The dirty little secret no politician will admit: There is no way to ‘go for growth’

Investment professionals and politicians who spurned Liz Truss’s “go for growth” strategy for the British economy are slowly waking up to an uncomfortable truth.

The former U.K. Prime Minister’s plan, which relied on unfunded tax cuts that were perceived to be inflationary, may have been the only growth plan for Europe’s economies to escape over-indebtedness and low productivity without having to turn to austerity or greater state control of the economy. Not that any of them are prepared to admit it.

Britain’s Institute of Fiscal Studies on Monday described parties’ reluctance to admit as much on Monday as “a conspiracy of silence” arguing Labour’s pledge to rule out tax hikes was a “mistake.” “We wish Labour had not made those tax locks and it will be difficult [politically] to break,” IFS director Paul Johnson said about the party currently leading the polls.

But it’s not just British politicians who are refusing to face up to reality. In France, where an impending snap parliamentary election threatens to empower extremists on both sides of the political spectrum — to the cost of President Emmanuel Macron’s centrist Renaissance party — there is a similar reluctance to admit there are only bad options on the table.

French Finance Minister Bruno Le Maire highlighted last week, after French bonds began to wobble, that anything short of centrism risks placing France under the supervision of Brussels and the International Monetary Fund.

What he failed to point out is that even supposedly sensible centrists face having to do the unthinkable in the longer run.

“They have to go to financial repression because high growth as a strategy out of over-indebtedness is not going to be funded by the bond market,” Russell Napier, an influential investment advisor who authors the Solid Ground newsletter, told POLITICO. “I think it doesn’t matter who you vote for, you end up with roughly the same thing. So the market’s not maybe saying ‘we’re very sanguine about Labour [in the U.K.].’ They’re just saying: ‘It doesn’t really matter who you vote for. We are heading toward this route.’”

Incoming financial repression

That route, in Napier’s opinion, means it’s time for financial repression: putting a lid on the free movement of capital and having the government and other technocratic institutions increasingly determine which sectors benefit from public sector funding, and even more critically, from private sector funding too.

The pathway takes Europe much closer to the dirigiste policies that dominated the continent in the post-war period and away from the market-based liberalism that investors have become used to over the past four decades.

Truss’s risky tax cuts had hoped to avoid a push towards state-guided credit rationing by unleashing the power of the private sector and the financial industry to stimulate such a high rate of growth that the accompanying inflation just wouldn’t matter — especially if the Bank of England’s interest rate policy acted in support.

But the dilemma facing France, one of the EU’s largest economies, encapsulates three further political complexities: Paris does not control its own monetary policy, its public sector spending capacity is restricted by fiscal rules created in Brussels — which it is now officially in breach of — and any move to direct private sector financing domestically could clash with the bloc’s greater efforts to create a single capital markets and banking union.

That doesn’t leave much wiggle room for any incoming French government to experiment with a “dash for growth”, either of the free-market Truss variety, or — which is more relevant for France — the free-spending government interventionist one.

Politicization of the ECB

For Macron, the stakes are abundantly clear. In a speech to the Sorbonne University in April, he said: “We must be clear on the fact that our Europe, today, is mortal. It can die. It can die, and that depends entirely on our choices. But these choices must be made now.”

But in the same speech he, too, advocated a wholesale reordering of Europe’s economic framework largely because he — like the populists on either side of him — can’t afford everything he wants.

The current economic model, he said, is no longer sustainable “because we legitimately want to have everything, but it doesn’t hold together.”

Like all of the French presidents of the last 25 years, Macron has faced this constraint on domestic policymaking by trying to co-opt the one institution that has no formal constraints on creating money out of thin air — the European Central Bank. In his Sorbonne speech, he stressed that “you cannot have a monetary policy whose sole objective is to address inflation.”

The ECB’s mandate can only be updated by changing the whole EU treaty, something for which Europe’s leaders have no appetite. But even within its current legal straitjacket, the ECB has found plenty of ways to support national governments when it can, with a sequence of tools and programs that have allowed it to buy their bonds and keep their borrowing costs below where they would naturally have been.

It’s the newest of these tools that is likely to play a key role in the next few weeks. The ECB has stopped net purchases of bonds as part of its broader policy to bring inflation down, but it has one tool — so far untested — that it can use to alleviate any market stress after the elections: the so-called Transmission Protection Instrument.

The TPI allows the ECB to buy the bonds of individual governments whose borrowing costs it considers out of step with macroeconomic fundamentals. The idea is to ensure that its single monetary policy applies reasonably equally across the whole euro area. But it creates substantial scope for the ECB to exercise financial repression on behalf of those it considers aligned with its own mission.

It implies that the ECB knows better than markets what the value of a government promise to pay is. And in not setting any ex ante limits to the scale of its interventions, it has bestowed upon itself enormous power to take on the markets if it disagrees with them strongly enough.

It’s this power that Macron may want to harness if he is still able to present a budget he can call his own after July. But by the same token, he will want to ensure that the ECB denies that support to his opponents if they emerge victorious, just as it did to Italy’s Silvio Berlusconi and Greece’s Alexis Tsipras a decade ago.

According to Napier, whether the ECB ultimately decides to use the TPI or not, the decision will have political implications, not least because it will change the parameters of what the central bank is really prepared to do save the euro, and on whose behalf.

“If you think Macron is an ally of the [European] project, then you don’t use it until after there’s some type of chaos,” Napier said.

