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American Express Delivers Solid Second Quarter Results
Second quarter profits at credit card company American Express nearly triples, and came in well ahead of analyst estimates, as spending by card holders vaulted 16 per cent.
American Express also benefited from having to put away less than half as much money to cover losses as it did in the previous year.
“While spending among affluent consumers and businesses remains strong, today’s card members are borrowing less and paying down more of their outstanding debt. We remain cautious about the economy and the challenging regulatory environment.” chairman and chief Executive Kenneth Chenault said.
The figures bode well for American Express which seems to have rebounded from last year, where its cardholders spent less on their cards, and fell behind its peers.
The card company like its rivals now face the prospect of encouraging increased spending without loosening its credit standards.
American Express, unlike most rivals, issues credit cards and is subject to legislation enacted earlier this year that limits rate increases, which will bite into income.
For the latest quarter, American Express posted a profit of $US1 billion ($1.12bn), or US84 cents a share, up from $US337 million, or US9c a share, a year earlier. Revenue, net of interest expense, rose 13 per cent to $US6.86bn.
The company’s US card business, its largest by revenue by far, swung to a profit as revenue, net of interest income, rose and provisions for losses plunged 56 per cent.
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E*Trade Posts Second Quarter Profit
E*Trade Financial the online brokerage company has returned to profitability after posting second quarter profits on Wednesday for the first time in three years.
The company has not faired well after its business was negatively impacted by bad loans made by its banking division, which reported its seventh consecutive drop in loan loss provisions.
Net charge-offs, or loans that E*Trade doesn’t think it can collect, were $US225 million ($252m), falling 42 per cent from a year ago.
E*Trade gave its earnings a boost by releasing US$60 million from its loan loss as opposed to adding to it, suggesting that the company now believes it has enough capital to cover any impending losses.
The in improvement in the company’s loan portfolio during the second quarter was the difference between E*Trade reporting a profit rather than a loss.
In an interview with Dow Jones Newswires, E*Trade chief executive Steven Freiberg said: “The most significant dollar change (for the company) has been continued improvement in delinquencies and therefore write-offs and provisions in the legacy loan book.”
Mr. Freiberg took the helm at E*Trade on April 1st, and given the current state of the U.S. economy says the company would probably experience a continued decline into 2011.
A closely followed metric with E*Trade is its daily average revenue trades (DARTs), which it reported as being 170,000, up ten per cent from the first quarter however still 16 per cent below where it was a year earlier. The broker like its rivals benefitted from the “flash crash” on the U.S stock market in May 6.
Mr. Freiberg said, however, that trading in June was “not anywhere near as robust,” adding that the “residual effects of the flash crash have caused more investors to become concerned”.
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War of Words Erupts Between CBA and NAB
A war of words has erupted between two of the big four lenders, with Ralph Norris chief executive of CBA, lashing out at NAB’s claims that the lender is making super profits in mortgage lending.
The banking oligopoly in Australia is normally a cozy affair, and Mr. Norris criticizing a rival is indeed surprising.
Mr. Norris said that NAB arguing that CBA was hurting the economy because it was neglecting the business sector preferring to concentrate on less risky mortgage lending was “rubbish”
“I think the real issue is that we have a bank (NAB) that has performed poorly for many years and missed out on an opportunity when the mortgage market opened up,” Mr Norris said in an exclusive interview with The Australian. “Now they’re blaming everyone but themselves.”
CBA and rival Westpac took advantage of the historic opportunity that the financial crisis presented to establish their dominance in mortgage lending.
The two lenders grew their mortgage books organically by specifically targeting the influx of first time home buyers, which was brought about by the governments fiscal stimulus.
The two lenders increased their market share through acquisition, with CBA acquiring Bankwest and Westpac swallowing St. George.
Mr. Norris’s comments suggest that the industry has now become openly hostile towards NAB, as it seeks to establish itself as a trusted community minded lender.
The war of words erupted in June, when Mark Joiner, NAB’s finance director suggested that the banking industry was earning super profits on its mortgage book.
The allegation came at a very sensitive moment, when the resource industry was under pressure by former Prime Minister Kevin Rudd’s proposal that it be charged a super profits tax, leaving other industries feeling vulnerable and wondering whether they too would be targeted with such a tax.
Mr. Joiner said that the Basel II agreement which governs banking capital adequacy, meant that the amount required to be held against a mortgage halved, meaning that the return on equity for such a loan doubled to 45 per cent.
Mr. Joiner then drew attention to CBA and Westpac and their bias towards mortgage lending, with home loans accounting for more than 60 per cent of their balance sheet, compared to less than 50 per cent for NAB.
