In the last four trading days, banks were once again hampered by new lawsuits, as their past business malpractices continue to catch up to them. Though these things are not new for investors, these new litigations will likely hurt the banks’ financials to some extent.
Notably, amid continued pressure on revenues, banks have been streamlining operations and focusing on core businesses. This strategy has become one of the major growth drivers for banking stocks.
Also, in a relief for big banks, the Federal Reserve postponed the timing for certain regulatory requirements “that have yet to be integrated into the capital plan and stress-testing framework.” These changes will be effective for the 2016 capital plan and stress-testing period.
(Read the last Bank Stock Roundup for Nov 20, 2015)
Recap of the Week’s Major Developments:
1. The Federal Reserve has approved the final rule to amend the capital plan and stress testing rules effective 2016. The final rule amends some capital action assumptions in the stress test regulations. Also, the company-run stress test requirements for savings and loan holding companies are being delayed till Jan 1, 2017.
Per the final rule, banks will be given more time to include certain regulatory requirements into their capital plan and stress-testing structure. Such requirements include the supplementary leverage ratio, which is being included in the framework in 2017.
Further, for stress testing rules, firms will continue using the generally applicable risk-based capital framework. However, use of the advanced approaches risk-based capital framework mandatory for firms with minimum $250 billion in total consolidated assets or $10 billion in on-balance sheet foreign exposures will be deferred indefinitely. However, application of advanced approaches framework for the regulatory capital ratios will continue as before for such firms.
Additionally, the common equity tier 1 capital requirement by the banks for clearing the stress test under Fed’s revised regulatory capital rules will be fully phased-in over the nine-quarter planning horizon of the 2016 capital plan and stress testing cycles. Notably, the modified rule will require banks to hold more capital in comparison to that needed under the existing capital rules for maintaining the tier 1 common ratio as per requirement. However, tier 1 common capital requirement will be null after the new rules become effective.
2. Litigation issues seem to be far from over for major global banks. 10 banking giants and two trading platforms have been hit with a class action lawsuit for alleged conspiracy in order to restrict competition in the most commonly traded derivative – interest rate swaps market.
The suit, filed in the U.S. District Court in Manhattan by The Public School Teachers' Pension and Retirement Fund of Chicago, alleged that the banks – The Goldman Sachs Group, Inc., Bank of America Corp. BAC, Citigroup Inc. C, JPMorgan Chase & Co. JPM, Credit Suisse Group AG, Barclays PLC, The Royal Bank of Scotland Group plc, UBS Group AG, Deutsche Bank AG and BNP Paribas SA – colluded to thwart the trading of interest rate swaps on electronic exchanges.
Notably, since 2007 the banks have acted collectively to purge any firm or practice that had the possibility to bring exchange trading to buy-side investors in the $320 trillion interest rate swaps market in order to “preserve an extraordinary profit center.” As a result of the collusive act, the Chicago school teachers’ pension fund, which bought interest rate swaps from several banks in order to hedge against interest rate risk on debt, were left with limited choice and paid excess for those swaps.
Among other defendants, trading platforms ICAP Capital Markets LLC and Tradeweb Markets LLC, were alleged to have facilitated the antitrust violations by serving as a platform for cartel and taking business decisions on behalf of the banks. As most of the defendant banks own equity stakes in Tradeweb and hold positions on the board and governance committees of the company, the bankers influenced the direction of the Tradeweb and jointly prevented the development of more investor friendly swap exchanges by companies including CME Group, TrueEX and Javelin Capital Markets.
3. According to a Biz Journal report, three Georgian counties – Cobb, DeKalb and Fulton – have sued BofA and its group firms for allegedly violating the federal Fair Housing Act (“FHA”). As per Harris Penn Lowry LLP (the law firm representing these three counties), during the early-to-mid 2000s, the defendants were engaged in discriminatory mortgage-lending practices like equity stripping, thereby violating the FHA (read more: BofA Sued by 3 Georgian Counties for Violating FHA).
4. Citigroup has been hit with a lawsuit filed by Pacific Investment Management Company (PIMCO) and other investors. This pertains to the bank’s alleged failure to monitor toxic securities backed by over $13.8 billion of mortgage loans, which resulted in significant losses. The company’s subsidiary – Citibank NA – is accused of failing to discharge its duties as a trustee for the 25 private-label trusts, which dates from 2004–2007 (read more: Citi Sued by PIMCO and Others over Toxic Mortgages).
5. There is yet other news from Citigroup. According to a Reuters report, the bank is likely to offload its stake in the Brazil-based credit card processing joint venture with Elavon Inc., a wholly owned subsidiary of U.S. Bancorp USB. The move comes as a result of a difference of opinion over additional capital for the loss-making unit (read more: Citi to Shed Stake in Brazilian Credit Card Joint Venture?).
6. Fifth Third Bancorp FITB has made a minority investment in Cincinnati-based Zipscene, LLC that specializes in analyzing consumer behavior for the restaurant industry. The financial terms of the deal remain undisclosed.
Fifth Third’s latest investment is consistent with its current strategy to build a portfolio of companies for driving growth in its Payments and Commerce Solutions group (read more: Fifth Third Makes Minority Investment in Zipscene).
Price Performance
The overall performance of banking stocks remained bearish. Here is how the seven major stocks have performed:
|
Company |
Last Week |
6 months |
|
JPM |
-1.0% |
3.1% |
|
BAC |
-1.2% |
6.3% |
|
WFC |
-1.1% |
0.5% |
|
C |
-1.2% |
-0.1% |
|
COF |
-0.5% |
-4.9% |
|
USB |
-0.6% |
2.1% |
|
PNC |
-0.7% |
1.2% |
In the last four trading sessions, Citigroup and BofA were the major losers, with their shares falling 1.2% each. Further, Wells Fargo & Co. WFC declined 1.1%.
Over the last six months, Capital One Financial slumped 4.9%. On the other hand, BofA and JPMorgan were the top performers, with their shares rising 6.3% and 3.1%, respectively.
What's Next in the Banking Universe?
Over the next five trading days, banking stocks are expected to perform in a similar manner, unless some unprecedented event occurs.
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