Over the last four trading sessions, performance of banks remained skewed toward the negative side. Though banks continued with defensive measures to maintain profitability, investors remained concerned about any near-term possibility of revenue growth.
However, improved performance of the Federal Deposit Insurance Corporation (“FDIC”) insured banks came on the back of higher revenues. Banks can only witness a steady top-line growth one the interest rates rise (which is not expected in the next couple of months).
(Read the last Bank Stock Roundup for May 22, 2015)
Recap of the Week’s Most Important Developments:
1. FDIC-insured commercial banks and savings institutions reported first-quarter 2015 earnings of $39.8 billion, up 6.9% year over year. The rise was led by a $4.3 billion increase in net operating revenue. Higher trading revenue for banks, including Citigroup Inc. C and JPMorgan Chase & Co. JPM, was the main reason for top-line growth.
Overall, during the first quarter, the banking industry reflected a marked improvement. Also, the number of troubled assets and institutions decreased, which is encouraging. Further, absence of substantial legal expenses acted as a tailwind.
Moreover, improvement was recorded in loan and deposit balances. However, a rise in non-interest expenses and pressure on margins were experienced. Also, higher loan loss provision was an undermining factor (read more: FDIC-Insured Banks' Q1 Earnings Improve on Higher Revenues).
2. Bank of America Corp. BAC may have to resort to further expense cuts in its trading division, unless trading revenues improve significantly. This was stated by the company’s CEO Brian Moynihan at an investor conference in New York.
Moynihan said at the conference, “If the environment stays sort of flattish, less volatility, we’ll have to keep working that expense base down. We’ve got to probably work it down again in the next couple of years if the business stays where it is.” (read more: Will BofA's Trading Division See Additional Expense Cuts?).
3. Streamlining moves continue at Citigroup. This time, the New York based banking giant is set to sell its margin foreign exchange business to U.S.-based online foreign exchange market broker – FXCM Inc. and Denmark-based investment bank – Saxo Bank. Terms of the deal remained undisclosed.
According to a filing, FXCM is set to acquire the vast majority of margin forex accounts of Citigroup’s CitiFX Pro; while Saxo Bank will purchase the client book of Citigroup’s margin FX business in Singapore.
Separately, the legal battle over metal financing deals between Citigroup and Mercuria Energy Group Ltd took a new turn. The High Court in London ruled that Citigroup is not entitled to claim payment of $270 million from Cyprus-based commodities trader Mercuria Energy for the metals held at two scam-tainted Chinese ports (read more: Citigroup Sells Forex Accounts to FXCM, Saxo Bank and Setback for Citigroup in Repo Deal Case with Mercuria).
4. JPMorgan will be slashing more jobs with an aim to trim expenses and improve efficiency. As per a Wall Street Journal report, the bank plans to lay off 5,000 employees across the board by 2016.
Notably, job cuts are already in motion as JPMorgan intends to move toward automation. With increased usage of Internet and mobile banking, the company will be overhauling nearly 5,500 of its branches to become more resilient and less dependent on human tellers.
At an investor conference in New York, JPMorgan CEO Jamie Dimon recently stated that on an average, Chase branches would be laying off at least one employee over the next two years. Last February, at Investor Day conference, the company had come up with figures which showed that automated branches will be much more cost effective.
As per figures provided by JPMorgan, it costs 65 cents per deposit when done with a teller, while ATM deposits costs 8 cents and its 3 cents for deposits done by mobile app. Therefore, increased automation will aid expense savings and enhance profitability as revenue growth has remained subdued for some time.
Nevertheless, lay-offs will be impacting all four segments of JPMorgan. Further, employees in legal and compliance divisions are likely to be affected. From junior analysts to managing directors, all employees will come under the line of fire. While some of them will be reassigned to other divisions, those who are not ready to move will be laid off.
5. The investigation surrounding JPMorgan’s hiring of relatives and children of Chinese government officials continues to extend. The U.S. Securities and Exchange Commission (“SEC”) has subpoenaed the New York-based bank for all of its communications related to 35 Chinese officials including Wang Qishan – who is at the forefront of China’s anti-corruption campaign. The news, first reported by The Wall Street Journal, stated that the SEC issued the subpoena late last month (read more: JPMorgan Subpoenaed by SEC Over China Hiring Probe)
Price Performance
Performance of banking stocks remained subdued over the last four trading days. Despite the improved performance of FDIC-insured banks, continued pressure on top-line growth perhaps weighed on banking stocks.
|
Company |
Last Week |
6 months |
|
JPM |
-0.4% |
11.5% |
|
BAC |
-0.5% |
-1.6% |
|
WFC |
0.4% |
4.6% |
|
C |
-0.8% |
1.2% |
|
COF |
-0.8% |
2.2% |
|
USB |
0.3% |
0.0% |
|
PNC |
0.8% |
11.0% |
In the last four trading sessions, The PNC Financial Services Group, Inc. PNC gained 0.8%. On the other hand, shares of BofA, JPMorgan, Citigroup and Capital One Financial Corp. COF fell marginally.
Over the last six months, JPMorgan and PNC Financial were the top gainers, with their shares advancing 11.5% and 11%, respectively. However, BofA declined 1.6%.
What's Next in the Banking Universe?
In the coming five days, we expect banks to perform in a similar manner, unless some positive headlines reverse the trend.
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