Daily Update: July 15, 2020

Banks are treading water as the coronavirus crisis stirs up a storm of problems—including low interest rates shrinking lenders’ profits, dramatic and widespread unemployment, and deteriorating credit conditions. Three of the biggest banks on Wall Street have provisioned $28 billion combined in rainy day cash for present and future loan losses.

Reporting a 51% decline in second-quarter profits, to $4.69 billion from $9.65 billion, alongside a 77% revenue boost for its trading business, JPMorgan Chase Chairman and CEO Jamie Dimon warned that “this is not a normal recession.”

"While we have seen some signs that are encouraging in May and June, May and June are really the easy months in terms of what this recovery could look like," JPMorgan Chase CFO Jennifer Piepszak said in a July 14 call with reporters, according to S&P Global Market Intelligence. "And we'll really expect to gain more visibility on the damage that we're dealing with over the coming months, which will be much more challenging."

"Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy,” Mr. Dimon said in a statement.

Citigroup’s earnings declined 73% year-over-year to $1.3 billion from $4.8 billion, yet the bank’s second-quarter results surpassed analysts’ expectations.

“While credit costs weighed down our net income, our overall business performance was strong during the quarter, and we have been able to navigate the COVID-19 pandemic reasonably well. The Institutional Clients Group had an exceptional quarter, marked by an increase in Fixed Income of 68%,” Citigroup CEO Michael Corbat said.

Wells Fargo recorded a $2.4 billion net loss during the second-quarter—marking its first quarterly loss since 2008. The bank said it will slash its dividend to 10 cents per share, down from its previous dividend paid over the past four quarters of 50 cents per share.

“We are extremely disappointed in both our second-quarter results and our intent to reduce our dividend,” Wells Fargo President and CEO Charlie Scharf said, adding that the bank’s “view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.”

Wells Fargo has "a series of employees who've been told that their jobs will ultimately go away, but we were going to let some time pass as we got through the initial stages of the COVID crisis," Mr. Scharf said on the July 14 call to discuss the second-quarter results, according to S&P Global Market Intelligence.

JPMorgan Chase made a $10.47 billion credit provision, while Citigroup reserved $7.9 billion and Wells Fargo set aside $9.5 billion.

“Allowances for loan losses—up sharply in the first half—will grow more incrementally and weigh heavily on [North American banks’] full-year earnings. However, we expect most banks to remain profitable,” S&P Global Ratings said in its midyear outlook for banks.

During the first quarter, growth in loan loss reserves moved large banks’ credit allowances to levels roughly comparable with those at the start of the 2008-2009 recession, according to S&P Global Market Intelligence. Now, while banks are better capitalized, additional large loan loss reserve increases are likely needed to get banks closer to plausible full-cycle losses.

While the outlook bias on bank ratings has turned negative since April, S&P Global Ratings expects that strengthened balance sheets, governments’ support to retail and corporate markets, and the likelihood of a sustained economic recovery will limit bank downgrades this year.

Today is Wednesday, July 15, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Battle of Factors: Low Volatility versus High Beta

2020 has surprised us all with a number of firsts. Not only did we witness wild swings in the market from one quarter to the next, we also saw an unusual performance of commonly followed factors. While this blog will not attempt to predict factor performance, it will address recent factor behavior and put this behavior into historical context.

—Read the full article from S&P Dow Jones Indices

Food in Focus: Meat prices continue to climb in June

Consumer meat prices rose by a double-digit percentage again in June, with beef leading a broader rise in grocery prices during the month. The meat, poultry, fish and eggs portion of the U.S. Consumer Price Index, or CPI, rose 12.8% year-over-year during the month, driven by higher prices for beef, data from the Bureau of Labor Statistics released July 14 showed. That far outpaced the increases in other product categories, including a 5.1% increase in dairy and related products as well as a 2.3% advance in the price of fruits and vegetables.

—Read the full article from S&P Global Market Intelligence

Lyft, Uber face slow, bumpy recovery of ride-hailing demand – experts

Uber Technologies Inc. and Lyft Inc. are likely through the worst of the massive drop in ridership caused by the COVID-19 pandemic, though recovery to pre-coronavirus demand levels will be a long, slow road, experts said. Travel restrictions, stay-at-home orders and a major shift to working from home pummeled business for ride-hailing services. Uber and Lyft said demand bottomed out in April. Though recovery began in May, demand continues to lag pre-pandemic levels. Uber Eats and its presence in international markets could aid its recovery, while Lyft's focus on North America could limit the speed of its return, experts said. Uber finalized a deal July 6 to buy smaller U.S. food-delivery company Postmates Inc. in an all-stock deal valued at about $2.65 billion. On July 7, Uber announced an expansion into grocery delivery in Canada and Latin America. The moves could help grow the reach of Uber's food-delivery services, which the company says remain in high demand.