“Australia should have a balanced economy; not a big skew to mortgage or business lending,” Mr. Joiner told The Australian.
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Macquarie Looking To Sell Stake In Sprint Finance Corp
Australian investment banking major Macquarie is seeking offers valued at approximately US$3.5 billion for Real Estate Investment Trust (REIT) Sprint Finance Corp. If a deal is successful, it would be the largest sale of a U.S. based REIT in over three years.
The Bloomberg news service which cited unnamed sources close to the negotiations saying three publicly traded REIT’s including Lexington Realty Trust, National Retail Properties and Realty Income Corp have been approached recently. According to the sources several Private Equity firms have also expressed their interest in Sprint.
Macquarie declined to comment through its spokesperson, whilst the interested REIT’s also either declined to comment.
Sprint Finance Corp owns or finances approximately 1,200 retail properties across 45 states, The Scottsdale, Arizona-based REIT has listed assets valued at US$3.5 billion on its balance sheet., and debts of US$2.9 billion.
A consortium including Macquarie and Icelandic bank Kaupthing Bank hf acquired Sprint in 2007, for US$3.5 billion and $1.9 billion of assumed debt.
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EBay Has Good Second Quarter But Sees Currency Headwinds Affecting Future Performance
EBay, the online auction site and owner of PayPal has reported second quarter profits which were better than expected, but threw a note of caution saying it expects adverse currency movements to have a negative impact on overseas sales.
According to the Bloomberg news service, Ebay’s Second-quarter net income rose 26 percent to $412.2 million, or 31 cents a share, from $327.3 million, or 25 cents a share. The company delivered earnings of 40 cents a share, with the average estimate of analysts polled by Bloomberg predicting the company would earn 38 cents a share.
Despite EBay’s improved performance as it recovers from a fall in spending on e-commerce, the company’s strategy of focusing on international markets threatens its turnaround.
A declining Euro and other currencies against the US dollar reduces the value of its international income in dollars.
Currently EBay earns more revenue internationally than any other large US internet company including the likes of Google, Yahoo and Amazon.
The impact of adverse currency movements is estimated to hurt sales by as much as US$250 million dollars. The company expects third quarter revenue to be between US$2.13 billion and $2.18 billion. Most analysts have predicted that the third quarter revenue number to be US$2.2 billion.
In March the company reduced and scrapped some of its listing fees in its Marketplaces business. A move designed to attract a larger number of merchants to use the service. According to the company, the move has been successful, and those changes will boost second half yearly results.
John Donahoe, EBay chief executive officer says that whilst he believes the changes implemented will help the company’s performance in the long run, he was still dissatisfied with the progress of the flagship site in the U.S.
While confident the changes will help the company in the long run, Chief Executive Officer John Donahoe said he wasn’t satisfied with the progress of the main site in the U.S.
“I have high expectations for our company, our employees and for our customers,” Donahoe said in an interview. “We did good, not great in our execution in the U.S.”
The Marketplaces unit, which includes the main e-commerce site, ticket reseller StubHub and the classified-advertising service, accounts for most of EBay’s revenue.
Mobile service have become a strong source of growth for EBay, and though it trails rivals like Amazon in overall growth rates. The company is now the top mobile internet retailer in the U.S.
EBay says that goods sold through devices like the iPhone, iPad and other devices will more than double to US$1.5 billion this year.
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NAB And Bank of New York Mellon Propose Tie Up
Australian banking major NAB says it is in talks with Bank of New York Mellon on a possible joint venture in asset servicing.
The proposed deal would see the two lenders combine forces to increase their product and service offerings to client, in an environment where there is increased demand for global capability.
“The deeper partnership, which could take the form of a joint venture, would combine NAB’s offering in the Australian asset servicing market with BNY Mellon’s extensive global capability,” NAB said in a statement.
NAB says that it still needs to work out specific details of the partnership, which it would explore over the next few months.
NAB and BNY Mellon Asset Servicing have had a relationship since 1996 when BNY Mellon was appointed NAB’s global custodian for all foreign assets of NAB’s custody client base.
Simultaneously NAB was appointed by BNY Mellon to serve as its Australian and New Zealand sub-custodian for its global clients.
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Australian Economy Experiencing Robust Growth
No matter who ends up winning the upcoming Australian general election, the winner will undoubtedly have to take control of an economy growing at an above trend rate of 3.5 per cent.
According to the Westpac-Melbourne Institute leading index of economic activity which was released on Wednesday, the annualized growth rate during may was 6.7 per cent, much higher than the long term trend rate of 3.0 per cent.
The index is an indicator of the likely rate of economic activity for between three to nine months into the future.