Many things could still change between now and July 7. The far right National Rally’s Jordan Bardella, for example, has already walked back some of the party’s spendiest plans, aiming to reassure markets that conflict with the EU over its fiscal rules can be avoided.

But in an interview with the FT published on Thursday, Bardella upset the bond markets again by saying he’d campaign for a big rebate from the EU budget, only hours after his ally and mentor Marine Le Pen signaled that a National Rally government would try to wrest away Macron’s powers as commander-in-chief.

In other words, the threat of major market instability in July remains alive and well. And, as Napier put it: “If bond yields blow up in France they can blow up anywhere.”

(Additional reporting by Geoffrey Smith)

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The best banks in the Asia-Pacific region, according to customers

SINGAPORE — Customers in Asia-Pacific have picked their favorite banks as lenders scramble to meet consumer expectations in a fast-changing environment.

After a prolonged period of high inflation — and interest rates — banks in the region are starting to navigate the global trend of lower rates. They’re also facing technological innovation that has the potential to transform the sector, as generative AI gains traction around the world.

Against this backdrop, CNBC and market research firm Statista surveyed 22,000 individuals with a checking or savings account in 14 major economies. The report below — the first of its kind — is designed to highlight the banks that best meet consumer needs in their respective markets.

For the survey, participants evaluated their overall satisfaction with a bank, and whether they would recommend it to others. They also rated each based on five criteria: trust, terms and conditions (such as fees and rates), customer service, digital services and quality of financial advice. Read the full methodology here. The ranking only included banks that qualified according to the criteria described in the report.

See below to see which banks made the list in your location.

Australia

1 ING Group
2 Bank Australia
3 Westpac
4 Ubank
5 NAB
6 Alex Bank
7 Newcastle Permanent Building Society
8 People’s Choice Credit Union
9 Beyond Bank
10 ME
11 Suncorp
12 MyState Bank
13 Australian Military Bank
14 Community First bank
15 Heritage Bank

Source: CNBC & Statista

Dutch bank ING came out top in Australia, against a sea of local competition. Like most economies, Australians valued trust the most and were less concerned on the financial advice they were given.

China

1 China Merchants Bank
2 Bank of China
3 ICBC
4 HSBC
5 China Construction Bank
6 Postal Savings Bank of China
7 China Minsheng Bank
8 Standard Chartered
9 SPD Bank
10 Bank of Communications
11 Agricultural Bank of China
12 UBS (China) Limited
13 JPMorgan Chase Bank (China)
14 China Everbright Bank
15 Ping An Bank
16 DBS Bank (China)
17 Bank of Suzhou
18 Bank of Jiangsu
19 Chongqing Rural Commercial Bank
20 Hang Seng Bank
21 Hubei Rural Credit Union Association
22 Huishang Bank
23 East West Bank
24 WeBank
25 Hankou Bank (HKB)

Source: CNBC & Statista

China Merchants Bank, listed in both Shanghai and Hong Kong, earned the top spot in mainland China beating both domestic and foreign players.

Hong Kong

1 China Construction Bank
2 China Minsheng Bank
3 ICBC
4 SPD Bank
5 China Everbright Bank
6 Bank of Communication
7 HSBC
8 CGB
9 Livi Bank
10 China Merchants Bank

Source: CNBC & Statista

China Construction Bank, one of China’s four major state-owned banking institutions, was ranked the top lender over foreign players like HSBC.

India

1 ICICI Bank
2 HDFC Bank
3 Axis Bank
4 Kotak Mahindra Bank
5 State Bank of India
6 HSBC
7 Paytm Payments Bank
8 Standard Chartered
9 Federal Bank
10 IndusInd Bank
11 Union Bank of India
12 Karnataka Bank
13 Punjab National Bank
14 Bank of Baroda
15 Bandhan Bank
16 Fincare
17 DSCB
18 Kerala Gramin Bank
19 Fino Payments Bank
20 APCOB
21 Punjab Gramin Bank
22 IDFC First Bank
23 UCO Bank
24 RBLBank
25 New India Bank

Source: CNBC & Statista

ICICI bank, a leading private sector bank in India, was the top pick in the country despite strong competition from mostly local lenders.

Indonesia

1 Bank Central Asia
2 Bank Mandiri
3 Sea Bank
4 Jago
5 Raya Bank
6 Bank Negara Indonesia
7 United Overseas Bank
8 PermataBank
9 Cimb Niaga
10 DBS
11 Bank Rakyat Indonesia (BRI)
12 BNC
13 Bank Muamalat
14 Jenius
15 BCA Syariah
16 HSBC
17 BDP DIY
18 Bank Aceh
19 Standard Chartered
20 Bank Sumsel Babel

Source: CNBC & Statista

Bank Central Asia, Indonesia’s largest private commercial bank, beat the competition to clinch the top spot. Customers valued both trust as well as digital services in their ranking.  

