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Bank of America just ended a weak quarter—but there were 3 little-noticed bright spots



Around Christmas of last year, Bank of America looked as though it had clinched one of the biggest comebacks in banking history. After flirting with bankruptcy in the great financial crisis, BofA went on a half-decade tear to post $29 billion in net income for 2019, a 75% jump in just two years. CEO Brian Moynihan was doing what had seemed impossible: closing the profits gap with longtime universal banking champ, Jamie Dimon’s JPMorgan Chase, and BofA easily outracing another rival it has long lagged, Wells Fargo. In late 2016, Wells Fargo’s market cap was 40% bigger than BofA’s. Then BofA took off, and scandal-scarred Wells stalled. By the close of 2019, BofA’s share price had doubled to $35, and its $300-billion-plus valuation dwarfed Wells’ by the same 40%.

Then the COVID-19 crisis pummeled BofA’s profits and stock price. By deeply discounting what was, even before, a modest valuation, Wall Street is signaling that the bank will earn a lot less in the future than it made last year.

Its new earnings report is turning investors even more negative. On Oct. 14, BofA announced a steep drop in profits to levels far short of the numbers JPMorgan unveiled the day before. Net earnings for the third quarter fell to $4.9 billion, down from $5.8 billion in Q2 and $7.0 billion in Q4 of 2019. By contrast, JPMorgan earned $9.4 billion in Q3, notching the second-best quarterly number in its history. BofA’s results sorely disappointed Wall Street, sinking its shares by 5.33% to $23.62 at the close. That selloff was something of a surprise, since the numbers were more or less in line with analysts’ expectations. BofA narrowly beat the FactSet consensus for earnings. Revenues fell short by just 2%, and it way outperformed on credit costs, taking a hit of almost half-a-billion dollars or one-third below what Wall Street expected.

As he made clear on the call, Moynihan is doing nothing to change the steady course that looked like such a winner a few months ago. He’s deploying a compelling consumer strategy: Instead of aggressively pushing banking products, or even wooing new clients, he focuses on growing along with his existing customers by gaining a bigger “share of wallet” as their incomes and needs increase. The idea is that folks with checking accounts at BofA’s 4,300 branches will stick with the bank for credit cards, car loans, and mortgages, and managing their nest eggs via a private banker or Merrill Lynch financial adviser. That’s business that Moynihan says “sticks to your ribs.”

Because BofA funds its gigantic, nearly $1 trillion in loans almost entirely with ultra-low-cost deposits, it’s bound to generate big and growing profits, as long as it holds overhead and credit costs in check. So far, Moynihan has aced both goals, keeping overall expenses virtually flat. He’s holding defaults at among the lowest for any bank via his policy of granting credit card loans to people who are already solid customers, and avoiding high exposure to risky sectors such as commercial real estate.

What’s potentially troublesome is that profits didn’t fall because the COVID-19 crisis unleashed another wave of credit losses. Instead, BofA’s bedrock businesses throttled back. So the question arises: Will BofA quickly get back on track to earn around $30 billion a year, or will a low-rate, post-pandemic economy cause BofA to become durably less profitable than over the past few golden years?

One thing’s for sure: Wall Street’s now expecting BofA to earn even less in future quarters than the $4.9 billion posted in Q3. BofA’s current market cap is $205 billion, down from $305 billion at the end of 2019. Let’s say investors give its shares a price/earnings multiple of 15, well below the S&P 500 average of 21 over the past three decades. In that case, they’d be expecting BofA to be generating just $14 billion a year in earnings, or $3.5 billion a quarter, 29% below what it made in Q3. Talk about how-low-can-you-go expectations.

This writer—who praised Moynihan’s grow-with-your customers approach when he introduced it in 2011—is betting that BofA rebounds strongly.

Here are takeaways pointing to a resurgence in future quarters.

Credit costs dropped from huge back to normal, and Moynihan believes he’s booked all the damage upfront

As I described in my story on JPMorgan Chase’s report, a new accounting regime, in place since the start of 2020, requires that banks book all of their projected losses, over the entire life of all of their loans, in the current quarter. That applies even if the borrowers are still paying on time. So instead of taking those expenses gradually as credits actually go delinquent, banks now must take the entire wallop upfront.

As a result of the new rules, BofA shouldered $9.9 billion in provisions—a direct blow to earnings—in Q1 and Q2 of 2020. That’s almost triple the total for all of 2019. But in Q3, credit costs dropped to $1.4 billion. In the consumer bank that also makes small-business loans, the progress was particularly impressive, with provisions cratering from $2.55 billion in Q2 to just $479 million.

