for a soft landing ahead. More

According to Refinitiv Lipper data, global equity funds observed a net $2.67 billion worth of net selling in the week ended July 19, booking their first weekly outflow since June 21.China’s economy grew at a frail pace in the second quarter, pointing to overall momentum faltering rapidly due to weakening demand at home and abroad.Additionally, expectations of rate hikes strengthened following a report from the U.S. Commerce Department indicating strong core retail consumption.Investors withdrew $3.04 billion from U.S. equity funds while purchasing Asian and European equity funds to the tune of $609 million and $336 million, respectively.Sectoral equity funds attracted collective inflows of about $1.78 billion, with investors piling up tech, financial and industrial sector funds of $1.05 billion, $904 million and $793 million, respectively.Meanwhile, global bond funds saw $5.29 billion worth of net purchases as inflows extended into a fourth successive week.Global high-yield bond funds received a net $2.97 billion, the biggest amount since April 5. Government and corporate bond funds attracted $627 million and $724 million worth of inflows, respectively.Investors also purchased money-market funds of about $2.86 billion, after a net $28.8 billion worth of selling in the previous week.Data for commodity funds showed that investors exited $295 million worth of precious metal funds in the eighth straight week of net selling. They also sold energy funds worth a marginal $2 million. Meanwhile, data for 24,134 emerging market funds showed equity funds received $1.1 billion, the biggest weekly inflow since May 3, while bond funds obtained about $568 million, marking a third straight weekly inflow. More

(Reuters) – U.S. banks benefited from higher interest rates in the second-quarter, driving a rally in major indexes, but lower consumer spending, slower loan growth and the increased costs of retaining deposits cloud the outlook for the sector.The results follow a tumultuous first quarter in which Silicon Valley Bank and two other lenders failed. Signs of a revival in the investment banking sector, as higher rates and economic uncertainty have hampered deals and trading, also drove share gains. The upbeat results sparked a rally in bank stocks with the S&P 500 Banks Index gaining 9.3% and the KBW Regional Banking Index rising 13.7% month-to-date. Here are four charts that explain major banks’ second quarter: NET INTEREST INCOME Net interest income, the difference between what banks charge on loans and pay out on deposits, at the largest U.S. lenders rose on higher U.S. Federal Reserve interest rates, but analysts cautioned that the benefit might soon fade as the central bank nears the end of its tightening cycle. INVESTMENT BANKING U.S. banking giants reported mixed results for investment banking in the second quarter, but investors have bought their stocks in the expectation of a second half revival in deal-making. An outlier, Bank of America (NYSE:BAC) outperformed rivals by reporting a surprise gain in investment banking fees in the quarter. DEPOSIT LEVELS Deposits at most large lenders edged lower. The cost of retaining deposits is under investor scrutiny after bank runs led to the collapse of three lenders earlier this year, leading customers to move their cash to big banks or higher yielding alternatives.Banks will likely face pressure to pay higher rates on deposits to lure or retain customers, which would erode their profits, analysts have said. PROVISIONS FOR CREDIT LOSSESWorries around the health of the economy accelerated earlier this year following the banking crisis. Commercial real estate (CRE) loan portfolios have also emerged as a concern for the banking industry. The anxiety centers around office loans, as financing costs rise for many buildings that have seen big vacancies as staff continue to work from home.Here are three charts on mid-sized banks’ second-quarter results: DEPOSIT LEVELS While regional bank earnings in recent days have reassured investors that the crisis has subsided, regional banks are being squeezed as they pay customers more to retain their deposits.NET INTEREST INCOME Interest income at most banks rose over the prior year on higher rates, but declined sequentially, with analysts saying that the tailwind from higher borrowing costs that have boosted profits in recent quarters is nearing its end. INDEX PERFORMANCE Bank stocks were crushed during the first quarter crisis but have started to rebound. The KBW Regional Banking Index has rallied 13.4% month-to-date but remains down 13.6% so far this year. In comparison the benchmark S&P 500 has gained nearly 19% year-to-date. More