—Read the full article from S&P Global Market Intelligence

The Future of Credit

Default, Transition, and Recovery: Weakest Links Reach A New High As Their Pace Of Growth Slows

The number of global weakest links (issuers rated 'B-' or lower by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications) has increased to 611, from 600 since the last report. Default rates among weakest links are typically about eight times higher on average globally—the trailing 12-month weakest links default rate is 30.4%, compared with a speculative-grade population default rate of 3.4%. The media and entertainment (including hotels, and gaming and leisure) (107 issuers), consumer products (79 issuers), and oil and gas (59 issuers) sectors lead weakest links—together they account for 40% of the weakest links.

—Read the full report from S&P Global Ratings

Deep Dive: Recessions show how purchase price multiples link PE, distressed debt

The U.S. economy in February officially fell into a recession for the first time in 128 months. As in past recessions, this current downturn links two distinct asset classes, private equity and distressed debt, in two specific ways. One is obvious, the other perhaps less so. An obvious link is found in the debt markets. When companies backed by private equity sponsors run into trouble, two key private equity capital sources — leveraged loans and high-yield bonds — are among the instruments that eventually populate distressed investor portfolios. The second link is the purchase price multiples, or PPMs, that sponsors pay for their acquisitions. PPMs not only dictate the total cost of private equity acquisitions, but they also play a significant role in deciding how much distressed investors will recover from their investments in troubled and bankrupt companies.

—Read the full article from S&P Global Market Intelligence

LCD Q2 Market Review: Leveraged Loans Rebound; High-Yield Issuance Soars With Help From The Fed

In the staggered, often stunning capital markets recovery in the second quarter of 2020, abetted by what was largely implicit Fed support, bond issuance across the ratings spectrum soared to new records and loan issuance slowed to a crawl, though the balance between the two pillars of the leveraged finance segment – leveraged loans and high-yield bonds – improved somewhat in June. For the first time since the throes of the Great Recession in 2009, the second quarter produced more secured high-yield bond issuance ($54.8 billion) than institutional loan volume ($44.4 billion), with loans accounting for 45% of the total. For reference, the mix in 2Q19 was $70.3 billion of institutional loans and $20.8 billion of secured high-yield bonds, for a share split at 77%/23%. For the same 2018 period it was $140 billion of loans and $9 billion of bonds (94%/6%).

—Read the full article from S&P Global Market Intelligence

Banking Sector Under Pressure

US bank loan loss projections tower over allowance levels

As banks start to report second-quarter earnings, they are widely expected to post staggering credit costs. But an optimistic view holds that a second round of large loss provisions might be enough to put the bulk of the pandemic's damage behind them. To get a sense of where the industry stands, S&P Global Market Intelligence analyzed how much banks have already set aside for loan losses relative to stress-test loss projections. For historical context, this analysis also looked at actual charge-offs the last time there was a deep recession.

—Read the full article from S&P Global Market Intelligence

Credit unions forge ahead with tech investments as COVID-19 keeps members home

The COVID-19 pandemic has pressed credit unions to double down on efforts to enhance their offerings of electronic services as their customers are forced to stay at home. In recent years, credit unions were already increasing the number of electronic services they offered. For instance, a total of 65.9% of U.S. credit unions provided mobile banking services in 2020, up from 48.7% in 2014, according to data compiled by S&P Global Market Intelligence. The fallout from the coronavirus only underscores the need to increase adoption that can help members connect with credit unions without visiting a branch, executives said.

