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Bank Stock Roundup: Rising Treasury Yields, Dismal View, BAC, C, USB in Focus

Swayta Shah

During the last five trading sessions, performance of major bank stocks remained bullish on account of rise in yield on the 10-year Treasury notes. A rise in longer-term yields boosts bank profits, as widening spreads between long and short-term rates lead to improvement in net interest margin and support top-line growth.

While cut in interest rates by the Federal Reserve will hamper banks’ net interest income (NII) growth in the quarters ahead, rise in long-term yield cheered investors. The yield had been falling for quite some time and even had inverted during the past few months.

Notably, as factored in by the markets, major banks are expected to report disappointing trading/markets results for the third quarter. Also, decline in interest rates led many banks to lower NII guidance for 2019.

However, banks continue with their efforts to counter the challenging operating backdrop by diversifying revenues and upgrade technology to meet changing customer needs. The banks have been undertaking inorganic growth efforts and expanding in new regions to increase market share.


 

(Read: Bank Stock Roundup for the Week Ending July 26, 2019)

Major Developments of the Week

1. At the Barclays Global Financial Services Conference in New York, major banks including Bank of America BAC, Citigroup C and Wells Fargo WFC presented near-term dismal outlook. Banks remain concerned about lower interest rates and several other macroeconomic and geopolitical matters. These factors are expected to have an adverse impact on their financials during the current quarter and in 2019. (Read more: Bank Stocks Jump Despite Disappointing Near-Term Outlook)

Further, at Investors Day conference, U.S. Bancorp USB lowered its long-term growth financial targets in the wake of the persistent global turmoil, anticipations of further rate cuts and low inflation in the coming quarters.

U.S. Bancorp targets return on assets (ROA) in the range of 1.35-1.65%, unchanged from 2016. The company upped the return on equity (ROE) target to 14.5-17.5% from 13.5-16.5%. Further, long-term target for return on tangible common equity had been kept unchanged in the range of 17.5-20%.

However, the Minneapolis-based bank lowered its long-term revenue growth projection to 5-7% from the 6-8% estimated in 2016.

On the cost front, management reduced its expense growth rate to be in the range of 2-4% from the prior target of 3-5%. In addition, the bank reiterated its long-term target for the efficiency ratio to remain in the low 50s range.

Therefore, given the changes in outlook for several line items, net income is now anticipated to grow at 5-7%, lower than the previous target of 6-8%. Also, the earnings per share growth rate is projected to be down in the 7-10% range from 8-10%.

2. Citigroup is strongly promoting zero-interest balance transfers between credit cards from different banks to Citi, per an article by Reuters. The company is third largest U.S. card issuer, and its card business makes up about one-third of total revenues. (Read more: Citi Boosts Credit Card Unit Despite Weakening U.S. Economy)

3. U.S. Bancorp has acquired Talech, a Palo Alto-based software company, thus taking another step toward digital banking, which has become essential in the technology-driven environment. Financial terms of the deal, however, remain undisclosed. (Read more: U.S. Bancorp Acquires Talech, To Boost Digital Banking)

4. PNC Financial PNC plans to open 25 new branches in metropolitan cities. This news was announced by its chairman president, Bill Demchak, at the Barclays Global Financial Services Conference in New York. The bank has decided to enter the retail markets of Boston and Nashville, TN and expand further in Dallas and Kansas City, MO. (Read more: PNC Financial to Open Branches in Untapped Markets)

Price Performance

Here is how the seven major stocks performed:
 

Company

Last Week

6 months

JPM

4.7%

15.0%

BAC

7.0%

3.7%

WFC

3.2%

0.0%

C

5.0%

11.9%

COF

5.4%

13.0%

USB

4.3%

10.8%

PNC

4.1%

9.1%


Over the last five trading sessions, BofA and Capital One COF rallied 7% and 5.4%, respectively. Also, shares of Citigroup and JPMorgan JPM jumped 5% and 4.7%, respectively.

Over the past six months, shares of JPMorgan and Capital One have appreciated 15% and 13%, respectively. Further, shares of Citigroup have gained 11.9%.

What’s Next?

Over the next five trading days, performance of bank stocks will depend on the outcome of the Federal Open Market Committee meeting scheduled on Sep 17-18.Per the CME FedWatch tool, there is an 88.8% chance that the central bank will cut rates by 25 basis points.

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