Regulatory investigations on banks remained in place, but active restructuring activities and steps to improve revenues by some of the banks were more prominent in the last five trading days. Optimism was surrounded by banks’ efforts to move London-based activities to Ireland amid rising concerns over UK’s exit from the European Union (‘EU’).
Such move is expected to benefit banks from the low corporate tax rate, English speaking population, English-style official system and Eurozone membership of Ireland going forward.
Moreover, to improve mortgage revenues, Wells Fargo & Company (WFC) increased incentives for efficient loan officers.
However, the regulators’ announcement that enforcement actions are being planned against banks for allegedly rigging the currency rates was on the downside. Nevertheless, the law-enforcement agencies are trying to make fast-track settlements with the banks in order to avoid lengthy litigations. According to us, this will work in favor of the banks too, as many of them are currently facing several other probes and litigations, thus hampering their financials.
(Read last to last week’s developments: Bank Stock Round up for Aug 11, 2014)
Recap of the Week’s Most Important Developments:
1. Amid growing concerns regarding UK’s exit from the EU, several U.S. banks are contemplating to shift their London based operations to Ireland. The report refers to Wall Street giants like Citigroup Inc. (C), Bank of America Corp. (BAC) and Morgan Stanley (MS) that are eying Ireland as a probable location if it becomes necessary to leave U.K. Ireland has several positives that are luring U.S banks to shift their operations from UK in the event the latter leaves the Eurozone.
2. In an endeavor to drive up declining mortgage revenues, Wells Fargo is boosting employees’ payoff. As the housing market in the U.S. is improving with demand for new home purchases, the company’s mortgage businesses – being one of the biggest in the U.S. – is striving for the greater market share.
In a telephone conversation with Franklin Codel, supervising mortgage origination for Wells Fargo, it has been noted that Wells Fargo has revised its pay plan beginning the current year. However, the latest modifications have been made in order to recruit and retain employees, particularly efficient loan officers. The new plan is applicable throughout 2015 and changes could be made, if necessary.
The top tier commission rate for the loan officers increased to 70 basis points (bps) or 0.7% from 63 bps. This reflects a base commission of $11,200 in a month for an employee who closes loans of $1.6 million.
3. Major global banks have been notified by the regulators that enforcement actions are being planned against them for alleged rigging of currency rates. At the same time, talks to settle those investigations are in progress between the banks and the U.S. Federal Reserve and the Office of the Comptroller of the Currency.
The enforcement actions could lead to cease-and-desist orders, penalties or banning of bankers from the industry. Additionally, banks like JPMorgan Chase & Co. (JPM), Citigroup and Morgan Stanley, among others, have been sent letters outlining the exact finding and a note of caution regarding imminent enforcement actions.
Regulators across the globe are urgently addressing the allegations of banks rigging WM/Reuters rates, which are used for determining foreign exchange prices. (Read more: Banks in Talks to Settle Currency-Rigging Investigations?)
4. JPMorgan has been sued by an Indianapolis-based Episcopal church over the fraud and mismanagement of its trust accounts. The Christ Church Cathedral filed a lawsuit in a U.S. District Court claiming that the bank, by purchasing more than 177 unsuitable investment products using the church funds between 2004 and 2013, caused a loss worth $13 million to the church. (Read more: JPMorgan (JPM) Sued over Mismanaging Church Trust Assets)
5. Almost after a year of announcing its plan to vend the private equity arm – One Equity Partners (OEP) – JPMorgan signed a deal to sell 50% stake in the same. Lexington Partners Inc., along with AlpInvest Partners BV, a unit of The Carlyle Group LP (CG), will be buying OEP for an undisclosed amount. Nonetheless, per market rumors, Lexington and AlpInvest will likely be paying approximately $2 billion in aggregate for 50% of the portfolio companies currently held by OEP. Notably, the deal is expected to close by this year-end.
JPMorgan’s decision to divest OEP primarily stems from the unit’s inconsistent returns and uncertainty regarding its role in the bank. Further, this decision corresponds to the Volcker Rule (a provision of the 2010 Dodd-Frank law), which prohibits a company from investing more than 3% of the private equity funds raised. (Read more: JPMorgan Divests 50% Stake in OEP to Lexington & AlpInvest)
Price Performance
Overall, there was optimism with several steps by banking stocks to drive growth. The performance of banking stocks was on the upswing owing to the expected improvement.
|
Company |
Last Week |
Last 6 months |
|
JPM |
0.8% |
-1.1% |
|
BAC |
0.0% |
-8.8% |
|
WFC |
0.6% |
10.4% |
|
C |
0.7% |
-1.6% |
|
COF |
0.7% |
10.4% |
|
USB |
0.8% |
2.3% |
|
PNC |
0.4% |
1.7% |
In the last five trading sessions, JPMorgan and U.S. Bancorp (USB) were the major gainers, with their share prices rising 0.8% for both.
Over the last six months, Capital One Financial Corp. (COF) and Wells Fargo were the top performers, with their shares gaining 10.4% each. However, BofA witnessed an 8.8% price decline over the same time frame.
What Next in the Banking Universe?
Since no major development is expected next week, the performance of banking stocks is not expected to change significantly.
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