Efforts of major banks to conclude litigation issues pertaining to their past business conduct remained the key trend in the last five trading days. Litigation issues dominated the headlines. Among others, JPMorgan Chase & Co.’s (JPM) recent mortgage securities deal worth $4.5 billion with nearly 21 institutional investors was remarkable.
Nevertheless, the pessimism was somewhat offset by the restructuring and streamlining initiatives announced by some banks during the week. Amid ongoing instability in Russia and Ukraine, these banks are curtailing their Russian exposure. These moves should bolster the banks’ financial performance and drive operational efficiencies going forward. (Read last to last week’s developments: Regions, SunTrust, BB&T in Focus Following Q2 Earnings)
Recap of the Week’s Most Important Developments:
1. Bank of America Corp. (BAC) announced a settlement associated with the sale of risky residential mortgage-backed securities (RMBS) by Countrywide Financial Corp. (acquired in 2008), for which the bank has been ordered to pay $1.27 billion.
The fine was levied by the U.S. District Judge Jed Rakoff in Manhattan, after a jury held BofA accountable to pay penalty for selling defective loans to Fannie Mae (FNMA) and Freddie Mac (FMCC) from Aug 2007–May 2008 via Countrywide. The company was accused of selling loans underlying these RMBS without properly assessing the creditworthiness of borrowers. (Read more: BofA Fined $1.3B for 'Hustle' Fraud, May Appeal)
2. JPMorgan Chase & Co.’s $4.5-billion mortgage securities deal with nearly 21 institutional investors has been approved by the trustees of the securities. The settlement accord was announced in Nov 2013, just a few days prior to the $13-billion deal with the U.S. regulators. Nevertheless, the settlement accords for 6 of the 330 RMBS trusts issued by JPMorgan and Bear Stearns have been rejected by the trustees. Further, 27 trusts have obtained extension till Oct 1, 2014 to approve the accord.
JPMorgan also reached a $650,000 settlement with the Commodity Futures Trading Commission (CFTC) to resolve the claims of filing falsified reports on the trading positions of some of its large traders. This settlement clears the bank of charges made by the U.S. futures and option markets regulator. Besides monetary penalty, the federal regulator has ordered the firm to tighten its systems associated with reports of the large traders. (Read more: JPMorgan to Pay $650K for Clearing CFTC False-Report Charges)
3. In an effort to strengthen its commercial banking operations in the Asia-Pacific region, Citigroup Inc. (C) intends to hire around 100 bankers. The company, which has presence in more than 100 countries, operates commercial banking business in 32 countries with around 4,000 employees. This hiring represents an increase of 10% in the company’s employee base in its Asia-Pacific commercial banking business. (Read more: Citigroup to Hire 100 Bankers in Asia, Targets Smaller Clients)
4. In a bid to streamline its technology platform, JPMorgan has decided to cut hundreds of technology support jobs in its corporate and investment bank (CIB) division. As part of the downsizing process, jobs will be cut in New York, Chicago, Tampa and Dubai operations. JPMorgan had already indicated a job slash nearly a month and a half ago. In case of a persistent lull in the trading business, the bank had hinted, a large-scale pink-slip handout might take place in the Investment Banking division, with compensation levels going down as well. (Read more: JPMorgan to Slash Tech Support Jobs Amid Trading Worries)
5. Bound by the regulatory pressure, Citigroup announced that it inked a deal with an investment firm – Lexington Partners to vend 80% of its limited partnership interest worth $1.5 billion in Metalmark Capital Partners II (MCP II). Following the announcement of revised business terms between Citigroup and Metalmark in Dec 2013, Citi will continue to tender 20% of its limited partnership interest to existing MCP II limited partners. The terms of the agreement with Lexington, which is anticipated to close in fourth quarter of 2014, were not disclosed. Moreover, the deal awaits certain customary conditions.
To abide by the Dodd Frank Wall Street Reform and Consumer Protection Act, Citigroup has taken the recent move of dropping its alternative holdings in recent years. Notably, in 2013, Citi Venture Capital International was sold to Rohatyn Group for an undisclosed amount.
Price Performance
Despite reporting decent second-quarter results, banking stocks continued to depict a downward trend. The performance of banking stocks remained subdued owing to legal hassles and restructuring costs. Hence, the stocks ended last week on a pessimistic note.
|
Company |
Last Week |
Last 6 months |
|
JPM |
-4.6% |
3.4% |
|
BAC |
-3.4% |
-10.5% |
|
WFC |
-2.4% |
12.6% |
|
C |
-3.2% |
1.5% |
|
COF |
-2.5% |
13.5% |
|
USB |
-2.9% |
5.2% |
|
PNC |
-2.2% |
3.8% |
In the last five trading sessions, JPMorgan and BofA were the major losers, with their share prices declining 4.6% and 3.4%, respectively.
Over the last 6 months, Capital One Financial Corporation (COF) and Wells Fargo & Company (WFC) were the top performers, with their shares gaining 13.5% and 12.6%, respectively. However, BofA witnessed a 10.5% price decline over the same time frame.
What's Next in the Banking Universe?
Since no major development is expected next week, the performance of banking stocks is not expected to change significantly.
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