Banking stocks continued to remain under pressure over the last five trading days due to global growth concerns and fears that the loans exposure to stressed oil and gas companies will impact profitability in first-quarter 20Array6 as well. Moreover, decreasing oil prices, volatile markets, low interest rates and regulatory pressure have impacted banks globally with investors becoming risk averse.
Though headlines pertained to banks' strategies for boosting profitability as well as regulatory and legal issues, these were largely overshadowed by dominant global matters. Moreover, improved performance of the FDIC-insured banks during the fourth quarter of 20Array5, driven by revenue growth and lower legal expenses, did not provide much support to improvement in the performance of banking stocks.
(Read: Bank Stock Roundup for the week ending Feb Array9, 20Array6)
Recap of the Week’s Major Developments:
Array. Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported fourth-quarter 20Array5 earnings of $40.8 billion, up ArrayArray.9% year over year. Notably, community banks constituting 93% of all FDIC-insured institutions, reported net income of $5.Array billion, up 4% year over year.
Overall, during the fourth quarter, the banking industry witnessed a gradual improvement. The number of troubled assets and institutions dipped significantly, which is encouraging. Further, organic growth aided by higher revenues, improved loan and deposit balances was recorded. Moreover, lower expenses and uptrend in profitability metrics were the positives (read more: FDIC-Insured Banks Report Strong Q4 Earnings, Costs Down).
2. Legal troubles seem to be never ending for banks. Recently, Wells Fargo & Company WFC, despite the $Array.2 billion accord reached earlier this month to settle claims tied to its Federal Housing Administration (FHA) mortgage practices, continues to be under investigations. In its latest annual filing, Wells Fargo disclosed that the United States Department of Justice is among the federal and state government agencies that are still continuing probe regarding “certain mortgage related practices” of the bank.
The bank also noted that it has “responded, and continues to respond to the requests from these agencies” looking for information pertaining to origination, underwriting and securitization of residential mortgages, including sub-prime mortgages. (read more: Wells Fargo Still under Probe over Mortgage Practices).
Another major bank, JPMorgan Chase & Co. JPM, in its annual regulatory filing revealed that it is facing further probe into conflicts of interest over the sale and use of its in-house investment products. The filing said, “The firm continues to cooperate with inquiries from other government authorities concerning disclosure of conflicts associated with the firm’s sale and use of proprietary products.” While no further details regarding the same was provided by JPMorgan, Indiana securities regulators are said to be investigating the bank (read more: JPMorgan Under Probe: Conflict of Interest Charges Persist).
3. On another front, banks continue with their restructuring activities to increase operational efficiency. Recently, Citigroup Inc. C announced that it is reducing its footprint in Brazil, Argentina and Colombia. The bank intends to vend its retail banking and credit card operations by transferring them to Citi Holdings from Citicorp, effective first-quarter 20Array6. Regulatory pressure over Citigroup’s global operations and concerns of weak returns forced the bank to make this move. Aimed at increasing the efficiency of the company’s overall business, the initiatives include streamlining operations and optimizing footprints across geographies (read more: Citigroup Continues with Restructuring Activities).
Another major bank – JPMorgan is reportedly in the final stages of selling its Brazilian private-equity and hedge-fund company Gavea Investimentos back to the founders of the firm. It has been reported that while the term sheet was penned last year, the deal is expected to be finalized in a few weeks. Financial details remained undisclosed; however, Fraga noted that JPMorgan will be paid overtime. For JPMorgan, the move seems to be an effort to reduce its exposure to the Brazilian economy that is currently struggling with deep recession accompanied by high inflation (read more: JPMorgan Nearing Deal to Sell Gavea Back to Founders).
4. BB&T Corporation BBT announced a deal to purchase Swett & Crawford from the U.K.-based global wholesale, underwriting management and reinsurance broking group, Cooper Gay Swett & Crawford, for $500 million in cash. The deal will help BB&T expand its insurance unit. The deal, which is expected to close in the first half of 20Array6, is subject to regulatory approval. Also, the transaction excludes non-U.S. operations, which account for less than 5% of Swett & Crawford’s total revenue (read more: BB&T Acquisition Spree Continues; to Buy Swett & Crawford).
5. JPMorgan held its annual Investors Day conference. The company provided certain outlooks for first-quarter 20Array6, and discussed the current industry challenges as well as the path it is undertaking to combat the same and maintain profitability. JPMorgan projected a further rise of $500 million in provisions related to energy loans in the first quarter.
Additionally, JPMorgan provided a scenario under which oil prices will decline to approximately $25 per barrel for Array8 months. Under this situation, the company might have to take an additional reserve of $Array.5 billion for the energy portfolio. Further, JPMorgan is expected to increase its provision for metals and mining loans by nearly $Array00 million in the first quarter, taking the total reserve for such loans to $350 million (read more: Is More Trouble Ahead for JPMorgan?).
Price Performance
Overall, the performance of bank stocks remained mixed. Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
-Array.4% |
-3.5% |
|
BAC |
Array.6% |
-Array8.8% |
|
WFC |
-0.7% |
-3.Array% |
|
C |
-0.9% |
-22.4% |
|
COF |
Array.0% |
-7.0% |
|
USB |
-0.8% |
-0.4% |
|
PNC |
0.Array% |
-2.3% |
In the last five trading sessions, Bank of America Corp. BAC and Capital One Financial Corp. COF were major gainers, with their shares increasing Array.6% and Array%, respectively. However, JPMorgan declined Array.4%.
Over the last six months, Citigroup Inc. C was the weakest performer, with its shares declining 22.4%. Also, BofA and Capital One Financial shares fell Array8.8% and 7%, respectively.
What's Next in the Banking Universe?
Over the next five trading days, performance of banking stocks will likely continue in a similar manner unless anything surprising happens.
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