Japan

1 SBI Sumishin Net Bank
2 Rakuten Bank
3 Sony Bank
4 Aeon Bank
5 au Jibun Bank
6 PayPay Bank
7 Sumitomo Mitsui Banking Corporation
8 Senshu Ikeda Bank
9 The Juhachi-Shinwa Bank
10 Iyo Bank
11 Ehime Bank
12 Japan Post Bank
13 Ja Bank
14 Kyushu Labor Bank
15 Hamamatsu Iwata Shinkin Bank
16 Keiyo Bank
17 Bank of Fukuoka
18 Shinsei Bank
19 The Nishi-Nippon City Bank
20 Aozora Bank
21 Saitama Resona Bank
22 MUFG Bank
23 Lawson Bank
24 Gunma Bank
25 Hachijuni Bank
26 Rokin Bank
27 Kiyo Bank
28 Tokyo Star Bank
29 The Bank of Okinawa
30 Kyoto Chuo Shinkin Bank
31 Abukuma Shinkin Bank
32 North Pacific Bank
33 Ogaki Kyoritsu Bank
34 Tottori Bank
35 Bank of Kyoto

Source: CNBC & Statista

SBI Sumishin Net Bank, a Japan-based company, managed to beat other domestic lenders to come out top. Japanese citizens valued trust as their most important criteria.

Malaysia

1 Maybank
2 Standard Chartered
3 Maybank Islamic
4 HSBC
5 RHB Islamic Bank
6 Bank Islam
7 AmBank Group Islamic
8 OCBC Bank
9 United Overseas Bank
10 Hong Leong Islamic Bank

Source: CNBC & Statista

Maybank, which is the largest bank by market value in Malaysia, was the customers top pick against competition from domestic and foreign lenders.

New Zealand

1 Bank of New Zealand
2 ASB Bank
3 The Co-operative Bank
4 SBS Bank
5 Kiwibank

Source: CNBC & Statista

Bank of New Zealand, one of New Zealand’s big four banks, earned the top spot among consumers who also valued trust as the most important criteria. In some economies, like New Zealand, there are fewer competitors in the market and the size of the banking market differs, thus only five banks made the list.

Philippines

1 Philippine National Bank
2 Union Bank (Philippines)
3 Maya Bank
4 OFBank
5 UnionDigital Bank
6 UNO Digital Bank
7 GoTyme Bank
8 LANDBANK
9 Metrobank
10 BPI

Source: CNBC & Statista

Philippine National Bank, one of the largest banks in the country, earned the top rank against competition from largely local lenders.

Singapore

1 DBS
2 HSBC
3 Citibank
4 Bank of Singapore
5 United Overseas Bank

Source: CNBC & Statista

Singapore’s biggest bank DBS beat its domestic peers to clinch the top spot in the city-state. Given the small market size, there are fewer banking competitors as a result only five made the list.

South Korea

1 TossBank
2 KakaoBank
3 Kwangju Bank
4 K bank
5 Jeonbuk Bank
6 KB Kookmin Bank
7 Industrial Bank of Korea
8 DGB Daegu Bank
9 BNK Busan Bank
10 KEB Hana Bank

Source: CNBC & Statista

Toss Bank, an internet-only bank based in South Korea, managed to fend off domestic competition to emerge as top lender in the country.

Taiwan

1 E.Sun Financial
2 Bank SinoPac
3 Standard Chartered
4 CTBC Bank
5 Taipei Fubon Bank
6 Taishin International Bank
7 HSBC
8 Rakuten International Commercial Bank
9 Cathay Financial
10 Mega International Commercial Bank

Source: CNBC & Statista

Taiwan’s E.Sun Financial, headquartered in Taipei, earned the top ranking with customers focused on trust and less concerned about financial advice.

Thailand

1 Kasikornbank
2 Siam Commercial Bank
3 Bank of Ayudhya
4 United Overseas Bank
5 Krung Thai Bank

Source: CNBC & Statista

Kasikornbank bank, Thailand’s second-largest lender, came out top in the country. Only five banks made the list as there are fewer competitors and the size of banking market varies.

Vietnam

1 Techcombank
2 Vietcombank
3 BIDV
4 Military Commercial Joint Stock Bank
5 ACB
6 Vietinbank
7 VIB
8 TPBank
9 Sacombank
10 VP Bank
11 BVBank
12 Shinhan Bank
13 SeA Bank
14 HDBank
15 Ocean Bank

Source: CNBC & Statista

Vietnamese private lender Techcombank is the customers’ top pick in the country, where trust again was the key factor for survey respondents.

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Berkshire Hathaway’s big mystery stock wager could be revealed soon

Warren Buffett tours the grounds at the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.

David A. Grogan | CNBC

Berkshire Hathaway, led by legendary investor Warren Buffett, has been making a confidential wager on the financial industry since the third quarter of last year.

The identity of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.

That’s because unless Berkshire has been granted confidential treatment on the investment for a third quarter in a row, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO may decide to explain his rationale to the thousands of investors flocking to the gathering.

The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.

That’s an area he has dialed back on in recent years over concerns about rising loan defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the yield on Berkshire’s cash pile in instruments like T-bills suddenly attractive.

“When you are the GOAT of investing, people are interested in what you think is good,” said Glenview Trust Co. Chief Investment Officer Bill Stone, using an acronym for greatest of all time. “What makes it even more exciting is that banks are in his circle of competence.”

Under Buffett, Berkshire has trounced the S&P 500 over nearly six decades with a 19.8% compounded annual gain, compared with the 10.2% yearly rise of the index.

Coverage note: The annual meeting will be exclusively broadcast on CNBC and livestreamed on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.

Veiled bets

Berkshire requested anonymity for the trades because if the stock was known before the conglomerate finished building its position, others would plow into the stock as well, driving up the price, according to David Kass, a finance professor at the University of Maryland.

Buffett is said to control roughly 90% of Berkshire’s massive stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.

While investment disclosures give no clue as to what the stock could be, Stone, Kass and other Buffett watchers believe it is a multibillion-dollar wager on a financial name.