Bill Evans chief economist of Westpac says that though there have been signs that the index has peaked, the index still suggests that there is a stronger outlook for growth during the near term than he was expecting.
Westpac is expecting an annualised growth pace of 3.5 per cent during the second half of 2010, slightly above trend of 3.25 per cent.
Despite the strong indicator, May was the second consecutive month where the rate of growth in the index had slowed.
“In absolute terms the growth rate remains remarkably high but it appears that growth in the index has peaked,” Mr Evans said.
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RBA Undecided On Further Interest Rate Hikes
The Australian central bank has signalled that interest rates may be held steady over the next few months, if inflation data which is to be released next week is in line with forecasts.
“The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” Australia’s Reserve Bank said in the minutes of its policy meeting of July 6, when it left rates unchanged.
The Reserve Bank of Australia (RBA) believes that the latest inflation data which is due to be released next Wednesday is likely to exhibit further moderation, but the RBA remains hawkish due to the fact that it expects the inflation rate was likely to remain at the upper end of its preferred 2-3 per cent target range.
The central bank at its most recent policy meeting held on July 6th left interest rates unchanged at 4.5 per cent, which was the second consecutive month of leaving them unchanged, after six consecutive rate hikes between October 2009 and May 2010.
The central bank cited previous hefty rate hikes had “afforded flexibility to maintain steady settings in the face of increased international uncertainty”.
The RBA increasingly appears to be in a quandary over the direction of monetary policy, as volatile financial markets make a strong case against further monetary tightening, whilst the Australian economies continues to appear robust, commodity prices are strong, and spare capacity is scarce.
The board minutes said some recent moderation in Asian growth was desirable but there is likely to be some uncertainty in the near term about the extent of the cooling.
The prospect for Australia’s largest trading partner is largely centred around growth for the next few years the RBA said, whilst the labour market continues to maintain its strength, though according to the central bank, according to its data, the housing market has cooled.
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CBA Says Australian Consumer Spending Weak
A new report authored by Commonwealth Bank suggests that whilst the job market is stronger, consumer spending is at its weakest level since the height of the global financial crisis.
The Commonwealth Bank Business Sales Indicator (BSI) fell by 0.3 per cent in trend terms in June after a similar decline in May. The decline over the last quarter is the worst result since the start of 2008.
Craig James, chief economist at CommSec, who wrote the BSI report, suggests that the chief reasons behind the decline were higher interest, doubts over the state of the global economy, rising utility charges and council rates, all of which were weighing on consumer minds.
“While we are hopeful about a lift in spending later in the year, future Reserve Bank (of Australia) rate decisions will be pivotal. Consumers feel as (if) they are under siege at present and they need a period of interest rate stability so they can focus on both the positive and negative influences on the household budget.” Mr. James wrote in the report on Tuesday.
During the last year in trend terms, the BSI has risen just 0.7 per cent, registering its slowest growth in 17 months.
The trend pace of growth has consistently slowed over the past seven months, exactly tracking the slowdown in the Australian Bureau of Statistics retail trade series, Mr James said.
In trend terms, the weakest sectors during June were telephone order providers, mail order, retail stores, and automobiles and vehicles.
The strongest gains registered in June in annual terms were personal service providers, amusement and entertainment.
The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through CBA merchant facilities.
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GE Capital Say Smaller Australian Lenders Still Find Funding Difficult
Non bank financial company GE Capital says raising finance for smaller lenders continues to remain difficult for smaller lenders when compared to the major banks.
Skander Malcolm who runs GE Capital in Australia says that because the banks have large depositor bases they were able to fund raise more effectively than smaller lenders such as GE Money.
“We’re trying to access capital markets, they are accessing capital markets as well. Certainly, it’s a lot easier for them because they have a whole lot of deposits on hand.” Mr. Malcolm told Sky Business News.
Mr. Malcolm added that the European Sovereign Debt Crisis had had an impact on the cost of funding.
“But from our perspective, we’re well funded through this year and into next (year), so we’re pretty comfortable with where we are. But for some of the organisations out there trying to raise funds, it’s not exactly a liquid market, so there are certainly challenges still out there.”
Mr. Malcolm stressed that GE Capital was not aiming to compete with the major lenders, preferring instead to maintain a specialist position.
“When we target specialist segments, particularly in the retail side but also in the commercial side, then we compete successfully. We generate returns that are anywhere between 20 and 40 per cent better than major banks, and that’s because we stick to segments that we know and understand.” he said.
During the global financial crisis GE Capital exited the home and car loan segments, because it was felt that the company would find it tough to fund those loans.
“Our funding requirements are a lot easier now, having made those decisions, We have no plans to move back into mortgage or auto.” Mr. Malcolm said.
