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For Most Big Banks, Pre-Crisis Returns are a Thing of the Past

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Storm Tracker: More than 860,000 customers still in dark in Michael's wake

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf


For Most Big Banks, Pre-Crisis Returns are a Thing of the Past

Despite a boost from tax reform, returns at most of the nation's largest banks remain well below pre-crisis levels.

The largest U.S. banks have reported steadily improving returns since the credit crisis, and a lower corporate tax rate helped push profitability higher in the first quarter. Still, returns at all but one of the big banks have lagged pre-crisis levels, largely because of capital and liquidity rules passed with the Dodd-Frank Act. The considerable increase in capital has suppressed returns on equity, while heightened liquidity requirements have squeezed margins.

JPMorgan Chase & Co. is the outlier among its peers with a first-quarter return on average equity of 13.7% that stands above its 13.0% return in 2006. In its first-quarter earnings release, JPMorgan said the tax cut helped lower income tax expense by about $240 million, despite a $2.0 billion increase in pretax income.

The other bulge-bracket banks benefited from lower taxes but did not reach pre-crisis returns.

Bank of America Corp. reported that its tax rate benefited by nine percentage points, while Citigroup Inc. reported a first-quarter effective tax rate of 24%, down from 31% in the year-ago quarter. Still, BofA's first-quarter return on average equity of 10.4% was far below the 16.2% it reported for full-year 2006, and Citigroup's first-quarter return on average equity of 9.2% was far below the 18.9% it reported for full year 2006.

For Goldman Sachs Group Inc., reaching pre-crisis returns has been a challenge thanks in part to Dodd-Frank's Volcker rule, which generally prohibits insured depository institutions and affiliates from proprietary trading — historically a key part of Goldman's business. Goldman's first-quarter return on average equity of 13.6% is less than half of the more than 30% return on average equity the company produced in each of fiscal years 2006 and 2007.

Before the crisis, Goldman Sachs "excelled at" using leverage as a proprietary fixed income, currencies and commodities trading firm to drive revenues and profitability, RBC Capital Markets analyst Gerard Cassidy said in a March report.

But regulations have "greatly curtailed" that practice, making the "old traditional 'Goldman Model' less profitable," Cassidy said.

The banks have also seen their returns come down because they have been forced to hold more liquid assets, which tend to have lower yields that reduce security portfolio income. The aim of provisions such as the liquidity coverage ratio is for banks to hold assets that they can quickly turn into cash to cover short-term obligations.

Regulators have taken such measures because illiquid assets held by financial institutions contributed to the financial crisis. A lack of liquidity led to the collapse of Bear Stearns Cos. LLC, whose sale to JPMorgan hits the 10-year mark on May 30.

But efforts to loosen some liquidity restrictions are being made in Washington. In March, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which allows investment-grade municipal bonds to qualify as high-quality liquid assets when determining banks' liquidity coverage ratio.

There is also a push to reduce some of the capital requirements large banks face. In April, regulators proposed re-calculating the enhanced supplementary leverage ratio that applies to U.S.-based global systemically important bank holding companies.

Holding additional capital is the biggest factor weighing down returns, Vining Sparks analyst Marty Mosby said in an interview.

Increased capital requirements are meant to help banks survive a downturn. But forcing banks to hold too much capital can lead to more risk-taking, Mosby said. Overly stringent capital requirements could entice banks to consider higher-risk businesses in an effort to boost returns, the analyst said.

Banks have yet to seek out too much risk because they have benefited from the post-crisis economic recovery, Mosby said. Institutions have seen credit costs go down, and they could see another tailwind if higher interest rates push up their net interest margins, he said.

Technological improvements that lower expenses can also improve ROAE. Better risk management systems that reduce spending on staffing can help banks more efficiently deal with regulations that have been adding to the cost structure.

But even if returns never reach pre-crisis levels, the regulatory requirements are good for bank valuations, said Nellie Liang, a senior fellow with the Brookings Institution. The rules make the financial system safer, and that adds value, Liang said.

"It has reduced the probability of default," Liang said in an interview. "It has also taken out the tail risk to the economy."



Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.



Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.



Storm Tracker: More than 860,000 customers still in dark in Michael's wake

Highlights

Florida, Georgia, Carolinas hardest hit

Peakloads down about 20% on week

Houston, Oct. 11 2018 — As the remnants of Hurricane Michael churned through the South Thursday, it cut power to more than 870,000 customers, shaving large chunks off daily peakloads and, while more than 30,000 technicians began working to restore service.

The center of Tropical storm Michael was about 25 miles south of Greensboro, North Carolina, as of 2 pm EDT Thursday, the National Hurricane Center said. It still had maximum sustained winds of 50 mph, moving northeast at 23 mph with an expected move offshore from southeastern Virginia Thursday night.

Since it made landfall near Mexico Beach on the Florida Panhandle between 1 pm and 2 pm EDT Wednesday, the storm left more than 860,000 people without power, but some of those services have been restored.



Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall on the Florida Panhandle as a Category 3 storm Wednesday, offshore oil and gas producers were busy evacuating crews and shutting in production Monday. By mid-day, nearly 20% of Gulf of Mexico oil production had been taken offline. That number will likely have risen when reported Tuesday as operators continued to shut down platforms Monday afternoon.

Meanwhile, just 24 days after Hurricane Florence made landfall, electric utilities were gearing up for Hurricane Michael restoration efforts by staging crews and supplies in the storm's path. Lost power demand is likely to have a knock-on effect on natural gas demand and prices.

After it brings over 100 mph winds to the western-most portion of Florida, Hurricane Michael is expected to turn northeast, bringing wind and rain to Alabama, Georgia and the Carolinas before heading back out to sea. Thiis article covers the key takeaways across commodities.