That’s because the cost basis of banks, insurers and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.

At the same time, Berkshire exited financial names by dumping insurers Markel and Globe Life, leading investors to estimate that the wager could be as large as $4 billion or $5 billion through the end of 2023. It’s unknown whether that bet was on one company or spread over multiple firms in an industry.

Schwab or Morgan Stanley?

If it were a classic Buffett bet — a big stake in a single company —  that stock would have to be a large one, with perhaps a $100 billion market capitalization. Holdings of at least 5% in publicly traded American companies trigger disclosure requirements.

Investors have been speculating for months about what the stock could be. Finance covers all manner of companies, from retail lenders to Wall Street brokers, payments companies and various sectors of insurance.

Charles Schwab or Morgan Stanley could fit the bill, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.

“Schwab was beaten down during the regional banking crisis last year, they had an issue where retail investors were trading out of cash into higher-yielding investments,” Shanahan said. “Nobody wanted to own that name last year, so Buffett could’ve bought as much as he wanted.”

Other names that have been circulated — JPMorgan Chase or BlackRock, for example, are possible, but may make less sense given valuations or business mix. Truist and other higher-quality regional banks might also fit Buffett’s parameters, as well as insurer AIG, Shanahan said, though their market capitalizations are smaller.

More from Berkshire Hathaway’s Annual Meeting

Buffett & banks

Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and confidence — into the industry on multiple occasions.

Buffett served as CEO of a scandal-stricken Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into Goldman Sachs in 2008 and another $5 billion into Bank of America in 2011, ultimately becoming the latter’s largest shareholder.

But after loading up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and U.S. Bank, he deeply pared his exposure to the sector in 2020 on concerns that the coronavirus pandemic would punish the industry.

Since then, he and his deputies have mostly avoided adding to his finance stakes, besides modest positions in Citigroup and Capital One.

‘Fear is contagious’

Last May, Buffett told shareholders to expect more turbulence in banking. He said Berkshire could deploy more capital in the industry, if needed.

“The situation in banking is very similar to what it’s always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes it wasn’t.”

Wherever he placed his bet, the move will be seen as a boost to the company, perhaps even the sector, given Buffett’s track record of identifying value.

It’s unclear how long regulators will allow Berkshire to shield its moves.

“I’m hopeful he’ll reveal the name and talk about the strategy behind it,” Shanahan said. “The SEC’s patience can wear out, at some point it’ll look like Berkshire’s getting favorable treatment.”

— CNBC’s Yun Li contributed to this report.

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Banks are in limbo without a crucial lifeline. Here’s where cracks may appear next

The forces that consumed three regional lenders in March 2023 have left hundreds of smaller banks wounded, as merger activity — a key potential lifeline — has slowed to a trickle.

As the memory of last year’s regional banking crisis begins to fade, it’s easy to believe the industry is in the clear. But the high interest rates that caused the collapse of Silicon Valley Bank and its peers in 2023 are still at play.

After hiking rates 11 times through July, the Federal Reserve has yet to start cutting its benchmark. As a result, hundreds of billions of dollars of unrealized losses on low-interest bonds and loans remain buried on banks’ balance sheets. That, combined with potential losses on commercial real estate, leaves swaths of the industry vulnerable.

Of about 4,000 U.S. banks analyzed by consulting firm Klaros Group, 282 institutions have both high levels of commercial real estate exposure and large unrealized losses from the rate surge — a potentially toxic combo that may force these lenders to raise fresh capital or engage in mergers.  

The study, based on regulatory filings known as call reports, screened for two factors: Banks where commercial real estate loans made up over 300% of capital, and firms where unrealized losses on bonds and loans pushed capital levels below 4%.

Klaros declined to name the institutions in its analysis out of fear of inciting deposit runs.

But there’s only one company with more than $100 billion in assets found in this analysis, and, given the factors of the study, it’s not hard to determine: New York Community Bank, the real estate lender that avoided disaster earlier this month with a $1.1 billion capital injection from private equity investors led by ex-Treasury Secretary Steven Mnuchin.

Most of the banks deemed to be potentially challenged are community lenders with less than $10 billion in assets. Just 16 companies are in the next size bracket that includes regional banks — between $10 billion and $100 billion in assets — though they collectively hold more assets than the 265 community banks combined.

Behind the scenes, regulators have been prodding banks with confidential orders to improve capital levels and staffing, according to Klaros co-founder Brian Graham.

“If there were just 10 banks that were in trouble, they would have all been taken down and dealt with,” Graham said. “When you’ve got hundreds of banks facing these challenges, the regulators have to walk a bit of a tightrope.”

These banks need to either raise capital, likely from private equity sources as NYCB did, or merge with stronger banks, Graham said. That’s what PacWest resorted to last year; the California lender was acquired by a smaller rival after it lost deposits in the March tumult.

Banks can also choose to wait as bonds mature and roll off their balance sheets, but doing so means years of underearning rivals, essentially operating as “zombie banks” that don’t support economic growth in their communities, Graham said. That strategy also puts them at risk of being swamped by rising loan losses.

Powell’s warning

Federal Reserve Chair Jerome Powell acknowledged this month that commercial real estate losses are likely to capsize some small and medium-sized banks.

“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” Powell told lawmakers. “We’re working with them … I think it’s manageable, is the word I would use.”

There are other signs of mounting stress among smaller banks. In 2023, 67 lenders had low levels of liquidity — meaning the cash or securities that can be quickly sold when needed — up from nine institutions in 2021, Fitch analysts said in a recent report. They ranged in size from $90 billion in assets to under $1 billion, according to Fitch.