—Read the full article from S&P Global Market Intelligence

Deposits at Sweden's top banks jump as clients off-load assets, draw down loans

Customer deposits at Sweden's largest banks increased sharply in the first quarter, which their finance chiefs said was attributable to financial asset sell-offs, risk reduction and drawdowns on liquidity facilities amid the coronavirus crisis. Svenska Handelsbanken AB (publ) and Skandinaviska Enskilda Banken AB both saw double-digit increases in deposits over the three-month period — 23.72% and 15.10%, respectively — according to an S&P Global Market Intelligence analysis of European banks with assets of more than €200 billion. Handelsbanken and SEB recorded the highest increases, with Swedbank AB (publ) in fourth, with a 9.60% increase.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

The Essential Podcast, Episode 16: Hydrogen at Scale — The First Element of the Energy Transition

Derided, doubted, and now celebrated—an old solution to fossil fuels has become the fuel of tomorrow. Simon Thorne and Roman Kramarchuk of S&P Global Platts join The Essential Podcast to explain the practicalities and obstacles for hydrogen as an energy carrier. Listen and subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts,  Deezer, and our podcast page. 

—Listen and subscribe to The Essential Podcast from S&P Global

BlackRock voted against management at 53 companies over climate concerns

BlackRock Inc. voted against dozens of management recommendations during the 2020 shareholder proxy season after finding that those companies were not making enough progress on climate issues. In a report released July 14, the world's largest asset manager said it had identified 244 companies including Exxon Mobil Corp., TransDigm Group Inc. and Fortum Oyj that "are making insufficient progress integrating climate risk into their business models or disclosures."

—Read the full article from S&P Global Market Intelligence

Environmental group sues US EPA over Clean Water Act rule aimed at pipelines

An environmental group sued the US Environmental Protection Agency to vacate a rule intended to prevent states from blocking natural gas pipelines and other infrastructure projects by denying critical water quality permits. The July 13 lawsuit filed by the Delaware Riverkeeper Network in the US District Court for the Eastern District of Pennsylvania came the same day EPA published the final rule in the Federal Register. The rule is "arbitrary and capricious and contrary to the text, structure, and overarching purpose of the Clean Water Act," said the suit (US District Court for the Eastern District of Pennsylvania Case 2:20-cv-03412).

—Read the full article from S&P Global Platts

Renewable Tracker: Southeast renewables jump in Q2, Cal-ISO slips with low hydro

Houston — US Southeast region renewable output jumped an average of 41% year on year for second quarter 2020, the biggest regional increase across the country, while the Electric Reliability Council of Texas moved into the top renewable output spot totaling 288 GWh/day. Renewables in the Southeast totaled less than 8% of the market share despite a 34.6% jump in hydro, a 22.6% increase in wind and a 39.8% rise in solar in Q2, according to S&P Global Platts Analytics data. The Midcontinent Independent System Operator followed the Southeast with a 22.3% average increase in renewables output for Q2, mostly due to a 26% jump in wind, the largest wind output increase nationwide, according to MISO data.

—Read the full article from S&P Global Platts

The Future of Energy and Commodities

Watch: Market Movers Europe, Jul 13-17: OPEC+ will decide on output cuts, as US sanctions target Nord Stream 2

In this week's highlights: OPEC nears decision point on future cuts; question marks still hang over the Nord Stream 2 gas pipeline; can carbon allowances sustain their upward momentum? And the London August white sugar contract is due to expire.

—Watch and share this video from S&P Global Platts

OPEC sees bullish oil market recovery ahead as it readies to ease output cuts

Global oil demand will rebound strongly in the second half of 2020 and throughout 2021, offering OPEC ample room to boost supplies to the market as it recovers from COVID-19, the organization's latest analysis showed. The data came as OPEC and its allies are scheduled to ease their production quotas by some 2 million b/d in August, with officials citing new-found optimism in the world economy's prospects. In its closely watched Monthly Oil Market Report, released July 14, OPEC revised upward its forecast of 2020 oil demand by 130,000 b/d to 90.72 million b/d. And in its first 2021 market outlook, OPEC projected oil demand would surge to 97.72 million b/d -– still below pre-pandemic levels but an acute recovery from the hard-hit second quarter of 2020.

—Read the full article from S&P Global Platts

Dirty tanker markets face reality check after boom busts: Fuel for Thought

The tanker markets experienced an extremely volatile second quarter as the coronavirus pandemic threw all oil-related markets off-kilter, with rates on some routes swiveling from record-highs to record-lows in just a matter of months. But with the oil market gradually rebalancing and the summer lull kicking in, freight rates are likely to stay largely steady and soft in the coming months. And according to S&P Global Platts Analytics, freight rates on the dirty tankers’ market will likely remain under pressure until OPEC+ cuts are reversed. “Spot rates in most vessel groups hit new lows for the year as deeper-than-expected OPEC+ production cuts and less demand for floating storage have not been sufficient to accommodate surplus tonnage,” it said.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.