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Bank Stock Roundup: Fed Interest Hike Expectation Raise Optimism; JPMorgan, Citi in Focus

Zacks Equity Research

Over the last five trading days, major banks’ rally continued with expectation of another interest rate hike this month. The rate hike will aid top-line expansion for banks, making way for improved results in the quarters ahead. An upsurge in interest income is anticipated for banks and margin pressure is likely to ease further. Further, domestic economic growth will support their financials.

Mortgage rates, which were on an upswing, declined this week, hitting 4.10%. In spite of the plunge, investors are apprehensive about parking funds in the housing market, thanks to the volatility in the financial world. However, homeowners seeking lower rates for refinancing are definitely big-time gainers.

Meanwhile, banks remained focused on strategies to enhance profitability through restructuring and acquisitions, in the last five trading days.

(Read: Bank Stock Roundup for the week ending Feb 24, 2017)



Important Developments of the Week

1. At the annual Investors Day conference, JPMorgan Chase & Co.’s JPM management discussed the current macroeconomic backdrop and the path the company is taking to enhance profitability over the medium term. In addition, the company provided first-quarter and full-year 2017 guidance. The first and foremost thing that comes to every investor’s mind is the improving rate scenario and how banks will capitalize on the same. JPMorgan is well positioned for raising rates, which will drive its net interest income.

Further, JPMorgan intends to invest significantly in its credit card business and become more technologically focused to remain competitive amid growing customer needs. Notably, JPMorgan affirmed its long term-targets of cost-to-revenue ratio of 55% (despite continued investments in franchise), return on tangible common equity (ROTCE) of nearly 15% and net payout ratio of 55–75% (read more: What Lies Ahead for JPMorgan Amid Improving Economy?).

2. Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported fourth-quarter 2016 earnings of $43.7 billion, up 7.7% year over year. Notably, community banks, constituting 93% of all FDIC-insured institutions, reported net income of $5.3 billion, up 10.5% year over year.

Banks’ earnings were driven by higher revenues, loan growth and lower loan-loss provisions. Moreover, improved trading revenue remained another positive. On the other hand, expenses flared up (read more: FDIC-Insured Banks: Q4 Earnings Strong, Revenues Escalate).

3. Following Wells Fargo & Company’s WFC $185-million settlement in Sep 2016 to resolve regulators’ claims of illegally opening millions of unauthorized accounts, the U.S. lender now plans to cut back 2016 cash bonuses for eight top executives and withhold stock awards received in 2014 by 50%. The clawback of bonuses will reduce Wells Fargo's bonus pay by $32 million.

Notably, eight top executives included the new CEO Tim Sloan and CFO John Shrewsberry as well. After the disclosure of malpractices related to the opening of around two million bank and credit card accounts without customers’ consent, Wells Fargo has been facing issues with clients as they are reluctant to conduct business with the lender. Following this scandal, new account openings slumped about 44% (read more: Wells Fargo Slashes Bonus for Executives Post Scandal).

4.  More than a decade after withdrawing its operations from Saudi Arabia, Citigroup Inc. C is making efforts to re-enter the region. The bank is currently in discussions for acquiring a banking license in Saudi Arabia, as it is trying to capitalize on the country’s financial reforms.

Though the company is optimistic about receiving the license, it is apprehensive that the talks could fail at the last stage. Without a license from the Capital Market Authority (CMA) – the regulatory body in Saudi Arabia for applying for full financial, legal, and administrative independence – international banks face hurdles on working on deals signed in the country. (read more: Citigroup in Discussion for Saudi Arabia Banking License).

Price Performance

Here is how the seven major stocks performed:
 

Company

Last Week

6 months

JPM

2.0%

36.5%

BAC

4.1%

57.7%

WFC

1.6%

16.1%

C

1.8%

27.6%

COF

1.9%

31.7%

USB

0.7%

25.6%

PNC

0.5%

40.8%


In the last five trading sessions, Bank of America Corp. BAC and JPMorgan were the major gainers with their shares increasing 4.1% and 2.0%, respectively. Moreover, Capital One Financial Corp. COF shares inched up 1.9%.

BofA and The PNC Financial Services Group, Inc. PNC were the best performers in the last six months, with their shares surging a whopping 57.7% and 40.8%, respectively. Moreover, JPMorgan’s shares jumped 36.5%.

What’s Next?

In the coming five days, nothing major is likely to occur in the banking space. Unless there is a substantial upheaval in the global markets, bank stocks will continue to perform in a similar fashion.

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J P Morgan Chase & Co (JPM): Free Stock Analysis Report
 
PNC Financial Services Group, Inc. (The) (PNC): Free Stock Analysis Report
 
Wells Fargo & Company (WFC): Free Stock Analysis Report
 
Citigroup Inc. (C): Free Stock Analysis Report
 
Bank of America Corporation (BAC): Free Stock Analysis Report
 
Capital One Financial Corporation (COF): Free Stock Analysis Report
 
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