And regulators have added more companies to their “Problem Bank List” of companies with the worst financial or operational ratings in the past year. There are 52 lenders with a combined $66.3 billion in assets on that list, 13 more than a year earlier, according to the Federal Deposit Insurance Corporation.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 7, 2024.

Brendan Mcdermid | Reuters

“The bad news is, the problems faced by the banking system haven’t magically gone away,” Graham said. “The good news is that, compared to other banking crises I’ve worked through, this isn’t a scenario where hundreds of banks are insolvent.”

‘Pressure cooker’

After the implosion of SVB last March, the second-largest U.S. bank failure at the time, followed by Signature’s failure days later and that of First Republic in May, many in the industry predicted a wave of consolidation that could help banks deal with higher funding and compliance costs.

But deals have been few and far between. There were fewer than 100 bank acquisitions announced last year, according to advisory firm Mercer Capital. The total deal value of $4.6 billion was the lowest since 1990, it found.

One big hang-up: Bank executives are uncertain that their deals will pass regulatory muster. Timelines for approval have lengthened, especially for larger banks, and regulators have killed recent deals, such as the $13.4 billion acquisition of First Horizon by Toronto-Dominion Bank.

A planned merger between Capital One and Discovery, announced in February, was promptly met with calls from some lawmakers to block the transaction.

“Banks are in this pressure cooker,” said Chris Caulfield, senior partner at consulting firm West Monroe. “Regulators are playing a bigger role in what M&A can occur, but at the same time, they’re making it much harder for banks, especially smaller ones, to be able to turn a profit.”

Despite the slow environment for deals, leaders of banks all along the size spectrum recognize the need to consider mergers, according to an investment banker at a top-three global advisory firm.

Discussion levels with bank CEOs are now the highest in his 23-year career, said the banker, who requested anonymity to speak about clients.

“Everyone’s talking, and there’s acknowledgment consolidation has to happen,” said the banker. “The industry has structurally changed from a profitability standpoint, because of regulation and with deposits now being something that won’t ever cost zero again.”

Aging CEOs

One deterrent to mergers is that bond and loan markdowns have been too deep, which would erode capital for the combined entity in a deal because losses on some portfolios have to be realized in a transaction. That has eased since late last year as bond yields dipped from 16-year highs.

That, along with recovering bank stocks, will lead to more activity this year, Sorrentino said. Other bankers said that larger deals are more likely to be announced after the U.S. presidential election, which could usher in a new set of leaders in key regulatory roles.

Easing the path for a wave of U.S. bank mergers would strengthen the system and create challengers to the megabanks, according to Mike Mayo, the veteran bank analyst and former Fed employee.

“It should be game-on for bank mergers, especially the strong buying the weak,” Mayo said. “The merger restrictions on the industry have been the equivalent of the Jamie Dimon Protection Act.”

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The Federal Reserve may not cut interest rates just yet. Here’s what that means for your money

Economists expect the Federal Reserve to leave interest rates unchanged at the end of its two-day meeting this week, even though many experts anticipate the central bank is preparing to start cutting rates in the months ahead.

In prepared remarks earlier this month, Federal Reserve Chair Jerome Powell said policymakers don’t want to ease up too quickly.

Powell noted that lowering rates rapidly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.

But in the meantime, consumers won’t see much relief from sky-high borrowing costs.

More from Personal Finance:
Here’s when the Fed is likely to start cutting interest rates
Nearly half of young adults have ‘money dysmorphia’
Deflation: Here’s where prices fell

In 2022 and the first half of 2023, the Fed raised rates 11 times, causing consumer borrowing rates to skyrocket while inflation remained elevated, and putting households under pressure.

With the combination of sustained inflation and higher interest rates, “many consumers are experiencing higher levels of economic stress compared to one year ago,” said Silvio Tavares, CEO of credit scoring company VantageScore.

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Even once the central bank does cut rates — which some now expect could happen in June — the pace that they trim is going to be much slower than the pace at which they hiked, according to Greg McBride, chief financial analyst at Bankrate.

“Interest rates took the elevator going up; they are going to take the stairs coming down,” he said.

Here’s a breakdown of where consumer rates stand now and where they may be headed:

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

With most people feeling strained by higher prices, balances are higher and more cardholders are carrying debt from month to month compared with last year.

Annual percentage rates will start to come down when the Fed cuts rates, but even then they will only ease off extremely high levels. With only a few potential quarter-point cuts on deck, APRs would still be around 20% by the end of 2024, McBride said.

“If the Fed cuts rates twice by a quarter point, your credit card rate will fall by half a percent,” he said.

Mortgage rates

Fifteen- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy. But anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

Rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is around 7%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.

“Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist. “In this environment, there is a good possibility that rates will stay higher for a longer period of time.”

Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate, and those rates remain high.

“The reality of it is, a lot of borrowers are paying double-digit interest rates on those right now,” McBride said. “That is not a low cost of borrowing and that’s not going to change.”

Auto loans

Even though auto loans are fixed, payments are getting bigger because car prices have been rising along with the interest rates on new loans, resulting in less affordable monthly payments. 

The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, competition between lenders and more incentives in the market have started to take some of the edge off the cost of buying a car lately, said Ivan Drury, Edmunds’ director of insights.

Once the Fed cuts rates, “that gives people a little more breathing room,” Drury said. “Last year was ugly all around. At least there’s an upside this year.”

