Bank of America Financial Chief Exits as Part of Shake-Up
In the U.S. the Fed has introduced stress tests for big banks since the financial crisis. This was launched in order to make banks more prepared to potential crises and to control their planning and resilience in case of recession. Banks must pass these tests in order to increase dividends or buy shares back. Bank of America, the second largest bank in the country, a few times almost failed these stress tests, having received only conditional approval. This leads to difficulties with investors and also some problems inside the management team. For example some major financial players who represented the Board now seem to be out of game. Bruce Thompson, David Darnell and Brian Moynihan are leaving their posts without even hinting at their potential successors. Moreover, now they are evidently not in good terms though they seemed to be a team before.
Despite all challenges Bank of America has recently posted a revenue gain which followed five years of declines. The total gain over the past five years is 32%. It looks promising but still is much less than some other banks’ performance. Maybe new team will deal with regulators better though the old one seems to catch up while they are in power.
Lowest-rated Borrowers Staying Away from Bond Market
This is no surprise that any event, political or economic, have impact on financial architecture of the world. Such factors and China’s economic slowdown, crises in Greece and Puerto Rico and plunge in the oil prices couldn’t but influence investment. Highly indebted corporate borrowers have been receiving the least since 2010. Mutual funds prefer investing in companies with higher ratings that is risk-reducing. This created bias towards higher quality bonds. This means that today the market does not welcome companies with CCC ratings. In my opinion, this can lead to further deepening of problems because there will be lack of finance for companies. Thus it implies slower production growth and continuous search for money. Indebted countries have frightened investors in terms of high risks for their funds and this can possibly trigger further unwillingness to invest.
Not All Is Rosy for Eurozone after Greece Deal
The situation in Greece seems to be settled. A new bailout program looks promising and offers huge perspectives. The market has already reacted to this news by increasing the Stoxx 600 index up to 10%. Taking into account stable 2% growth of the EU economy investors appear confident in the Eurozone and in Greece as reliable partner. Moreover, this progress is driven by former problematic and crises countries such as Spain and Ireland. This drives further recovery that is reflected in corporate earnings which are expected to grow by 4% in 2015 and by 13% in 2016. To add to this bright future, I would like to mention that borrowing costs fell while demand for credit and mortgages is very strong. This can lead to even more rapid economic recovery that has been projected.
Despite all this optimism some questions still need answers. There is no unanimity whether this recovery is cyclical or structural. This depends mostly on how companies decide to spend their earnings. Secondly, the state of the world economy does not allow making long-term financial projections. There are too many controversial processes going out in the economies of different countries. The structure of the European economy is another concern. Greece situation has given a severe blow to the currency bloc and this will make investors think twice before pouring money. Political risk has increased as leaders of nations cannot reach consensus about some crucial issues.