Hello Swampians, I’m swapping slots with Ed this week, who is busy at the Aspen Security Forum. When I raise the topic of America’s identity crisis, I’m not talking about identity in the woke sense (though I’m planning to write my column next week about how companies are coping with consumer activism around identity politics). Rather, I’m talking about how Americans see themselves and their country, versus how foreigners do.My gut instinct would have been that Americans are far more optimistic about themselves and their home than others are. But in fact, it’s just the opposite.While just over half of Americans believe that the world holds negative opinions of them, about six out of 10 of those polled in advanced economies have a favourable view of the US, according to the Pew Research Center. Poland, Israel and South Korea are particularly gung-ho, with favourability ratings in the high 80s or 90s, but 60 per cent or more of those surveyed in most big European nations, as well as Canada, had positive views of the US.A lot of this is down to the current administration; global attitudes towards the US have improved significantly since Joe Biden became president. A large majority of those in rich countries believe the US is a reliable partner which supports democratic values like personal freedom. That said, there are worries about the future of American power, and its ability to defend the world.There is also a strong sense that the US has serious problems at home, such as dealing with falling living standards, a terrible healthcare system, and racial discrimination.Indeed, it may be those very issues that have led Americans to have a more negative view of themselves in the world than many allies do. Gallup data shows that only 37 per cent of Americans are satisfied with their country’s position in the world, versus a high of 71 per cent in 2002. This decline has led to an inwardness on international issues such as trade and global security, according to Pew.This is especially so among Republicans. Amazingly, less than half of them now see trade as an opportunity, compared to 72 per cent of Democrats, according to Gallup. Likewise, three times more Republicans than Democrats believe that the US is doing too much for Ukraine. Both sides increasingly believe that China is an enemy, and co-operation will be impossible.This is a grim picture, obviously. It’s particularly interesting to me that America’s problems at home seem to have amplified its desire for isolation from the rest of the world. This may pose an opportunity for the Biden administration if it can just tell a different story about the state of things at home and abroad.Certainly, there’s plenty of good news to tout. Inflation is down, and wage growth is still pretty robust, which means the cost of living crisis is abating (at least for some). Biden chalked up big wins at the recent Nato summit, with Sweden allowed to join the alliance and new security guarantees for Ukraine. According to the newsletter, “What Could Go Right?” emissions in the US are falling, Danes are building new wind farms here, chemical weapons stockpiles are being destroyed and aid for families is improving. Indeed, MSNBC’s Joe Scarborough has an entire essay in The Atlantic celebrating American achievements. The FT’s Simon Kuper this week also pointed out that we have many things about which to be cheerful, despite our proclivity to think we’re heading for the apocalypse.So my question to you Ed is, why doesn’t all the good news seem to land with the force of the bad?Recommended readingI have just started reading Kai Bird and Martin Sherwin’s amazing book American Prometheus about Robert Oppenheimer. So, so well crafted. The pages fly by.A really interesting piece in The New York Review of Books about the work of Japanese animator Hayao Miyazaki, who made films such as Spirited Away (one of my all-time favourites), Ponyo and My Neighbour Totoro, which are just as delightful for adults as for children. It’s really tough to make good art about the experience of being a child, but I think he nails it.In the FT, I enjoyed my colleague Pilita Clark’s piece on why women must learn to use the word no more often, and don’t miss Oren Cass on the struggle of American conservatives to find a new and more thoughtful way forward. I’d also suggest reading him as a guide to the best thinking of a nascent new right.Edward Luce responds Rana, I think that’s an interesting and complex question. Often when we think of big US political shifts, we look to the country’s history to give us some clues. The past may be particularly useful in trying to figure out why Republicans have turned so anti-internationalist in the past few years, as opposed to Democrats, who, as you say, have broadly held firm in their positive ratings for global engagement.In the late 1940s, a large chunk of the Republican party turned broadly isolationist, led chiefly by the Ohio senator Robert Taft. His leading in-party opponent, Arthur Vandenberg — the Mitt Romney, or perhaps John McCain, of his time — spoke up for the internationalist wing. Harry S Truman was returned to office in 1948, though it was a close-run election (and the Chicago Tribune famously miscalled it for Thomas Dewey). By 1952, much of the Republican isolationist fever had broken and the party nominated Dwight Eisenhower, who was the personification of the Atlanticist American. The isolationists, meanwhile, had morphed into the McCarthyite red scare crowd, which wrought such damage to the state department, Hollywood and much of academia.Why did the isolationists lose and what can that tell us about today? Partly it was because it became progressively more difficult to deny the threat that the Soviet Union posed. The USSR tested nuclear weapons, it tried to strangle West Berlin, backed the North Koreans to the hilt in the Korean War, and snuffed out whatever nascent non-communist movements had emerged in postwar eastern Europe. And partly it was because big domestic legislation, notably the GI Bill (giving wider access to higher education), drove a rising middle class increasingly towards the Democrats.Democrats held the House almost continuously until 1994. If history were to repeat itself, Donald Trump would lose next year to Biden (though Fox and Newsmax would wrongly call it for Trump), and the reality of what I call the revenge of geopolitics would become US political consensus. Alas, I have no great confidence in things always going right or history repeating itself. As you know, we are also in dispute about whether trade is to blame for America’s relative disenchantment with the world. I think that’s a misdiagnosis, but I acknowledge it has become a rare point of bipartisan consensus in Washington, DC (but not Aspen!). More

