Over the past five trading days, major banks’ performance was dismal despite the Federal Reserve increasing the interest rates for the third time this year. The rate now stands at 2-2.25%, the highest level in a decade.
While higher interest rates are beneficial for banks, markets had been expecting a bit more aggressive rate hike pace from the central bank. But the Fed stuck to the prior projection of one more hike later this year, three increases next year and one in 2020.
At the press conference following the end of the FOMC meeting, the Fed Chairman Jerome Powell said, “The change does not signal any change in the likely path of policy. Instead it is a sign that policy is proceeding in line with our expectations.” This led the bank stocks to fall as investors perceived it as unexpected.
Nonetheless, banks are expected to continue benefiting from the improving economy, rising rate environment, lower tax rates and easing of stringent regulations.
Talking about company-specific headlines, banks continued with restructuring and streamlining initiatives. These efforts are expected to attract more business and support revenue growth. Also, legal hassles related to banks’ past business misconducts dominated the headlines.
(Read: Bank Stock Roundup for the Week Ending Sep 21, 2018)
Important Developments of the Week
1. As part of its branch expansion strategy, JPMorgan JPM announced plans to foray into retail banking in Philadelphia by opening 50 branches and hiring around 300 new employees by 2023. Approximately 30 branches will be located in Philadelphia city, the majority of the rest will be in suburbs with a few in Delaware. (Read more: JPMorgan to Expand in Philadelphia, Open 50 Retail Branches)
Further, JPMorgan is expanding its branch network in Florida and Georgia by opening additional retail branches. The bank will open 35 branches in Florida and 25 in Georgia, over the next three years. (Read more: JPMorgan to Open Additional Branches in Florida & Georgia)
2. Moving ahead with its strategic moves, U.S. Bancorp USB announced the sale of its third-party ATM and Debit Servicing business to Fiserv, Inc. for around $690 million. Notably, the business to be sold is part of U.S. Bancorp’s Elan Financial Services unit. Nonetheless, card issuing, corporate payments and merchant-service payment businesses, including Elan Issuing and Elan Corporate Payments, will be retained by U.S. Bancorp and will operate as usual. (Read more: U.S. Bancorp to Vend ATM & Debit Servicing Business to Fiserv)
3. Banks continue to struggle with increasing legal hassles. An antitrust lawsuit filed against six major banks — JPMorgan, Bank of America BAC, Credit Suisse Group AG, The Goldman Sachs Group, Morgan Stanley and UBS Group AG — in August 2017, have received a U.S. District Judge’s approval. The lawsuit alleged the banks of jointly manipulating competitive scenario in the stock lending market since 2009. The news was reported by Reuters.
The banks have been given four weeks’ time to formally respond to the complaint made by the pension funds — Iowa Public Employees' Retirement System, California's Los Angeles County Employees Retirement Association, Orange County Employees Retirement System and Sonoma County Employees' Retirement Association and Torus Capital LLC.
The decision comes as a response to the request of dismissing charges that these banks had put forth in February 2018 to the U.S. District Judge Katherine Polk Failla in Manhattan. The banks had argued that the allegations put forth were “implausible on its face".
The pension funds had accused the banks of stifling growth of some start-up lending platforms, AQS and SL-x, by threatening and discouraging their potential clients. Also, the lawsuit states that the banks violated the federal antitrust law, also referred to as competition laws. Moreover, the funds said the conspiracy by the banks harmed investors and retirees by forcing them to pay high fees to engage in stock lending.
Notably, the plaintiffs had laid down several instances, which the judge found sufficient to indicate that some improper activity was conducted at the time. Per one of those instances, Goldman Sachs supposedly threatened to end business ties with The Bank of New York Mellon in 2012 in case it continued to support the AQS platform, post which, the latter had agreed to the terms.
Further, the lawsuit said that through a joint project called EquiLend LLC, the banks purchased SL-x’s intellectual property and shelved it. Also, the funds accused the banks of establishing EquiLend in 2001 to safeguard their interests in the stock lending market.
Price Performance
Here is how the seven major stocks performed:
|
Company |
Last Week |
6 months |
|
JPM |
-2.8% |
7.0% |
|
BAC |
-3.5% |
2.3% |
|
WFC |
-3.9% |
4.9% |
|
C |
-1.6% |
8.0% |
|
COF |
-3.6% |
2.8% |
|
USB |
-3.3% |
8.2% |
|
PNC |
-4.6% |
-6.8% |
Over the past five trading sessions, PNC Financial PNC and Wells Fargo WFC were the major losers, with their shares falling4.6% and 3.9%, respectively. Also, shares of Capital One COF declined3.6%.
Over the past six months, shares of U.S. Bancorp and Citigroup C have gained 8.2% and 8%, respectively. However, shares of PNC Financial have declined 6.8%.
What’s Next?
Over the next five trading days, performance of bank stocks may reverse as investors shift their focus from the Fed’s less aggressive rate hike stance to other factors like improving economy and upcoming third-quarter performance of banks.
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