The banking industry faced various regulatory probes from numerous authorities including the Department of Financial Services (“DFS”) in the last five trading days. Though banks are resorting to the resolution of legacy legal issues, there seems no end to these.
Recently, after allegations of rigging interest rates and foreign currency markets, major global banks such as JPMorgan Chase & Co. JPM and Bank of America Corp. BAC, came under scrutiny for their involvement in manipulating the Brazilian real (R$). Moreover, U.S. Bancorp USB was in focus for its efforts to resolve legal issues.
Further, the banking industry is increasingly facing new regulations for restoring transparency and reliability in the markets. These steps are expected to help in gaining investors’ confidence and financial stability to banks.
(Read the last Bank Stock Roundup for Jun 26, 2015)
Recap of the Week’s Most Important Developments:
1. Six weeks after reaching a multi-billion dollar settlement with regulators in the U.K. and the U.S., major banks might need to pump up their legal reserves since 15 of the largest banks in the world are on the radar of Brazil’s antitrust watchdog CADE. Reportedly, CADE is investigating these global banks for the alleged manipulation of the Brazilian real.
CADE has accused banks of engaging in anti-competitive price-fixing activities at least between 2007 and 2013, in order to rule out competition in the space; and manipulate benchmark rates including Brazil’s PTax and WM/Reuters. BofA, Citigroup Inc. C, JPMorgan, UBS AG UBS, Barclays Plc BCS and The Royal Bank of Scotland Group Plc RBS are among the accused.
Other major banks that are being investigated are Deutsche Bank AG DB, Morgan Stanley MS, Bank of Tokyo-Mitsubishi UFJ, Credit Suisse Group AG CS, HSBC Holdings Plc HSBC, Nomura Holdings Inc. NMR, Royal Bank of Canada RY, Standard Bank Group Ltd and Standard Chartered Plc. Interestingly, none of the domestic banks is in the picture as yet.
However, CADE is working with Brazil’s central bank and other international authorities on the case. Without disclosing much, the watchdog hinted that related penalties could amount to nearly 20% of the money raised from the scam (Read more: 15 Global Banks Under Brazilian Scanner for Rate Rigging).
2. The toughened regulatory stance in the aftermath of the 2008 financial crisis brought back transparency and reliability in the markets, which in turn, helped in restoring investors’ confidence. Out of the many significant measures undertaken by the government to ensure consumer protection, the Dodd–Frank Wall Street Reform and Consumer Protection Act were signed into law by President Obama in Jul 2010.
The Dodd-Frank Wall Street Reform law was enacted so that lawmakers could participate in observing financial market risks. The rule placed greater restrictions on derivative securities and the firms that trade them.
For swaps specifically, the Commodity Futures Trading Commission (“CTFC”) proposed margin requirements in Oct 2014. The margin rules were levied on the uncleared swaps of covered swap entities in order to warrant protection and the soundness of swap dealers and major swap participants.
The evasion of Dodd-Frank by large firms compelled the CTFC to propose a new rule, which was voted unanimously. The new rule states, “Covered swap entities would be required to comply with the Commission’s margin rules for all uncleared swaps in cross-border transactions, with a limited exclusion.”
The Goldman Sachs Group, Inc. (GS), BofA, Morgan Stanley, JPMorgan and Citigroup are among the 60 firms, which will have to comply with the new regulation. However, the firms will be permitted to conform with foreign laws when the agency deems them comparable to Dodd-Frank standards (Read more: New CFTC Rule: Cross-Border Margin for Uncleared Swaps).
3. Major banks continue to face investigation by banking regulators for business misconduct. It is now the turn of the DFS to probe the banks for their alleged manipulation of International Swaps and Derivatives Association Fix (“ISDAFIX”). As a global benchmark, ISDAFIX is used for setting values of interest rate swaps, and functions as a valuation tool for a number of financial products.
Though the DFS has requested for information from major banks, no subpoenas have been issued. Further, no particular bank is in focus. The German regulator – the Federal Financial Supervisory Authority (“BaFin”) – was eyeing Deutsche Bank for its involvement in the ISDAFIX rigging.
Notably, Deutsche Bank is the second global bank whose name is being publicly dragged into the ISDAFIX manipulation. Though DFS has not discovered anything concrete related to the banks’ role in manipulating ISDAFIX, we cannot be sure about where this probe will lead to (Read more: Banks Under Review for ISDAFIX Manipulation Charges).
4. In order to resolve the lawsuit filed by the customers of the brokerage firm Peregrine Financial Group, Inc., the core banking unit of U.S. Bancorp’s – U.S. Bank National Association – has agreed to pay $44.5 million. U.S. Bancorp representative Dana Ripley stated that the company is satisfied with the settlement, which will not impact its second-quarter 2015 results. The company was accused of inappropriately handling an account at the bank which was created for the benefit of Peregrine customers (Read more: U.S. Bancorp Settles Peregrine Case for $44.5M).
5. Driven by its strong liquidity position, Bank of the Ozarks, Inc. (OZRK) has increased its dividend for the 20th consecutive quarter. The company declared a quarterly cash dividend of 14 cents per share, which represents a 3.7% rise over the prior payout. The dividend will be paid on Jul 24 to shareholders on record as of Jul 17, 2015 (Read more: Is Bank of Ozarks a Rare Growth and Income Combo?).
Price Performance
Overall, the optimism surrounding banks’ growth prospects from restructuring plans and resolution of legal issues, was somewhat overshadowed by the recent regulatory probes and turmoil in Greece. Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
-1.4% |
9.5% |
|
BAC |
-2.2% |
-4.3% |
|
WFC |
-1.2% |
5.1% |
|
C |
-1.7% |
2.2% |
|
COF |
-0.8% |
8.0% |
|
USB |
-2.0% |
-1.6% |
|
PNC |
-1.2% |
7.4% |
In the last five trading sessions, BofA and U.S. Bancorp were major losers, with their shares declining 2.2% and 2.0%, respectively. Moreover, Citigroup fell 1.7%.
Over the last six months, JPMorgan and Capital One Financial Corporation COF were the top performers, with their shares rising 9.5% and 8.0%, respectively. However, BofA and U.S. Bancorp declined 4.3% and 1.6%, respectively.
What's Next in the Banking Universe?
In the coming five days, nothing big is expected on the banking front. Unless there is a major upheaval in the global market, we believe that bank stocks will continue to perform in a similar manner.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment