Following the most awaited increase in the benchmark federal funds rate after more than nine years to 0.25%-0.50% from zero since December 2008 by the Federal Reserve, the last four trading days depicted optimism over the banking stocks. The interest rate hike, though at a slower pace, will ease some pressure on net interest margin (NIM) – a key source of banks’ earnings and is expected to bolster the financial performance and drive operational efficiencies going forward.
However, legal issues related to shoddy malpractices continued. Nevertheless, banks were on acquisition spree with restructuring activities taking the center stage. Approvals for certain deals depict that regulators are now keen on mergers & acquisitions (M&A) activities.
(Read the last Bank Stock Roundup for Dec 11, 2015)
Recap of the Week’s Key Developments:
1. Legal issues related to past deeds continued for banks. Recently, marking an end to a roughly two-year long probe related to disclosure flaws, JPMorgan Chase & Co. JPM successfully settled the matter with the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). The company agreed to pay $307 million (in aggregate), while admitting to wrongdoings. JPMorgan had been under the SEC as well as the CFTC scanner for potential conflict of interests (Read more: JPMorgan Settles Conflict of Interest Charges for $307M).
In yet another resolution of a legal headwind, JPMorgan has settled a class-action lawsuit, stemming from the ‘London Whale’ scandal, for $150 million. The case, filed in the U.S. District Court for the Southern District of New York, was led by public pension funds in the U.S. states of Arkansas, Ohio and Oregon and in Sweden. (Read more: JPMorgan to Pay $150M for Settling 'London Whale' Lawsuit)
Another banking giant –The Bank of New York Mellon Corporation’s BK efforts to rid itself of the case related to its role overseeing mortgage-backed securities (“MBS”) of Countrywide Financial Corp. suffered a setback after the U.S. District Judge William Pauley in Manhattan rejected the bank’s bid to dismiss the lawsuit. BNY Mellon can soon be burdened with a lawsuit by pension funds alleging the company caused billions of dollars in damages by failing to perform its day-to-day obligations as a trustee, which includes ensuring proper documentation of the underlying home loans as well as protection of bondholders' rights. (Read more: BNY Mellon Appeal Snubbed, Countrywide Suit to Continue)
2. Amid increasing regulatory restrictions on banks, revaluating certain underwriting insurance policies, the U.S. banking and financial services firm – Wells Fargo & Company WFC vended its crop insurance business. Rural Community Insurance Services (RCIS) and its subsidiary Rural Community Insurance Company (RCIC) has been sold to Zurich American Insurance Company (ZAIC), a subsidiary of Zurich Insurance Group. The agreement is anticipated to be completed by the end of first-quarter 2016. Per terms of the deal, the unit will be sold for $675 million – $1.05 billion. However, other financial details were undisclosed (Read more: Wells Fargo Vends Crop Insurance Unit to ZAIC).
3. Citigroup Inc. C will be axing around 2,000 jobs next month, mainly middle or back-office positions globally. Notably, the recent layoffs are part of Chief Executive Officer Michael Corbat’s restructuring activities. This move follows the bank’s strategy of reducing costs, amid decreasing business transactions, stricter regulations and high litigation costs. Since the 2008 financial crisis, banks have been reducing jobs to trim costs. At the Goldman Sachs US Financial Services Conference in New York in December, Citigroup’s Chief Financial Officer – John Gerspach said "From an expense point of view, we will be taking a repositioning charge of say about $300 million in Citicorp in the fourth quarter,". "That is as we continue to resize our infrastructure and our capacity to deal with a continuing low-revenue environment." (Read more: Citigroup to Conduct 2,000 Layoffs Globally Next Month).
4. In continuation of its strategy to trim international operations, Citigroup is set to offload its consumer and commercial banking business along with its insurance operations in El Salvador to Grupo Terra. Financial terms of the deal remained undisclosed. As per the deal, the Honduras-based investment group Grupo Terra will acquire a bulk share of Banco Citibank de El Salvador, S.A., Citi Tarjetas de El Salvador, S.A. de C.V., as well as insurer Seguros e Inversiones, S.A. (SISA) and other associated companies. Notably, the deal excludes the Citibank, N.A. branch in El Salvador. Currently, the deal is subject to regulatory approval by the Salvadoran authorities. Upon closure of the deal, Citigroup, which has presence in El Salvador for over 51 years, will continue to operate its corporate and investment banking business (Read more: Citi Cuts El Salvador Presence; Vends Business to Grupo Terra).
5. Regulatory approvals on acquisitions are on an upswing for banks. Recently, BB&T Corporation BBT received regulatory approvals from the Federal Reserve, the Federal Deposit Insurance Corporation and all state banking regulators to acquire Allentown, PA-based National Penn Bancshares Inc. NPBC. The deal will close in the next few months.
Further, Fifth Third Bancorp’s FITB deal to sell 17 branches, retail and private banking deposits worth $383 million and consumer loans in Pittsburgh to Pennsylvania-based F.N.B. Corporation (FNB) has received all necessary regulatory approvals. Recently, in the last pending consent, the Office of the Comptroller of the Currency also extended its affirmation. First National Bank of Pennsylvania, the largest subsidiary of FNB Corp, intends to close the deal in the second quarter of 2016. (Read more: Fifth Third's Branch Sale to FNB Corp Gets Regulatory Nod).
6. KeyCorp.’s KEY deal to acquire Buffalo, NY-based First Niagara Financial Group Inc. FNFG may have to wait a bit longer to get regulatory approvals. The Federal Reserve has extended the public comment period by a month till Jan 31, 2016. The stock-and-cash deal, worth approximately $4.1 billion, was announced in October. Senator Charles E. Schumer, a Democrat from New York, in letter to the Fed on Dec 20 had urged for more time for people to comment on the transaction. Senator also wanted the Fed to consider holding public discussion over concerns pertaining to the economic impact of the deal across Upstate New York region. Further, the prior comment period overlapped the holiday season.
Price Performance
The overall performance of banking stocks remained bullish. Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
3.6% |
-3.0% |
|
BAC |
3.5% |
-1.3% |
|
WFC |
2.3% |
-3.6% |
|
C |
2.8% |
-8.1% |
|
COF |
1.7% |
-16.7% |
|
USB |
2.6% |
-2.4% |
|
PNC |
2.6% |
-1.8% |
In the last five trading sessions, JPMorgan and Bank of America Corporation BAC were major gainers, with their shares increasing 3.6% and 3.5%, respectively. Moreover, Citigroup rose 2.8%.
Over the last six months, Capital One Financial Corporation COF was the weak performer, with its shares declining 16.7%. Further, Citigroup and Wells Fargo shares fell 8.1% and 3.6%, 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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