Banking Up A Storm

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What's going on?

On Friday, Citigroup and Wells Fargo, two of the US’s largest banks, reported their third-quarter earnings – and beat analyst skepticism.

What does this mean?

Citigroup’s third quarter profit was $500 million more than expected, while Wells Fargo’s revenue for the period was a pinch higher than forecast at $22 billion. Both banks reported an increase in “net interest margin”, meaning there was a greater gap between what they paid depositors for their cash versus what they charged borrowers for loans.

Why should I care?

For markets: A helping hand for US banks’ stocks.

The better-than-expected results have helped repair some of the damage to US banks’ battered share prices. Citigroup’s stock had previously fallen by 6% this year (but rose by 2% on Friday), while Wells Fargo’s had plummeted by 14% (but bounced back by 1% on Friday). The boost in net interest margin means banks will make more money off their loans to customers. This might just put a smile on investors’ dials, as they’ve been concerned that banks’ profits would suffer from the mix of long and short-term interest rates. (Banks make a chunk of their cash by borrowing cheaply in the short term and lending at higher rates for longer periods, and the rates haven’t been ideal for this.)

The bigger picture: Drawing a line under the past.

The positive third quarter gives both banks some breathing room. Citigroup is running with it, aiming to slash nearly $3 billion in costs by 2020 while spending $1.5 billion on new technology, among other things, to help it boost productivity and become more competitive. Meanwhile, Wells Fargo is trying to rebuild its reputation after being plagued by a series of scandals, including allegations of it opening millions of accounts for people who didn’t want them.

Originally posted as part of the Finimize daily email.

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