With the end of yet another earnings season, banks are now again concentrating on the resolution of legacy issues and restructuring activities. Though regulatory probes are ongoing, steps taken to resolve litigation issues by banks related to their past business conduct has helped regain investors’ confidence in the past five trading days.
Amid ongoing pressure on revenues, the strategy of streamlining operations and focusing on core businesses to drive operational efficiencies was also prominent with Bank of America Corp. BAC making the headlines.
Federal Reserve Board has proposed a new long-term debt and capital requirement level for the “too big to fail” banks. With the implementation of the rule, Standard & Poor's ("S&P") Ratings Services believes the level of government support might be lower and therefore has kept credit ratings of eight major banks under review for a downgrade.
(Read the last Bank Stock Roundup for Oct 30, 2015)
Recap of the Week’s Key Developments:
1. Standard & Poor's Ratings Services, part of McGraw Hill Financial MHFI has put the senior unsecured and non-deferrable subordinated debt ratings of eight major U.S. banks under review for a downgrade. These banks include The Goldman Sachs Group, Inc. GS, Wells Fargo & Company WFC, JPMorgan Chase & Co. JPM, Citigroup Inc. C, BofA, The Bank of New York Mellon Corp. BK, State Street Corp. STT and Morgan Stanley MS.
Notably, the Federal Reserve Board, led by Chairperson Janet Yellen, proposed a new long-term debt and capital requirement level for the “too big to fail” banks. Under the proposed rule, the selected banks will be required to include the long-term debt in their respective holding companies’ balance sheets. Such debt can be converted into equity in the event of a failure, as this would help infuse the capital required to support critical operations during a crisis. (Read more: Fed Proposes New Rules: Big Banks to Raise $120B in Debt?)
Change in federal policies to support troubled banks is the rationale behind the S&P review. Regulators are planning to build liquidation plans for U.S. banks to combat another financial crisis. Therefore, S&P believes the level of government support might be lower as compared with the bailout of banks owing to the financial crisis in 2008. The review is expected to be completed by early December 2015. (Read more: S&P to Review Ratings of Major US Banks on Fed's New Rule)
2. With the strategy of simplifying operations and improving efficiency amid a challenging industry and regulatory backdrop, BofA announced the sale of its $87-billion money-market fund business (managed by BofA Global Capital Management) to BlackRock Inc. BLK. Touted as one of the largest deals in cash management industry, the transaction will close in the first half of 2016. While the terms of deal were not disclosed, it still requires consent from fund shareholders and regulators. (Read more: Why BofA Sold Money-Market Fund Business to BlackRock)
3. KeyCorp. KEY is acquiring the Buffalo, NY-based First Niagara Financial Group Inc. FNFG in a stock-and-cash deal worth approximately $4.1 billion, leading to the creation of the 13th largest U.S.-based commercial bank (in terms of total assets). KeyCorp is paying a premium of nearly 10% on First Niagara's closing price as of Oct 29. Specifically, the company is offering $2.30 in cash and 0.68 KeyCorp share for each share of First Niagara.
Notably, the transaction, expected to close in the third quarter of 2016, is still subject to regulatory approvals as well as consent from shareholders of both KeyCorp and First Niagara. (Read more: Why KeyCorp Tumbled 7% on Deal to Acquire First Niagara)
4. According to the U.S. Securities and Exchange Commission (SEC) filing, BofA has agreed to settle charges for defrauding shareholders and relying on an electronic mortgage registry known as MERS by paying $335 million. Investors accused the bank of concealing its exposure to risky mortgage securities. The settlement was disclosed in the company’s filing, according to which BofA has already reserved funds for the settlement as of Jun 30, 2015. However, the settlement awaits final documentation and the court’s approval. (Read more: BofA Agrees to $335M Mortgage Lawsuit Settlement)
5. After a $136 million settlement to the Consumer Financial Protection Bureau (“CFPB”) along with Attorneys General in 47 states and the District of Columbia over violations related to sale and collection of credit card debt in July this year, JPMorgan will now have to shell out $50 million in compensation to customers and another $50 million in fines to the state of California over similar charges.
California was not among the 47 states, which penalized JPMorgan more than $200 million in July. Though the settlement still requires court approval, it will mark the end of a 2013 lawsuit, which accused JPMorgan of using illegal methods to collect debts from over 125,000 credit card holders. (Read more: JPMorgan to Settle California Credit Card Suit for $100M)
6. Wells Fargo is set to pay $81.6 million to resolve charges of repeatedly failing to provide timely required notices to homeowners in bankruptcy. The agreement entered with the Department of Justice’s U.S. Trustee Program was filed in the U.S. Bankruptcy Court for the District of Maryland and awaits court approval.
Price Performance
The overall performance of banking stocks was skewed towards the optimistic side. Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
3.4% |
4.6% |
|
BAC |
3.2% |
6.5% |
|
WFC |
2.0% |
0.5% |
|
C |
1.8% |
1.8% |
|
COF |
1.3% |
-1.9% |
|
USB |
1.1% |
-0.3% |
|
PNC |
2.6% |
0.6% |
In the last five trading sessions, JPMorgan and BofA were major gainers, with their shares increasing 3.4% and 3.2%, respectively. The PNC Financial Services Group, Inc. PNC also rose 2.6%.
Over the last six months, BofA and JPMorgan were the top performers, with their shares surging 6.5% and 4.6%, respectively. However, Capital One Financial Corp. COF slumped 1.9%.
What's Next in the Banking Universe?
In the next five trading days, banking stocks are expected to perform in a similar manner unless there is some unprecedented event.
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