Over the last five trading days, the major banks showed a bullish trend. Investors’ confidence received a boost with the banks clearing the annual regulatory stress test successfully. The results reflect banks’ capability of withstanding economic downturn and negative U.S. interest rates with a high level of capital.
On the other side, the extent of the negative impact of U.K.’s exit from the European Union (EU) on banks is difficult to predict. It is anticipated that major banks having exposure to U.K. including JPMorgan Chase & Co. JPM will experience high costs and lower profits. Moreover, employees of the banks will be affected with job cuts taking place. Further, the ongoing global economic uncertainty will affect business activities all the more.
The global impact of Brexit will depend upon the procedures and negotiations with the EU over the coming months. The effect on trading activities and regulations risks for the banks will unfold gradually.
Meanwhile, there is a growing trend among large banks to move to an electronic trading platform to improve revenues with Bank of America Corporation BAC leading the way. Moreover, banks are striving to reap profits through restructuring and putting an end to legacy legal issues.
(Read: Bank Stock Roundup for the week ending Jun 17, 2016)
Important Developments of the Week
1. The Federal Reserve released the Dodd-Frank Act supervisory stress test 2016 (DFAST 2016) results, which reflected the continued stability in the banking system despite the Fed’s harsher hypothetical “severely adverse” scenario this time. The second straight year of clearing the first part of the annual stress test reaffirms that the U.S. banking giants remain sufficiently capitalized to survive an extremely difficult economic scenario. “The nation’s largest bank holding companies continue to build their capital levels and improve their credit quality, strengthening their ability to lend to households and businesses during a severe recession,” the Fed said in a statement.
2. BofA, will be paying $415 million to the Securities and Exchange Commission (“SEC”) to bring an end to the probe related to the breach of rules designed to protect client accounts. The SEC began a probe to verify whether BofA violated rules set for safeguarding of customer accounts and put retail-brokerage funds at risk for more profits. The settlement is one of the highest ever for the SEC after a $616 million fine paid by the affiliates of SAC Capital Advisors LP in 2013. The bank, admitting to its wrongdoings, fully cooperated with the SEC investigation and disclosed that the settlement will not impact second-quarter results.
In a separate case, BofA’s Merrill Lynch also agreed to a $10 million penalty for the resolution of a SEC case. The SEC accused the unit for misleading customers on structured notes. Notably, Merrill Lynch paid an additional $5 million for settling a similar case with the Financial Industry Regulatory Authority.
3. BofA, which launched an electronic syndicated loan trading platform – Instinct Loans – through Merrill Lynch this month, began trading on this platform. The bank sought to reallocate certain leveraged loans to electronic exchange through its new electronic loan trading platform. BofA’s main purpose of launching Instinct Loans is to improve liquidity in the leveraged loan market by permitting clients to trade corporate loans twice a day electronically (read more: BofA's Instinct Loans Aims to Transfer Leveraged Loans).
4. Citigroup Inc. C has completed the acquisition of U.S. co-brand credit card portfolio of Costco Wholesale Corporation COST from American Express Company AXP. The bank has acquired over $10.5 billion of credit card receivables. The financial terms of the deal remained undisclosed. However, the banking giant stated that it does not expect the acquisition and conversion to have any material impact on its 2016 earnings (read more: Citigroup Acquires Costco Portfolio from American Express).
Price Performance
Overall, the performance of banking stocks reflected bullish sentiments. Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
2.8% |
-2.7% |
|
BAC |
4.8% |
-18.5% |
|
WFC |
2.8% |
-11.6% |
|
C |
5.2% |
-15.3% |
|
COF |
2.2% |
-9.9% |
|
USB |
2.7% |
-1.7% |
|
PNC |
3.6% |
-8.8% |
In the last five trading sessions, Citigroup and BofA were the major gainers, with their shares increasing 5.2% and 4.8%, respectively. Moreover, The PNC Financial Services Group, Inc. PNC shares rose 3.6%.
BofA and Citigroup were the worst performers over the last six months with their shares losing 18.5% and 15.3%, respectively. Moreover, Wells Fargo & Company WFC shares fell 11.6%.
What's Next in the Banking Space?
Over the next five trading days, the performance of the banking stocks will depend on the results of the second round of the annual stress test, which would indicate whether banks get the green signal from regulators to increase dividends and share buybacks or not.
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