Of course, BofA took those big provisions in Q1 and Q2 because its models, based on extremely conservative assumptions on future GDP growth and unemployment, are forecasting that it will eventually need to charge off $9.9 billion in loans to businesses and people pounded by the pandemic. But as Moynihan noted on the conference call, we’re seeing little sign of damage so far. Only 0.54% of BofA’s over half-a-trillion dollars in consumer loans are more than 30 days past due. The mortgages, car loans, and the like no longer covered by forbearance are showing few defaults. As Moynihan put it, the charge-offs anticipated by the big provisions in the first half “have yet to materialize.”

Moynihan stated that he doesn’t expect to see a surge in charge-offs until mid-2021. “What we thought would happen in Q3 got pushed out, and keeps getting pushed out,” he said, attributing the delay in part to government assistance to families and small business, but also noting that consumers’ excellent payment record so far appears to signal that losses may not be as high as BofA anticipated.

Still, he says that there is “too much uncertainty” to begin lowering reserves, a move that would prove a windfall for profits, and could happen. In a statement that marks good news for future profits, Moynihan predicted that BofA now has all the reserves it needs to weather the crisis. If that’s the case, provisions in the next few quarters should be minimal.

But here’s the problem: Provisions were already low in Q3, yet BofA earned 16% less than in last year’s Q3, not to mention 30% less than in Q4. So what’s holding BofA back, and will the slowdown persist?

BofA is taking a one-two punch from low rates and a flatlining loan portfolio

A crucial source of growth is NII, or net interest income. Last year, BofA’s NII expanded by over $700 million to 1.5%. Although that’s a small increase, it enabled BofA to sustain its already high profitability, aided by Moynihan’s signature tight grip on expenses. But in Q2, NII dropped from $12.34 billion to $10.24 billion, or 17%. The decline has two sources. The first was a decline in interest rates that shrank the margin between what BofA collects on its loans and what it pays to depositors and savers. Second, BofA’s loan book not only stopped growing, but shrank a bit. Its total portfolio declined $18 billion or 1.85% over the past year.

In addition, total expenses at $14.4 billion were running almost 5% above the annualized rate in 2019. Moynihan and CFO Paul Donofrio ascribed the increase to a jump in one-time litigation costs, and $300 million to $400 million in extra expenses caused by the crisis, including the spending to process millions of PPP loans to small businesses, a burden just partially offset by fees.

To regain its pre-COVID pace, BofA needs to get NII growing again and wrestle down costs

As Moynihan acknowledged on the call, rates on his loan portfolio should remain extremely low going forward. As he also pointed out, BofA can offset that drag by growing the loan book that’s now treading water. In other words, attracting more borrowers will more than make up for the lower monthly payments it receives on its credit card loans and mortgages.

That’s just what BofA has been doing, and doing safely, for the past several years. Its total lending portfolio has waxed from by over $40 billion or 4.4% from 2017 to 2019, pretty much in line with the economy, including a $4 billion increase in credit card loans carrying average rates of 10.8%.

But can BofA get its loan book growing again? A bellwether is what’s happening with deposits. Gathering millions more checking account customers means that those extra households will add to revenues by taking out more credit card, car, and home loans over time. In the past year, BofA’s consumer deposits have surged by one-fifth, from $709 billion to $861 billion. By the way, the fall in rates is far from a total negative; the average BofA pays on those deposits has fallen from 0.11% to 0.05%. (The additional expense per dollar of deposits in manpower, real estate, and the like is an additional 0.8%, bringing the total to well under 1%. See why banking can be a great business?)

Hence, BofA appears to be fast gaining customers and expanding market share. That means its loan portfolio should wax a perhaps a point faster than the real growth in the economy. It’s also likely that Moynihan will put expenses back on the previous track of around $55 billion a year, and as in the past, hold the increases below the rate of inflation. The extra litigation expenses will phase out, and so will the extra spending on COVID.

Of course, BofA is essentially a machine designed to expand with the incomes of Americans and magnify profits by holding expenses constant, dollar for dollar. So if family incomes and GDP go flat for an extended period, BofA’s earnings will suffer. But a bet that the U.S. economy will come back is also a bet that BofA’s earnings will rebound, only faster.

