Bank Stock Roundup: Weak Q2 Trading Outlook Raises Concern, BofA & Citi in Focus
Over the last four trading days, performance of banking stocks remained bearish. Dismal trading revenue outlook provided by some of the major banks indicates that the earnings picture will be bleak in the second quarter. This is because, market activity was weak in the first two months of second-quarter 2017, on lower fixed-income client activity. Additionally, weak loan demand is expected to add to the woes.
Further, weakened expectations of a rate hike in June after the release of the last FOMC meeting minutes, shaken investors’ confidence. Uncertainty over further interest rate hikes has cropped on mixed U.S. economic data and increasing signals of rising political commotion in the White House.
Mortgage rates declined this week, hitting 3.94%, representing a new low in 2017, on weak inflation. In addition, the benchmark 10-year Treasury yield declined to 2.198%, underlining the second lowest level in 2017.
Nevertheless, strategies to enhance profitability through streamlining operations, acquisitions, and resolution of litigations and probes related to legacy matters and business misconducts persisted over the last four trading days.
(Read: Bank Stock Roundup for the week ending May 26, 2017)
Important Developments of the Week
1. The top executives of JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Morgan Stanley MS have hinted at weakness in the second-quarter trading revenues. At a Deutsche Bank investor conference, Marianne Lake, the chief financial officer at JPMorgan stated that the company’s trading business for the first two months of second quarter was down roughly 15% year over year. Specifically, lower fixed income trading weighed on the overall trading income, while equities were up marginally.
In a separate conference call, held by Sanford Bernstein, BofA’s chief executive – Brian T. Moynihan – warned investors that the bank’s earnings in the second quarter will be hit by decline in trading income (down 10–12% from the prior-year quarter), along with lower-than-expected interest rates, and the divestiture or shuttering of certain assets (these two factors are expected to reduce net interest income by $100–$110 million).
Additionally, Morgan Stanley’s CEO – James Gorman – hinted that the projections from JPMorgan and BofA reflect reality. In an interview with Bloomberg Television in Beijing, he said, “I don’t think we’re very different. We all have similar clients, if not the same clients.”
Similarly, Goldman’s Co-President David Solomon did not provide any direct view about the trading scenario. But he did say, “...volatility and client activities, which were more subdued in the first quarter, have continued in comparable fashion in the second quarter.” (Read more: Bank Stocks Down on Weak Trading Revenue Expectations in Q2)
2. Citigroup Inc. C continued the strategy of divesting parts of its consumer and investment banking operations to free up capital, reduce expenses and in turn, increase profits. The firm has entered into an agreement to vend its Fixed Income Analytics and Index Businesses to London Stock Exchange Group plc LSE. The cash deal has been signed for a consideration of $685 million, subject to certain adjustments. (Read more: Citigroup Divests Analytics and Index Businesses to LSE)
Furthermore, on mounting concerns over the U.S. retreat from global business, Citigroup is expediting plans of expanding its corporate banking across the Asia-Pacific region. The plan also comes up on the increasing fame of China in relation to global trade. Notably, other U.S. banks, including Morgan Stanley and The Goldman Sachs Group, Inc. GS, are expanding operations in this region with new recruits. (Read more: Citigroup to Expand Operations in Asia-Pacific Region)
3. KeyCorp’s KEY banking subsidiary, KeyBank National Association, has agreed to acquire HelloWallet, a personal financial software product from Morningstar, Inc. However, financial terms of the deal were not disclosed and closing of the transaction is subject to customary conditions. Once the acquisition is complete, 36 HelloWallet employees will work under KeyBank in Washington DC and Chicago. (Read more: KeyCorp Set to Acquire HelloWallet from Morningstar)
4. Troubles for Wells Fargo & Company WFC seem unlikely to end anytime soon. Recently, the bank was banned by The New York City Banking Commission from underwriting new bonds in the U.S. municipal bond market and renewing the existing contracts. The reason behind the unanimous vote for cutting back ties with the bank is the Federal Community Reinvestment Act (CRA) rating of "needs improvement" that was assigned earlier this year due to its discriminating lending practices. Also, its fake accounts scandal triggered the decision. (Read more: Wells Fargo Sees Municipal Business Ban in New York City)
5. As part of its efforts to transform into “a single-brand business serving core retail customers in the United States,” BofA closed the deal to divest its UK consumer credit card operations, MBNA Ltd. to Lloyds Banking Group plc (LYG). The transaction was announced in Dec 2016. The transaction completes BofA’s efforts to exit international consumer card operations, as part of its strategy to focus on core domestic business. At the time of the announcement, the deal was valued at $2.35 billion. With the closure of the deal, BofA is expected to record a decline in net interest income.
The transaction should lead to a marginal after-tax gain for BofA, which is expected in the second quarter. Further, in the current quarter, the sale should enhance the bank’s Basel 3 risk-based capital ratios by nearly 11 basis points (bps) under the Advanced approaches and 15 bps under the Standardized approach.
6. In order to lure new advisers, Wells Fargo has planned to give higher recruitment bonuses to financial advisers. The bank is planning to give three times the annual revenues generated by the brokers as bonus. The bonus has been designed in the form of a loan, which will be considered settled if the broker reaches the stipulated target and continues to work with the bank.
The advisors will receive bonus at the time of joining the bank and will get higher deferred compensation, which they are entitled to receive after some years of working in the bank. Another reason that led to the hike was the increasing rate at which the brokers were leaving the bank’s brokerage arm following the revelation of fake accounts scandal in Sep 2016. (Read more: Wells Fargo Counters its Rivals by Raising Recruitment Bonus)
Price Performance
Here is how the seven major stocks performed:
Company | Last Four Trading Days | Last 6 months |
JPM | -2.7% | 1.6% |
BAC | -2.6% | 5.3% |
WFC | -0.6% | -4.2% |
C | -1.6% | 6.7% |
COF | -2.3% | -10.0% |
USB | 0.2% | 2.3% |
PNC | -1.0% | 6.7% |
In the last four trading sessions, JPMorgan and BofA were the major losers, with their shares declining 2.7% and 2.6%, respectively. Moreover, Capital One Financial Corp. COF descended 2.3%.
The PNC Financial Services Group, Inc. PNC and Citigroup were the best performers over the last six months, with their shares surging 6.7%. However, Capital One Financial’s shares declined 10.0%.
What’s Next?
In the coming five days, price performance of bank stocks is likely to follow a similar trend, unless there is any unprecedented event.
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