Fancy Banks


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What's going on?

Investors did a double-take as Bank of America (BoA), Goldman Sachs, and Citigroup all got dolled up to show off their first-quarter results on Wednesday.

What does this mean?

Investors responded to last quarter’s interest rate cuts and rising volatility by rejigging and rebalancing their portfolios, and all three banks were only too happy to accept their trading commissions, which gave that part of their business an expectation-busting boost. BoA and Goldman looked alike in another part of their business too: they both earned more than expected from advising companies on deals and fundraising last quarter – even as corporate clients focused more on battling a once-in-a-generation pandemic than on taking bankers’ advice.

Why should I care?

For markets: Investment versus consumer banking.

Unlike investment banks JPMorgan and Goldman Sachs – which rely on their trading and dealmaking segments for a lot of their income – BoA and Citigroup’s consumer businesses (think savings and loans) are a big part of both firms. That’s why it was notable to investors that BoA’s consumer business missed expectations. And with low rates and rising unemployment right now, things are probably going to get tougher for BoA, Citigroup, and similarly consumer-focused banking rivals.

The bigger picture: Preparing for the worst, hoping for the best.

In anticipation of the tough period ahead, banks ramped up the cash they put aside in case of unpaid loans last quarter. BoA, for example, put $4 billion aside against potential defaults on its credit cards, personal loans, and business loans, while Citigroup – the world’s largest credit card provider – put $5 billion aside on top of the $2 billion hit the bank took from unpaid debts over the period. And it’ll probably need even more than that: credit card bills tend to be one of the first things people stop repaying when they’re struggling financially (tweet this). Goldman might be glad its consumer business is comparatively new: the bank only put $1 billion aside.

Originally posted as part of the Finimize daily email.

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