The last five trading days depicted erosion of investors’ confidence over the banking stocks. The reaction followed the finalization of new Federal Reserve rules which limits bailouts for banks at the time of financial crisis and downgrade in ratings of 8 major banks by Standard & Poor's ("S&P").
Further, legal issues related to past wrongdoings continued. On the other side, in the technology-driven economy, banks have started collaborating with financial technology companies in a bid to capitalize on the online boom with JPMorgan Chase & Co. (JPM) and KeyCorp. (KEY) leading the pack.
Execution of such plans is expected to bolster financial performance and drive operational efficiencies going forward.
(Read the last Bank Stock Roundup for Nov 27, 2015)
Recap of the Week’s Key Developments:
1. Standard & Poor's ("S&P") Ratings Services, part of McGraw Hill Financial MHFI has downgraded the senior unsecured and non-deferrable subordinated debt ratings of eight major U.S. banks by one level, which were kept under review for a downgrade last month. These banks include The Goldman Sachs Group, Inc. GS, Wells Fargo & Co. WFC, JPMorgan Chase & Co. JPM, Citigroup Inc. C, Bank of America Corp. BAC, The Bank of New York Mellon Corp. BK, State Street Corp. STT and Morgan Stanley MS.
“We now consider the likelihood that the U.S. government would provide extraordinary support to its banking system to be ‘uncertain’ and are removing the uplift based on government support from our ratings,” S&P said in the statement (Read more: S&P Lowers Ratings of 8 Major US Banks on Fed's New Rule).
Recently, the new rule, which was required by the 2010 Dodd-Frank financial reform law, states that the Fed's authority to engage in emergency lending has been limited to programs and facilities with "broad-based eligibility" and prohibits lending to entities that are insolvent and imposes certain other limitations.
The Fed’s new lending program is required to be broad enough so that it can be used by at least five companies in contrast to the customized efforts previously undertaken for individual firms. The Fed is now restricted to providing emergency loans to individual companies and to insolvent companies, which are defined as those that had failed to pay "undisputed debts" in the previous 90 days (Read more: New Fed Rule Limits Bailouts, Promotes Broad Lending)
2. Legal woes continue to persist for banks including Citigroup and Wells Fargo. The 12-year suit by Allied Irish Banks Plc (AIB) that accused Citigroup of helping rogue currency trader John Rusnak hide around $691 million loss, is seeking $872 million from the bank. A trial is expected to commence on Jan 25, 2016 (Read more: Citi May Face $872M Charge over AIB Rouge Trader Suit).
After facing a civil lawsuit in May 2015, filed by Mike Feuer, attorney of the city of Los Angeles, for the unethical treatment of its employees and customers, Wells Fargo is now under the federal regulators’ investigations. The Office of the Comptroller of the Currency and the San Francisco Federal Reserve are probing the banking giant’s business practices. The financial bigwig has been under inquiry for setting impractical sales targets for its employees, inducing them to adopt fraudulent means for meeting the set quotas (Read more: Wells Fargo Under Regulators' Probe over Business Practices).
3. Banks are expected to keep their bonus pool unchanged for the traders, which are to be finalized based on the trading performance in December. Citigroup has come up with the move of keeping the 2015-end bonus pool for its traders almost unchanged from 2014. The decision comes even after elevated compliance costs and new regulations in the banking sector, which is likely to put strain on the bank’s weakened peers (Read more: Citigroup Keeps Traders' Bonus Pool Unchanged from 2014).
JPMorgan has also kept its 2015-end bonus pool almost unchanged from 2014. Though the bank’s plans may change depending on its trading performance in December, top managers of the bank were informed about its initial decision. The bank’s total compensation costs (including salaries and benefits) were $10.4 billion for 2014, which was 3.6% lower than the prior year (Read more: JPMorgan Keeps Traders' Bonus Pool Unchanged from 2014).
4. With the rising popularity of financial technology companies, also known as FinTech companies, one such strategic partnership has evolved between JPMorgan and an alternative small business lender, On Deck Capital, Inc. ONDK. Through this collaboration, JPMorgan looks forward to build its small-business unit and add more revenues by using On Deck’s small business lending platform to serve its small business customers.
In another similar deal, KeyBank, which operates under KeyCorp. KEY, entered into a strategic partnership with Aptexx, a provider of payment and property management software. Under the affiliation, Aptexx's Resident Anywhere service will be combined with KeyCorp’s real estate industry expertise and payment capabilities (Read more: JPMorgan & KeyCorp Join Hands with FinTech Companies).
5. Capital One Financial Corp. COF has completed a deal to acquire General Electric Co.’s GE healthcare-related loans worth roughly $8.5 billion and its Healthcare Financial Services (“HFS”) business. The completion of the transaction combined Capital One’s existing healthcare lending business with HFS. The just-completed deal will bolster Capital One’s revenue growth, going forward (Read more: Capital One Closes Deal to Buy GE's Healthcare Lending Unit).
6. Fifth Third Bancorp FITB is set to record a pre-tax gain of around $419 million ( $273 million after tax) during the fourth-quarter 2015, stemming from a transaction including sale of a large portion of Vantiv, Inc. VNTV shares and partial cancellation of warrant to purchase Vantiv shares. As the bank is gradually winding down its stake in Vantiv, a secondary offering of 13.4 million shares of Class A Common Stock of Vantiv has been initiated. Also, Fifth Third terminated its right under existing warrant to buy 4.8 million Class C Units of Vantiv Holding, LLC, the wholly-owned subsidiary of Vantiv for a cash consideration of $200 million.
Price Performance
The overall performance of banking stocks remained bearish. Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
-2.0% |
0.0% |
|
BAC |
-0.7% |
2.8% |
|
WFC |
-2.1% |
-3.5% |
|
C |
-1.3% |
-3.6% |
|
COF |
-2.1% |
-7.4% |
|
USB |
-1.6% |
-0.6% |
|
PNC |
-1.7% |
-1.2% |
In the last five trading sessions, Capital One Financial and Wells Fargo were major losers, with their shares decreasing 2.1%. JPMorgan also fell 2.0%.
Over the last six months, BofA was the top performer, with its shares rising 2.8%. However, Capital One Financial, Citigroup and Wells Fargo shares fell 7.4%, 3.6% and 3.5%, respectively.
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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