Learning from Q2 earnings results that showed muted top line, efforts by banks to ramp up revenue growth were commendable in the last five trading days. Banks have been striving hard to boost their top lines through inorganic growth strategies and restructuring of business lines.
However, the focus shifted from earnings to legal issues and regulatory probes pertaining to past business misconducts in the last five trading sessions. The U.S. District judge found a “viable legal theory” that can potentially bring relief to 27 plaintiffs who filed individual lawsuits against 16 global banks including Citigroup Inc. C, JPMorgan Chase & Co. JPM and Bank of America Corp. BAC for allegedly rigging LIBOR.
Notably, investors have accused the banks of reporting artificially low borrowing costs to ramp up earnings and appear financially healthy. Though nothing concrete can be said as of now, we believe the accused banks are expected to see a rise in legal costs as and when these claims are resolved.
Despite efforts of banks to improve revenues, performance of banking stocks remained mostly subdued over the last five trading sessions. We believe this was mainly due to overall negative market sentiments as earnings reports from across the industry reflected a weak second quarter. Hence, initiatives on part of banks failed to cheer up investors much.
(Read the last Bank Stock Roundup for Jul 24, 2015)
Recap of the Week’s Most Important News Releases:
1. After receiving necessary regulatory approvals in Jul 2015, BB&T Corp. BBT closed the acquisition of Susquehanna Bancshares, Inc. The $2.5-billion cash-and-stock deal was announced back in Nov 2014. With $18.7 billion in assets and $13.8 billion in deposits from Susquehanna as of Mar 31, 2015, the deal will significantly boost BB&T’s organic prospects.
Separately, Bank of the Ozarks, Inc. OZRK announced the completion of the deal to acquire Bank of the Carolinas. This marked the company’s 13th acquisition since Mar 2010. With Bank of the Carolinas operating eight full service branches in North Carolina, the deal will help Bank of the Ozarks strengthen its presence in the region. The merger will also likely provide a boost to Bank of the Ozarks’ expansion strategy (read more: BB&T Closes Susquehanna Deal: More Acquisition in Cards? and Bank of the Ozarks Closes Bank of the Carolinas Deal).
2. Regions Financial Corporation RF is keen on expanding its insurance business in Georgia. The company’s subsidiary, Regions Insurance, Inc., announced its plans to acquire the Georgia-based The A.I. Group, Inc. We expect the acquisition to boost Regions Financial’s growth, as A.I. Group is among the largest benefits consulting firms in the Southeast region (read more: Regions Financial to Expand Insurance Business in Georgia).
3. JPMorgan is relaxing the prerequisites for “jumbo” mortgages of up to $3 million. The idea is to combat the heightening competition and seize the top share of the upper end of the housing market. By easing the underwriting rules as well as reducing payments and credit scores associated with jumbo loans, JPMorgan looks forward to capitalizing on the enhanced higher-priced homes segment within the stabilizing housing market (read more: JPMorgan to Ease Jumbo Mortgages Terms: Growth Ahead?).
4. Citigroup’s deal to sell its subprime lending unit – OneMain Financial – to Springleaf Holdings, Inc. has drawn regulatory concerns. Hence, the closure of the deal might eventually get delayed. Notably, the deal, announced in Mar 2015, was scheduled to close by the third-quarter 2015.
In its latest quarterly filing, Springleaf stated that the review of the proposed deal from an antitrust perspective by the U.S. Department of Justice (“DOJ”), Antitrust Division is yet to complete. Notably, the DOJ has earlier sought for voluntary request for information from both Springleaf and OneMain and have issued a Civil Investigative Demand seeking information regarding the proposed deal.
Both the parties have responded to the DOJ’s request and have agreed not to complete the deal before Sep 10, 2015 in order to provide the DOJ adequate time to complete its antitrust review. Also, Springleaf stated that the state Attorneys General may seek to coordinate their antitrust reviews with the DOJ’s review.
Sprinleaf further mentioned, “The DOJ and certain state Attorneys General have expressed to us potential concerns with respect to the Proposed Acquisition. We expect to constructively engage with the DOJ and the states in an attempt to resolve any potential concerns. These discussions could result in a delay in the consummation of the Proposed Acquisition beyond the third quarter.”
5. As regulators striving to wipe out discrimination against minority borrowers in the auto loan industry, Fifth Third Bancorp FITB has been urged by the Consumer Financial Protection Bureau (“CFPB”) to change its auto-lending practices. The news first reported by The Wall Street Journal, stated that the proposal comes as a part of a probable settlement with CFPB, citing people familiar with the matter.
As a part of discussions to resolve an investigation into possible discrimination in the Fifth Third’s auto-lending business, CFPB has sent a letter to the company. In the letter the regulator has proposed the bank to cut the markup it provides to car dealers as part of auto loans. People acquainted with the matter stated that this possible move may lead to a lower monetary settlement.
At present, the amount of settlement is not known and it is also unclear whether the Ohio based-bank will agree to the proposal under regulatory pressure. Notably, in May 2014, Fifth Third had revealed that the DOJ was probing whether the bank resorted to discriminatory practices related to its indirect automobile loan portfolio.
The DOJ and CFPB’s investigation in discrimination against minority borrowers in the auto loan industry focuses on a practice called “dealer markup” or “dealer participation.” The banks serve as indirect lenders, facilitating dealers to add to the interest rate the banks charge and gain on the difference.
It is criticized that the practice empowers dealers with much flexibility to move certain consumers into more-expensive loans. The CFPB has stated that lowering the potential markups is likely to reduce the risk of discrimination.
Price Performance
Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
-0.4% |
19.5% |
|
BAC |
-0.4% |
8.7% |
|
WFC |
0.1% |
7.1% |
|
C |
-0.6% |
18.5% |
|
COF |
0.3% |
7.5% |
|
USB |
0.0% |
3.0% |
|
PNC |
0.4% |
10.1% |
In the last five trading sessions, The PNC Financial Services Group, Inc. PNC and Capital One Financial Corp. COF inched up 0.4% and 0.3%, respectively. On the other hand, JPMorgan and BofA fell 0.4% each.
Over the last six months, JPMorgan, Citigroup and PNC Financial were the top gainers, with their shares rising 19.5%, 18.5% and 10.1%, respectively. Further, BofA and Capital One climbed 8.7% and 7.5%, respectively.
What's Next in the Banking Universe?
In the coming five days, no major unprecedented incident is expected on the banking front. Hence, we believe that bank stocks will continue to perform in a similar fashion.
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