Federal student loans

Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.

Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.

For those struggling with existing debt, there are ways federal borrowers can reduce their burden, including income-based plans with $0 monthly payments and economic hardship and unemployment deferments

Private loan borrowers have fewer options for relief — although some could consider refinancing once rates start to come down, and those with better credit may already qualify for a lower rate.

Savings rates

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The top 10 things to watch in the stock market Monday

The top 10 things to watch Monday, Dec. 11

1. U.S. stocks are muted Monday following last week’s push to a new 52-week high in the S&P 500, helped by a stronger-than-expected jobs report Friday. Good economic news is good news for the stock market, for now, with investors looking ahead to Tuesday’s consumer price index report. But we’ll learn what the Federal Reserve makes of the state of the labor market and inflation when the central bank convenes this week for its final meeting of the year.

2. Bank stocks like Club name Wells Fargo became “extraordinary performers” last week, according to Jim Cramer’s Sunday column. “The percentage gains for bank shares and the pretty stock charts, all wondrous, look like they are in their infancy,” he writes.

3. Health insurer Cigna abandons its pursuit to acquire Club holding Humana — a deal that was misguided from the start because it never would have received regulatory approval. Cigna announces a new $10 billion stock buyback. And shares of Humana rally roughly 2% in premarket trading.

4. Occidental Petroleum announces plans to buy privately held CrownRock for $12 billion in cash and stock, while raising its quarterly dividend by 4 cents, to 22 cents per share. Before the deal announcement, Morgan Stanley had upgraded Occidental to overweight from equal weight, with an unchanged price target of $68 a share.

5. More analysts are warming up to energy stocks after last week’s carnage. Citi upgrades Club holding Coterra Energy, along with EQT and Southwestern Energy, to a buy. Coterra is the firm’s top large cap pick, with a $30-per-share price target based on capital-efficiency improvements.

6. Goldman Sachs upgrades Abbvie to buy from neutral, with a $173-per-share price target. The firm cites revenue that has proved more resilient than expected, along with the drug maker’s recent deployment of capital to build out its pipeline. Over the past two weeks, Abbvie has shelled out nearly $20 billion in cash to acquire ImmunoGen and Cerevel Therapeutics.

7. JPMorgan raises its price targets on a handful of cybersecurity stocks, including CrowdStrike (to $269 a share from $230), Club name Palo Alto Networks ($326 from $272) and Zscaler ($212 from $200).

8. Citi upgrades Nike to buy from neutral, while raising its price target on the stock to $135 a share, up from $100. The firm sees margin recovery beginning in the second quarter of next year through 2025, helped by easing freight costs, leaner inventories and a shift to direct-to-consumer.

9. Jefferies upgrades Best Buy to buy from hold, while raising its price target to $89 a share, up from $69. Analysts at the bank think this call won’t take much to work, with expectations low and the stock cheap and yielding a 5% dividend.

10. Citi resumes coverage of Club holding Broadcom with a buy rating and $1,100-a-share price target. The firm sees the chipmaker’s artificial-intelligence business offsetting the cyclical downturn in the semiconductor business, along with strong accretion from its recent acquisition of VMware. We thought the company reported a better quarter last Thursday than what the market gave it credit for. 

(See here for a full list of the stocks at Jim Cramer’s Charitable Trust.)

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Rashmikant Patel: How I recovered after Imperial Bank collapse

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Rashmikant Patel: How I recovered after Imperial Bank collapse


Founder of Educational Scientific and Technical Equipment Company (ESTEC) Limited Rashmikant Patel pictured on November 20, 2023 at his office in Parklands, Nairobi.

Having come back from his studies in the UK in 1978, Rashmikant Patel joined a pharmaceutical firm as one of the partners. But as it turned out, one of his partners was also a partner at Educational Scientific and Technical Equipment Company (ESTEC).

In 1985, one of the owners of ESTEC Limited was relocating to the UK and offered Mr Patel the opportunity to manage the firm on a 25 percent profit-sharing basis, which he accepted.

“Unfortunately, our finances were quite low, and there was never enough money to import the equipment that I would have liked to import at that time,” says Mr Patel, the managing director at ESTEC, a supplier of analytical solutions to testing laboratories in East Africa.

In 1995, he purchased and took over the company, fully using the money he had borrowed from his father and selling his house.

“Slowly, I started running the business and retaining the profits generated in the business, unlike in the past when the other partner was still onboard,” recalls Mr Patel.

However, at the time, there was a flood of Chinese and Indian school equipment imports while ESTEC Limited was an agent of a British company, which was costly for schools, depressing his sales.

“I decided to look at the laboratory equipment market for manufacturing companies. One of our suppliers supplying us with medical equipment happened to be importing laboratory equipment too. So I decided to diversify to laboratory equipment for pharmaceutical manufacturers,” he says.

Mr Patel says it was a good time because the pharmaceutical sector was growing.

He says his family was never in business and being a pharmacist, he too had never run any business. This was like being thrown into the deep end of the swimming pool.

He says the major hurdle he had at the beginning was financing equipment imports and having bagged his first big sale with one of the leading pharmaceutical companies locally.

“Financing was the biggest challenge because nobody will offer you credit terms unless you are well established or have been doing business with them for a long time, especially when the goods are expensive like the equipment we sell,” says Mr Patel.

“A lot of people have got into trouble in businesses and fallen by the wayside due to a lack of finances.”