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17 Ways You Can Develop New Habits and Improve Your Life



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Walmart sues government to pre-empt allegations it helped fuel opioid crisis



Walmart Inc. sued the federal government in an effort to preempt regulators’ claims that the retailer added fuel to the U.S.’s opioid crisis by filling suspicious painkiller prescriptions in its pharmacies.

The world’s largest retailer argues in the suit that the U.S. Justice Department and Drug Enforcement Administration is scapegoating the chain to divert attention from the agencies’ failures to effectively address the public-health crisis over opioids.

Watchdog groups have “meticulously cataloged” the ways regulators have “failed to safeguard the public from improper diversion of prescription opioids,” Walmart’s lawyers said in the 54-page complaint. Walmart indicated it sued the government in anticipation of the DOJ filing its own lawsuit alleging the retailer mishandled the highly addictive pills. The company wants a judge to remove “unacceptable uncertainty” about its practices.

A spokesperson for the Justice Department didn’t immediately respond to calls for comment after regular business hours. James Pokryfke, a DEA spokesman, declined to comment. The complaint comes a day after federal prosecutors announced an $8.3 billion deal with drugmaker Purdue Pharma LP under which the company will plead guilty to criminal charges over its marketing of its opioid-based OxyContin painkiller.

Walmart has been promoting its health-services offering in the U.S. — where care is expensive and the insurance system is complex. The company has announced plans to expand its low-cost clinics in Georgia and the Chicago area.

Walmart sued the government in Sherman, Texas — the same district in which federal prosecutors once weighed hitting the chain with criminal charges over its opioid-dispensing practices, according to ProPublica. Joe Brown, the former U.S. Attorney for east Texas, threatened to indict the retailer for intentionally supplying doctor-run pill mills that routinely wrote hundreds of prescriptions for opioid painkillers, according to the report. DOJ officials in Washington nixed the indictments, ProPublica said.

Maureen Smith, a spokesperson for the U.S. Attorney’s office in Sherman didn’t immediately return a call seeking comment. Brown, who stepped down in May, didn’t return a call and email seeking comment. The Wall Street Journal reported earlier on the suit.

Walmart has been sued by more than 2,000 states, cities and counties seeking to recoup billions in tax dollars spent battling the fallout from the opioid crisis. The retailer, along with pharmacy chains, was set to face a federal trial in Cleveland over its opioid handling, but the case was delayed by the Covid-19 outbreak.

Local government officials claim Walmart and companies such as CVS Health Corp., Walgreens Boots Alliance Inc.and Rite Aid Corp intentionally turned a blind eye to suspiciously large opioid prescriptions to ramp up billions in profits.

In its suit, Walmart said it has a robust system for monitoring opioid prescriptions and federal regulators are making unreasonable demands on the chain.

“DOJ and DEA are placing pharmacists and pharmacies in an untenable position by threatening to hold them liable for violating DOJ’s unwritten expectations for handling opioid prescriptions—expectations that are directly at odds with state pharmacy and medical practice laws,” the company said.

The case is Walmart Inc. v. U.S. Department of Justice, 20-cv-00817, U.S. District Court, Eastern District of Texas (Sherman).(Updates with details on opioid suits against Walmart starting in eighth paragraph)

–With assistance from Chris Strohm and Laurel Calkins.

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Trump claims at debate that China is paying for farm subsidies. In fact, U.S. taxpayers are footing the bill



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At Thursday’s U.S. presidential debate, President Donald Trump falsely claimed in an exchange with rival Joe Biden that China is paying American farm subsidies.

“I just gave $28 billion to our farmers,” Trump said.

“[That’s] taxpayers’ money,” Biden, the Democratic nominee, interjected. “[The money] didn’t come from China.”

Trump objected: “No, no. You know who the taxpayer is? It’s called China. China pays $28 billion, and you know what they did to pay it, Joe? They devalued their currency and they also paid up, and you know got the money? Our farmers, our great farmers, because they were targeted.”

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Trump’s claim that China paid for American farm subsidies is false, given that the U.S. has drawn from its own government coffers to pay for subsidies to bolster farmers hurt by the U.S.-China trade war. It is also unclear how his claims of China ‘paying up’ or ‘devaluing its currency’ relate to U.S. government subsidies to American farmers.

Trump’s January phase I trade deal with China—a first step in resolving the years-long trade war—included a vow from China to vastly increase its purchases of American farm goods. Such action would have benefited U.S. farmers, but as of now, China is far behind on meeting its targets.