“As of Wednesday, July 19, 2023, your bargaining committee has reached a tentative agreement with BCMEA”, the International Longshore and Warehouse Union (ILWU) Local 502 told its members in a statement.The local unit represents 3,000 of the 7,500 dock workers who went on strike earlier this month. More

(Reuters) -American Express kept its forecast for full-year profit unchanged on Friday, disappointing investors and overshadowing its quarterly results that topped estimates on record card member spending by its young and affluent customers. While spending on its cards touched a record high in the second quarter, AmEx’s cautious forecast for the year points to a potential slowdown in consumer spending, which has remained resilient despite a series of interest rate hikes by the U.S. central bank to tame inflation.AmEx shares were down 4% in premarket trading as the credit card giant reaffirmed its per-share profit forecast of $11 to $11.40 for 2023. Analysts on average expect $11.11 per share, according to Refinitiv.Referring to AmEx’s forecast revision during the COVID-19 pandemic in 2020, CFO Jeff Campbell told Reuters that AmEx only alters its outlook if something “wildly different” happens.AmEx’s total provisions for credit losses came in at $1.2 billion in the second quarter, compared with $410 million a year earlier. “Card member spending hit another all-time high,” CEO Stephen Squeri said in a statement. Total network volumes climbed 8% to $426.6 billion in the second quarter ended June 30. AmEx has so far been largely spared from the impact of rising prices for everything from energy to groceries as its young and well-heeled customer base carries on with shopping, dining out and travel. The company said Millennial and Gen Z consumers remained its fastest-growing customer cohort, representing 60% of new consumer accounts acquired globally, while spending by the group increased 21% in the U.S. compared to a year earlier.”Across all demographics, all customer types, all geographies, travel and entertainment spend is just very strong,” Campbell said. The credit card company reported a profit of $2.89 per share in the quarter, beating analysts’ average expectation of $2.81 per share.Total revenue, net of interest expense, rose 12% to a record $15.05 billion but fell short of expectations of $15.48 billion. More

Largely positive reports from big U.S. banks this week have helped restore investor confidence in the industry following the collapse of three banks in the country earlier this year.Huntington’s shares were up marginally in premarket trading.A rate hike campaign by the U.S. Federal Reserve has allowed lenders to charge higher interests on loans, bolstering their net interest income (NII) – the difference between what banks earn via lending and pay out on deposits.Huntington’s NII jumped 7% to $1.35 billion, helping offset the hit from provisions for credit losses that rose 37% to $92 million in the three months ended June 30. Total commercial loans in the quarter were $68.14 billion, up 6% from last year.However, Columbus, Ohio-based Huntington lowered its forecast for annual NII growth, mirroring moves by some of its peers suggesting that high borrowing costs could begin to weigh on loan demand later in the year. The bank now expects NII to increase between 3% and 5% in 2023, compared to its prior forecast of a 6% to 9% growth.Comerica (NYSE:CMA) and Fifth Third Bancorp (NASDAQ:FITB) have also trimmed full-year NII growth forecasts. Huntington earned $0.35 per share in the second quarter versus analysts’ average estimate of $0.34 per share, according to Refinitiv IBES data.Deposits at banks have largely stabilized after a series of bank runs earlier this year. Total deposits at Huntington were $148 billion, up nearly 2% from the first quarter. More