Efforts by major banks to conclude litigation issues pertaining to their past business conduct remained the key trend in the last five trading days. Litigations and probes dominated the headlines with Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) leading the field.
The law-enforcement agencies are trying to resolve such issues in order to avoid lengthy litigations. Further, optimism surrounded the industry as co-operation from the banks in resolving legal issues was prominent.
(Read last to last week’s developments here: Bank Stock Roundup for Oct 24, 2014)
Recap of the Week’s Most Important Developments:
1. BofA became the second major U.S. bank after Citigroup Inc. (C) to restate its results owing to alleged foreign-exchange (FX) rate manipulation. BofA revealed $400 million of FX related charges owing to its engagement in advance talks with the regulators to settle the allegations. The additional charge increased the company’s net loss to $232 million or 4 cents per share from $70 million or 1 cent per share, as reported on Oct 15.
Nevertheless, BofA stated that there is no assurance that talks would lead to a settlement. Moreover, the company lowered its estimate of maximum probable losses from legal issues exceeding present reserves from $5 billion to $3.1 billion, as of Sep 30, 2014.
2. In a notable development, KeyCorp. (KEY) has restated its third-quarter 2014 results. The company has revised its last-quarter earnings downwards to make room for some adjustments pertaining to its closed education lending business.
However, while filing with the Securities Exchange Commission (SEC), the company found that some items were not correctly accounted for. This, eventually led to an after-tax loss of $24 million, related to its discontinued education lending business. As a result of this revision, net income attributable to the bank for third-quarter 2014 was $186 million, with earnings coming in at 21 cents per share.
However, educational lending business being a discontinued operation, earnings from continuing operations remained unchanged at 23 cents per share. Notably, the bank had closed its education lending business in Sep 2009. (Read more: KeyCorp Adjusts Earnings Due to Education Lending Loss)
3. Wells Fargo & Company (WFC) is taking initiatives to end a two-year-old mortgage litigation filed by the U.S. government regarding the bank’s Federal Housing Administration (‘FHA’) lending program. In its 10-Q for third-quarter 2014, the company revealed that it is amid discussions with the U.S. government for a possible settlement.
Alongside, in its latest quarterly filing, Wells Fargo disclosed that as of Sep 30, 2014, it estimated the upper end range of loss due to legal issues in excess of the company’s legal reserves to be around $950 million. The figure is down from the prior-quarter estimate of $1.2 billion and $1 billion in the year-ago period. (Read more: Wells Fargo in Talks to Resolve FHA Mortgage Suit)
4. In the latest quarterly regulatory filing, JPMorgan revealed that regulators across the globe are conducting investigations into its foreign-exchange (FX) trading-related operations. The probes are mainly focused on JPMorgan’s spot FX trading activities and the corresponding controls in place to offer these services.
The agencies involved in the probe include the U.S. banking regulators, the Commodity Futures Trading Commission (CFTC), the U.K. Financial Conduct Authority (FCA) and other foreign government authorities. JPMorgan, while cooperating with the regulators regarding the investigation, is also holding discussions to settle the FX probe.
However, it is too early to speculate about the probability of any settlement. The talks may not materialize into anything concrete. (Read more: JPMorgan Faces Probe Over FX Rigging, Ups Legal Reserves)
5. The legal tussle continues over the manipulation of London Interbank Offered Rate (LIBOR). This time, the financial bigwigs including BofA, Mitsubishi UFJ Financial Group Inc. (MTU), Barclays PLC (BCS) and Citigroup have filed a motion in the Manhattan federal court seeking release from claims of manipulating the LIBOR. U.S. District Judge Naomi Reice Buchwald, who is looking into the related antitrust cases against the banks and the British Bankers’ Association (BBA), has been asked by the banks to dismiss charges from 17 lawsuits pertaining to Libor-based over-the-counter (OTC) transactions and other related deals.
In their standing, the banks cited that investors’ allegations are improper and some other allegations no longer remain valid as it has been dismissed by previous court rulings. Also, the banks claimed that some of the defendants do not fall under jurisdiction of the court.
It is alleged that banks engaged into conspiracy to submit lower rates to the BBA for artificially suppressing LIBOR during the financial crisis. Higher rates would project the companies financially weak, hence, the suppression of their rates estimations aided in presenting secure financial health of the companies during that period and benefiting from their investments in financial products tied to LIBOR during that period.
Price Performance
Overall, optimism prevailed with several steps taken by banks to resolve legacy issues. Most of the banking stocks showed positive price movement.
|
Company |
Last Week |
Last 6 months |
|
JPM |
1.2% |
16.4% |
|
BAC |
1.2% |
18.3% |
|
WFC |
2.5% |
12.4% |
|
C |
0.9% |
16.5% |
|
COF |
-0.5% |
10.7% |
|
USB |
3.1% |
10.7% |
|
PNC |
2.3% |
7.8% |
In the last five trading sessions, U.S. Bancorp (USB) and Wells Fargo were the major gainers, with their share prices increasing 3.1% and 2.5%, respectively. Further, The PNC Financial Services Group, Inc. (PNC) gained 2.3%.
Over the last 6 months, BofA and Citigroup were the top performers, with their shares advancing 18.3% and 16.5%, respectively. Moreover, JPMorgan witnessed a 16.4% price increase over the same time frame.
What Next in the Banking Universe?
Since no major development is expected next week, the performance of banking stocks should not change significantly.
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