Farm relief

The trade war began in July 2018, when the Trump administration levied $34 billion in tariffs on Chinese goods, meaning it cost more for American companies to import products from China. In response, China imposed a 25% tariff on U.S. soybeans and other agricultural products, meaning American goods became more expensive for Chinese importers. Subsequent rounds of tit-for-tat measures followed, which raised China’s tariffs on soybeans to as high as 33%; Chinese tariffs on U.S. pork products reached 72%.

Trump often claims that China paid the tariffs his administration imposed on Chinese goods. It’s true that the U.S. Treasury has collected billions of dollars in tariffs in recent years, but that money is paid by U.S. importers of Chinese goods, not by Chinese entities or China itself.

In reality, tariffs are intended to be a deterrent. Those imposed by the Trump White House made it more expensive for American companies to buy Chinese items; the idea being that American companies would import fewer Chinese goods if the products became more expensive, which would ultimately hurt China. American companies did seek out alternatives to Chinese products after the tariffs went into effect, but they also responded by raising their prices to cover the added cost and by cutting other expenses, like jobs. In June 2019 alone, a group of trade associations found that Chinese tariffs cost U.S. businesses $3.4 billion. By the time of the trade deal in January 2020, Trump administration tariffs had cost U.S. companies tens of billions of dollars.

The $28 billion figure that Trump mentioned on Thursday appears to refer to the $28 billion in subsidies the United States Department of Agriculture (USDA) allotted to American farmers between 2018 and 2019. The USDA rolled out the subsidy mechanism, called a Market Facilitation Program, in 2018 to provide relief to farmers whose crops had been targeted by China’s retaliatory trade war tariffs.

Corn And Soy Fields Ahead Of USDA WASDE Report
A farmer pulls a planter through a soybean field in this aerial photograph taken over a farm near Buda, Illinois, U.S., on Tuesday, July 2, 2019. The U.S. trade war with China hit American soybean farmers especially hard.
Daniel Acker/Bloomberg via Getty Images

Just as U.S. tariffs on Chinese goods made the items more expensive in the U.S., China’s retaliatory tariffs on U.S. goods made American products more expensive in China. And in this instance too, the added cost was a deterrent. Instead of importing, say, soybeans from the U.S., Chinese companies imported them from other countries, such as Brazil. That was bad news for U.S. soybean farmers, who exported roughly 25% of their harvests to China in 2017, before the trade war began.

The tariffs led to a precipitous drop in U.S. soybean exports to China. From 2017 to 2018, they fell 70%.

It is not clear how Trump came to the conclusion that China footed the $28 billion bill for farmer subsidies. The payments were the handiwork of the USDA’s Commodity Credit Corporation, an agency that is authorized to borrow from the U.S. Treasury to stabilize America’s farm economy.

“President Trump has great affection for America’s farmers and ranchers. He knows that they’re fighting the fight and that they’re on the front lines,” Agriculture Secretary Sonny Perdue told reporters in 2018.

Farmers are viewed as a core constituency in Trump’s electoral base, and the president continues to hold commanding leads over Biden in 2020 polls of American farmers.

Observers have criticized Trump for using the little-known USDA mechanism to shield his administration from negative political consequences of the trade war, without having to put the measure before federal lawmakers.

“What’s unique about this is, [the subsidies] didn’t go through Congress,” Joe Glauber, the USDA’s former chief economist, told NPR in December 2019. “The sector that is hurt the most [agriculture], and which would normally complain, all of a sudden it’s assuaged by these payments.”

The Trump Administration’s approach has caught the attention of the U.S. Government Accountability Office, the U.S.’s watchdog agency. It’s investigating whether the payments were disproportionately distributed to large corporations or to places that supported Trump in the 2016 election.

Trade deal

The trade deal that the Trump administration signed with Beijing in January this year holds China to new purchasing targets in exchange for the lowering of tariffs. Officially, Chinese tariffs on U.S. goods remained in place, but in practice China granted tariff-free waivers on goods like pork and soybeans to Chinese importers.

As part of the deal, China agreed to purchase $36.6 billion worth of agricultural goods, a $12.5 billion increase from pre-trade war levels in 2017. On paper, that action by China provides real relief to American farmers. But through August, China had only purchased $11 billion worth of agricultural products, less than half of what it needed to buy to be on track to meet the conditions of the trade deal.

Meanwhile, from 2018 to 2020 U.S. farmers relied more heavily on U.S. government support. The share of income they receive from the U.S. government, as opposed to what they receive from selling their crops, has steadily increased in the last three years. So far in 2020, 40% of farmers’ net cash income has come from government subsidies, the highest percentage in two decades.

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