Banks ended the last week on a positive note with investors’ optimism over restructuring initiatives and resolution of legacy issues. Among others, Citigroup Inc. (C) and Wells Fargo & Co. (WFC) were in the news for taking proactive steps to remain profitable amid a tough industry backdrop.
On the other hand, Bank of America Corp. (BAC) took the limelight with its announcement of a $16.65 billion mortgage-settlement deal with the banking regulators. This removes a major litigation overhang for BofA and allows it to focus on revenue growth.
However, the news that the Federal Reserve’s discount lending window (that offers reliable source of funding to banks in case of liquidity crunch) can no more be a part of the ‘Living Will’ assumptions came as a blow to the major global banks. During the 2008 financial crisis, several banks had taken advantage of the discount lending window.
Now it’s important for the regulators to ensure that government funds aren’t involved to bail out banks in case they face liquidity crunch.
(Read last to last week’s developments: Bank Stock Round up for Aug 18, 2014)
Recap of the Week’s Most Important Developments:
1. Ending months of speculation, BofA finally reached a $16.65 billion settlement with the U.S. Department of Justice, a few other regulators and Attorneys General of six states. This boosted investor sentiments, which led to over 4.4% rise in the stock price in the last five trading days. Nevertheless, BofA expects the settlement to lower third-quarter 2014 earnings by 43 cents per share. (Read More: BofA Reaches $17B Mortgage Settlement, Q3 EPS to Take Hit.)
2. In sync with its strategy of shedding international operations, Citigroup is eyeing the sale of its retail banking operations in Japan. The buzz is that the U.S.-based bank has approached around 10 financial institutions, including Japan's top three lenders and regional banks. However, the company would retain its commercial and investment banking operations. (Read More: Citigroup (C) Might Vend Japan Retail-Banking Business.)
3. To combat the pressure of decreasing revenue, Wells Fargo is targeting the asset management industry to augment the same. The bank plans to double the size of its asset management unit to $1 trillion over the next decade, from the current level of $490 billion. Further, the bank intends to increase its international sales force and take over small asset managers to widen its product range. (Read More: Wells Fargo to Raise Asset-Management Business to $1 Trillion.)
4. In order to prevent defections and retain talent, Wall Street biggies are planning to hike the salaries of their junior staff in the range of 20–25%. Some of the banks including JPMorgan Chase & Co. (JPM), BofA, The Goldman Sachs Group, Inc. (GS), Citigroup and Morgan Stanley (MS) have either already announced the raise or are planning to do so in the coming months. (Read More: Banks Offer 20-25% Pay Hike to Retain Junior Bankers.)
5. Citigroup is restricted from selling hedge funds investments and private-equity funds to high worth clients going forward, The Wall Street Journal reported. This restriction follows the Citigroup–SEC settlement of $285 million earlier this month to compensate investors who were misled by the bank with a housing market related collateralized debt obligation (:CDO). Yet, the company is permitted to continue selling private investments to large institutions.
The SEC's "bad actor" rule passed just a year ago, which is a part of the 2010 Dodd-Frank regulatory overhaul holds back a party from participating in a private offering with "a relevant criminal conviction, regulatory or court order or other disqualifying event." Therefore, Citigroup has to abide by this rule as the settlement with the SEC got delayed.
Overall, optimism prevailed with several steps taken by banks to drive growth and resolve legacy issues. Most of the banking stocks showed positive price movement.
In the last five trading sessions, BofA and Citigroup were the major gainers, with their share prices rising 4.4% and 2.9%, respectively.
Over the last six months, Capital One Financial Corp. (COF) and Wells Fargo were the top performers, with their shares advancing 14.2% and 12.7%, respectively. However, BofA witnessed a 2.3% price decline over the same time frame.
What Next in the Banking Universe?
With no major development expected next week, the performance of banking stocks should not change significantly.
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