The banking industry reported strong quarterly results. The few missteps were Citi Group with their guidance and Germany's largest bank, Deutsche Bank.
On the positive side American Express had a record quarter. Bank of America was very profitable. It had an exceptionally strong report. Recently, two large regional banks joined forces to create the 6th largest banking concern in the US. BB&T allied with Sun Trust as a merger of equals. Even in this low interest rate environment US banks have found a model that works for them. The future, however poses new obstacles and challenges.
Internet
The corner bank and its branch network in shopping centers throughout the nation face a challenge with internet banks. Due to low overhead these digital tellers can offer a higher interest return to depositors. I don't see this as a big problem because people get an internal relief that drowns the fears around the stability of a lending institution by seeing an actual business. With all the dangers of hacking, a friendly teller trumps a half-of-a-percent interest. In addition, your corner bank does offer internet banking.
With that said, there are other and more dangerous problems looming on the horizon.
Consumer
With very few exceptions most home mortgages are made through the government by either Fannie Mae or Freddie Mac. This is a huge loss of business for the banking institutions. To try to salvage some of this "credit money," banks are getting into lines of credit lending for income. This is very profitable and one of the streams that are providing the current success for the banks. Banks are still the first option for small business, but as I reveal, this is dangerous territory.
Anyway, the US consumer is spending. Visa and Master Card are two hot stocks. At present, the consumer is buying autos. Last year(2018) was the fourth straight year in which over 17 million new cars were sold. Sounds great except the average price of the vehicle is now over $30,000. Dear Reader, in the 1970s you could buy the average home for that figure. This tells you many things amongst which the purchasing value of the dollar continues to decline and with it, the ability of the US consumer to maintain a standard of living. It too is also declining. In the 1970s it was common to purchase a auto with cash. Auto loans were for 36 months. Today, very few car sales are for cash. The length of an auto loan has been extended for 84 months. This is a terrible trend. As we have heard recently in the news with the federal employees being furloughed, even employed citizens with good jobs cannot get bye with missing one pay check. People are taking from Peter to pay Paul. This could cause a hiccup to lending institutions.
It gets worse. The consumer has run up a tab of $4 trillion when you combine credit cards, auto loans and student debt. This spending in the last five years is up 25%. Now, has the income equally rose the same percentage? No! Of course, not! The US consumer is in dangerous territory which means there will be defaults on the horizon. Speaking of which, currently, there are 7 million auto loans delinquent by 90 days according to Bank Rate.com. That figure translates to trouble in Big City.
Corporate
Our CEOs have done a poor job of leading our economy during the recovery from 2007-08. Corporate debt is $9 trillion and rising. Spending shareholder money on buybacks rather than research will come back to bite our nation. We have invented solar, but do not lead in the field. We developed PCs, but had them built on foreign soil. NAFTA killed 12 million manufacturing jobs. The same could be said about the textile industry, food industry, furniture, etc. Our iconic brands like GE, IBM, AT&T have low rated bonds at BBB and many companies are floating on debt. We hear that some emerging markets cannot service their debt like Venezuela. How far are we when our national debt climbs one trillion per year? It is now $22trillion! Next year, 23Trillion! I know that this is off the subject, but I feel that all things are related. So add this, there is possible collateral damage from derivatives. In 2007 the total swap market was $61 trillion. Today, it passes $120 trillion. This is unsustainable!
Potential Bankruptcy
This is another aspect that has the banking institution on the hook. The following are corporations that will possibly join Radio Shack and the Doo-doo bird. Keep in mind the name appears once, but these are chains which represent thousands of workers and millions in debt.
*Office Depot *Pier 1 Imports
*Land's End *Neiman Marcus
*99 Cents Only *Bebe
*Mattress Firm *Destination Maternity
*Guitar Center *Stein Mart
*Bon-Ton *Vitamins Shoppe
*BKH Acquisition Corp. *David's Bridal
*Fred's Pharmacy *Winn-Dixie's operator, Southeastern Grocers
*Nine West *Tops Market
*Cole Haan *Charlotte Russe
*Claire's *Full Beauty Brands
*Pet Smart *Bluestem Brands
*Eddie Bauer * Payless
How many more do you need? The retail crisis will disrupt our economy with thousands being unemployed and banking looking to the Federal Reserve to bail them out, again. If all that is scary consider that AI(robotics) will eliminate 25% of manual labor. The present economy is performing well, but a little further out there, dark clouds are forming.
