Why DSW (DSW) is Poised to Beat Earnings Estimates Again
Over the last five trading days, performance of banking stocks was bullish. Strong economic growth, desired inflation and a steady labor market boosted investors’ confidence. Moreover, the recent upswing in oil prices is expected to improve near-term inflation outlook, thereby smoothing the path to rise in interest rates.
Mortgage rates also slightly improved to 4.55%, as money was pulled out of the bond market. However, homeowners seeking lower rates for refinancing are definitely big-time losers. Increase in mortgage rates will limit refinancing activity.
Further, strategies to enhance profitability through streamlining operations, and resolution of litigations and probes related to legacy matters and business misconducts persisted in the last five trading days.
(Read: Bank Stock Roundup for the Week Ending Apr 27, 2018)
Important Developments of the Week
1. Legal hassles continue for major banks. Recently, per a U.S. Securities and Exchange Commission filing, Wells Fargo WFC has agreed to resolve a consolidated securities fraud class action suit related to the fake-accounts scandal revoked in September 2016. The settlement amount comes to around $480 million.
Wells Fargo stated it "reached an agreement in principle" with the parties that brought the complaint in the U.S. District Court for the Northern District of California. However, though the deal awaits certain customary conditions and final court approval, the San Francisco-based bank has already fully reserved the amount, as of Mar 31, 2018.
Per the filing, “reasonably possible” legal charges could be equivalent to $2.6 billion beyond amount reserved as of Mar 31, 2018. (Read more: Wells Fargo Resolves Sales Scam-Related Suit, To Pay $480M)
2. During its Investors’ Day presentation held this week, Wells Fargo came out with impressive expense outlook and expectations of lower impact on earnings from the regulatory cap on assets. The bank also mentioned that it expects to reward its shareholders with higher returns in the long term. It raised the higher end of its payout ratio target to 55-80%, from 55-75% it had set in 2016.
However, net interest income, which makes up more than 55% of revenues, is expected to be ‘relatively stable’ in 2018. Management expects that lower earning assets and higher deposit costs might offset benefits from higher interest rates. The bank expects to reduce expenses by $2 billion in 2018, followed by another $2 billion in 2019. It plans to achieve most of these savings by streamlining its lines of businesses along with 300 branch closures.
The bank reiterated that it expects total noninterest expenses to be in the range of $53.5-$54.5 billion for 2018, excluding litigation and remediation accruals expenses.
Considering Wells Fargo’s involvement in a horde of litigation issues, either due to poor risk control measures or supervision over employees, the Federal Reserve had ordered Wells Fargo to keep its assets under $1.95 trillion in February 2018.
At the time, the bank stated that it expects the restriction’s impact on its after tax net income to be about $400 million. However, at the Investors’ Day Wells Fargo’s treasurer, Neal Blinde said that modest growth in loans and deposits balance helped reduce the impact to about $100 million.
3. As part of its efforts to do away with less profitable businesses, Capital One COF will sell roughly $17 billion of first and second lien mortgages to DLJ Mortgage Capital Inc., a subsidiary of Credit Suisse Group AG CS. The deal, expected to close later this quarter, is expected to result in one-time gain for Capital One. (Read more: Capital One to Sell $17B of Mortgages & Resume Share Buyback)
4. As part of its efforts to expand into newer markets, JPMorgan JPM wants to set up a joint-venture brokerage in China. For this, the company is seeking approval from the securities regulator in the country. Gao Li, a spokeswoman for the China Securities Regulatory Commission, recently stated that J.P. Morgan Broking (Hong Kong) Ltd., a unit of JPMorgan submitted an application to acquire 51% stake in a Chinese securities venture. The application will be reviewed by the regulator efficiently, Li said.
This move by the bank comes after China, in April, pledged to open its financial markets and hence released guidelines giving permission to foreign companies to own a maximum of 51% of their local securities joint ventures. Notably, the country is expected to remove all ownership limits for foreign companies after three years.
5. KeyCorp’s KEY board of directors has approved a 14.3% hike in the quarterly common stock dividend. The revised dividend is now 12 cents per share compared with the previous figure of 10.5 cents. The dividend will be paid on Jun 15 to shareholders on record as of May 29. (Read more: KeyCorp Cheers Investors With 14% Dividend Hike)
Here is how the seven major stocks performed:
In the last five trading sessions, Citigroup C was the major gainer, with its shares rallying 6.8%. Shares of JPMorgan and Bank of America BAC have inched up 5.4%.
JPMorgan and BofA have been the best performers over the last six months, with their stocks appreciating 18.4% and 17.5%, respectively. Also, shares of PNC Financial PNC climbed 15%.
Over the next five trading days, bank stocks are expected to continue performing in a similar manner unless any unforeseen incident occurs.
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