Mr Patel says he has learned never to have partners in a core business unless it is a separate company because it allows you to make the decisions you want and divert resources to what is more important to the business.

He adds that when he had partners, the state of the cash flow was poor.

“There are two things I learned from my partners: one is to never draw money out of the business if you want to grow it, especially the profits. For the growth of a company, you need finances that I unfortunately didn’t have,” he says.

Mr Patel adds that 2015 was a dark year for him when the Imperial Bank collapsed with all the company’s finances, including his savings, and he had to start afresh as a new business.

“We also had to borrow money from private people and get back on track. That was one of the biggest faults that we had,” he says, adding that some of their customers also agreed to pay for the supplies earlier than the allowed credit period and sold some of the stock at a reduced profit margin to boost sales.

And with that, Patel advises against having all your finances in one bank.

He says he wished he kept his house instead of using it as collateral to get financing and had the finances to go into sectors like medical laboratory equipment, but that it takes a lot of finances and workforce to go into different lines.

“You can only get financing through bank loans or overdrafts but using bank money to do business is also not very good because you can get into deep trouble,” he cautions.

Growth and milestones

He adds that ESTEC’s business strategy is more about providing technical support and meeting clients’ and industry needs, picking from regulations and that the market has been growing from a regulatory point of view.

“Kenya was one of the fastest-growing economies at that time, and there was a desire for exports to the neighbouring countries, and we used that to position ourselves in building our strengths to meet international and regional standards and requirements to be competitive.”

With that, ESTCE Limited has grown in the pharma, food testing, environmental research, academics, and petroleum sectors, as well as with more partners and suppliers.

The company, he says, aims to ensure that every product on the market is safe for human use.

“There are a lot of gaps in standardisation within the East African Community. Our strategy involves building capacity competence in the area of analytical testing space,” he says.

The company has a presence in Uganda and Tanzania and aims to expand in the region.

“We are looking to grow, but growth is always a slow process in the current economic climate. We are looking into Ethiopia and Rwanda in the next 10 years and take the expansion further.”

The company is also considering venturing into areas such as clinical testing as technology advances, adding that they may be open to partnerships, private equity, or firms in a similar field for synergy rather than a merger to finance that growth and expansion.

Human resources

Mr Patel says it is difficult to find very good human resources, and the company is willing to pay for the right talent.

“Initially, we were just hiring good salespeople, but we realised that in the specialised field, skills and knowledge are important, so we hire technical people with a scientific background,” he says.

The entrepreneur adds that attracting talent is a big concern given that the sector has a high turnover rate, with some of the employees quitting to start their businesses.

“You can imagine growing from 5 people to 40 without human resource personnel. It was a big challenge, and we needed a human resource person to guide us on recruitment, people management, and other aspects of human resource management,” adds Mr Patel.

The entrepreneur says managing expenses is one of the biggest issues in running a business, and one needs to cut costs when the business is not doing well, maintain a reasonable profit, and set a limit on pricing.

“This year has been the toughest in the last ten years, with sales going down for the last two years, but we are still afloat, but profitability is not what it used to be,” he says.

Mr Patel concludes by saying he attributes the company’s growth to the pharma industry and the support of the government, especially the regulators setting the standards for testing, which they cannot ignore.

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UBS sees a raft of Fed rate cuts next year on the back of a U.S. recession

U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.

Evelyn Hockstein | Reuters

UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.

In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”

Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%.

The central bank has since held at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.

However, Fed Chairman Jerome Powell said last week that he was “not confident” the FOMC had yet done enough to return inflation sustainably to its 2% target.

UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”

“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.

“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”

The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.

“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.

U.S. Treasury yield curve will likely continue to steepen, analyst says

“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”

UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.

“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.

Worst credit impulse since the financial crisis

Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.

“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.

Signs of a recession may be on the horizon, says fmr. Fed economist Claudia Sahm

Meanwhile, private payrolls ex-health care are growing at close to zero and some of the 2023 fiscal stimulus is rolling off, Kapteyn noted, also reiterating the “massive gap” between real incomes and spending that means there is “much more scope for that spending to fall down towards those income levels.”

“The counter that people then have is they say ‘well why are income levels not going up, because inflation is falling, real disposable incomes should be improving?’ But in the U.S., debt service for households is now increasing faster than real income growth, so we basically think there is enough there to have a few negative quarters mid-next year,” Kapteyn argued.

A recession is characterized in many economies as two consecutive quarters of contraction in real GDP. In the U.S., the National Bureau of Economic Research Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” This takes into account a holistic assessment of the labor market, consumer and business spending, industrial production, and incomes.

Goldman ‘pretty confident’ in the U.S. growth outlook

The UBS outlook on both rates and growth is well below the market consensus. Goldman Sachs projects the U.S. economy will expand by 2.1% in 2024, outpacing other developed markets.

Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the U.S. growth outlook.

“Real income growth looks to be pretty firm and we think that will continue to be the case. The global industrial cycle which was going through a pretty soft patch this year, we think, is showing some signs of bottoming out, including in parts of Asia, so we feel pretty confident about that,” he told CNBC’s “Squawk Box Europe.”

Trivedi added that with inflation returning gradually to target, monetary policy may become a bit more accommodative, pointing to some recent dovish comments from Fed officials.

“I think that combination of things — the lessening drag from policy, stronger industrial cycle and real income growth — makes us pretty confident that the Fed can stay on hold at this plateau,” he concluded.

Correction: Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%. An earlier version misstated the range.

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As U.S.-China tensions rumble on, fintech unicorn Airwallex pushes into Latin America with Mexico deal

The deal, which is subject to regulatory approvals, marks a major push from Airwallex into Latin America.

Airwallex

Global fintech giant Airwallex on Thursday said it has agreed to acquire MexPago, a rival payments company based out of Mexico, for an undisclosed sum to help the firm expand its Latin America footprint.

The company, which competes with the likes of PayPal, Stripe, and Block, sells cross-border payment services to mainly small and medium-sized enterprises. Airwallex makes money by pocketing a fee each time a transaction is made.

The deal, which is subject to regulatory approvals and customary closing conditions, marks a major push from Airwallex into Latin America, a market that has become more attractive for fintech firms thanks to a primarily younger population and increasing online penetration.

Jack Zhang, Airwallex’s CEO, said the company was looking at Mexico as something as a hedge as it deals with geopolitical and economic uncertainty going on between the U.S. and China.

“U.S. people export to Mexico to sell to the consumer there,” Zhang told CNBC. “Because of the supply chain, you can also export out of Mexico to other countries like the United States.”

“You get both the inflow and outflow of money,” he added. “That’s really what we like the most. We can take a global company to Mexico and also help the global companies making payments to the supply chain.”

U.S.-China trade tensions have escalated in recent years, as Washington seeks to address what it sees as China’s race to the bottom on trade.

The U.S. alleges China has been deliberately devaluing its currency by buying lots of U.S. dollars, thereby making Chinese exports cheaper and U.S. exports more expensive, and worsening the U.S. trade deficit with China.

China has sought to address these concerns, agreeing to “substantially reduce” the U.S. trade deficit by committing to “significantly increases” its purchases of American goods, although it’s struggled to make good on those commitments.

“Mexico is one of the largest populations in Latin America,” Zhang added. “As the trade war intensifies in China and the US, a lot is shifting from Asia to Mexico.”

“[Mexico] is very close to the U.S. Labour is cheaper compared to the U.S. domestically. A lot of the supply chain is shipping there. There’s a lot of opportunity from e-commerce as well.”

A maturing fintech

Airwallex operates around the world in markets including the U.S., Canada, China, the U.K., Australia, and Singapore. The Australia-founded company is the second-most valuable unicorn there, after design and presentations software startup Canva, which was last valued at $40 billion.

The company, whose customers include Papaya Global, Zip, Shein and Navan, processes more than $50 billion in a single year. It has also partnered with the likes of American Express, Shopify and Brex, to help it expand its services internationally.

It has been a tough environment for fintech companies to operate in lately, given how interest rates have risen sharply. That has made it more costly for startup firms to raise capital from investors.

For its part, Airwallex has raised more than $900 million in venture capital to date from investors including Salesforce Ventures, Sequoia, Tencent and Lone Pine Capital. The company was last valued at $5.6 billion.

At this stage we are still expanding against our mission, which is to enable those smaller businesses to operate anywhere in the world and keep building software on top.

Zhang said that the company is at a stage where it has reached enough maturity to consider an initial public offering — the company says it now processes more than $50 billion in annualized transactions. However, Airwallex won’t embark on the IPO route until it gets to a certain amount of annual revenue, Zhang added.

Zhang is targeting $100 million of annual recurring revenue (ARR) for its software the business within the next year or two. Once Airwallex reaches this point, he says, it will then look at a public listing.

“At this stage we are still expanding against our mission, which is to enable those smaller businesses to operate anywhere in the world and keep building software on top … to protect our margins [and] grow our margins from a cost point of view, not just infrastructure,” Zhang said.

MexPago offers much of the same services as Airwallex — multi-currency accounts for small and medium-sized businesses, foreign exchange services, and payment processing — but there are a few more payment methods it has on offer which Airwallex doesn’t currently provide.

Why Latin America?

A big selling point of the MexPago deal, Zhang said, is the ability to obtain a regulatory license in Mexico without having to embark on a long process of applying with the central bank. The company has secured an Institution of Electronic Payment Funds (IFPE) license from MexPago.

Why Americans are relocating to Mexico City for a better life

That will allow Airwallex’s customers, both in Mexico and around the world, to gain access to local payment methods such as SPEI, Mexico’s interbank electronic payment system, and OXXO, a voucher-based payment method that lets shoppers order things online, get a voucher, and then fulfill their order with cash.

“The ability to access the license for the native infrastructure over there will give us a significant advantage with our global proposition,” Zhang told CNBC.

Airwallex has seen huge levels of growth in the Americas in the past year — the company reported a 460% jump in revenues there year-over-year.

Airwallex isn’t the only company seeing the potential in Latin America.

SumUp, the British payments company, has been active in Latin America since 2013, opening an office in Brazil back in 2013. The firm’s CFO Hermione McKee told CNBC in June at the Money 20/20 conference that it plans to ramp up its expansion in the region.

“We’ve had very strong success in Latin America, in particular, Chile recently,” McKee told CNBC in an interview.

“We are looking at launching new countries over the coming months.”

More than 156 million people in Latin America and the Caribbean are between the ages of 15 and 29, accounting for over a fourth of its population. These consumers tend to be more digital-native and mistrusting of established banks.

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Interest rates take center stage with banks set to report quarterly results

A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.

Reuters

Bank stocks remain under pressure due to high interest rates as financial firms like Club holdings Wells Fargo (WFC) and Morgan Stanley (MS) get ready to kick off earnings season.

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