Over the last five trading days, major bank stocks remained under pressure. Among the major negatives that kept investors away from bank stocks, Wells Fargo & Company’s WFC alleged unauthorized account opening scam dominated the headlines. The company lost its status of being the largest U.S. bank based on market capitalization to JPMorgan Chase & Co. JPM.
Moreover, a challenging operating backdrop and persistent low-rate environment compelled banks to lower their long-term targets.
Nonetheless, guidance from a few banks point to better investment banking and trading revenues in third-quarter 2016. Gradual market stability across the globe, marginal rebound in oil prices and chances of another rate hike soon are the primary reasons for an upbeat outlook.
Moreover, banks continue to restructure operations with an aim to focus on core businesses and improve efficiency. Further, resolution of litigations and probes related to legacy matters and business misconducts dominated the banking space, as usual.
(Read: Bank Stock Roundup for the week ending Aug 26, 2016)
Important News of the Week
1. The resolution of unauthorized account opening allegations did not end the matter for Wells Fargo. Though a $190-million fine by the Consumer Financial Protection Bureau (CFPB) will have no material impact on the company’s financials, it has come under fire from several quarters. The fine has led to a significant embarrassment for the company as its reputation is expected to see some damage, according to Moody’s Investors Service. Additionally, Wells Fargo's chief executive – John Stumpf – has been summoned to appear before the Senate Banking Committee to answer questions about the bank's sales practices (read more: Wells Fargo Facing Repercussions of $190M Fine from CFPB).
2. At its Investors Day conference in New York, U.S. Bancorp USB lowered its long-term financial targets in the wake of persistent global turmoil and a continued low interest rate environment. The company's net income is now anticipated to grow at 6–8%, lower than the previous guidance of 7–9%. Nonetheless, earnings growth rate is projected to remain in the 8–10% range (read more: U.S. Bancorp Lowered Outlook Amid Global Turmoil)
3. Bank of America Corporation BAC is witnessing an uptick in investment banking fees in third-quarter 2016. This was disclosed by Christian Meissner – head of global corporate and investment-banking business – at an investor conference in New York sponsored by Barclays PLC. Recovering oil prices and stabilizing market conditions are the primary reasons for the reversal in the investment banking scenario (read more: BofA's Investment Banking Fees Trending Up In Q3).
4. Similar to BofA, Citigroup Inc. C also came up with its expectation for trading revenue at the same investor conference. The bank expects to see a mid-single-digit rise in trading revenues in third-quarter 2016 on a year-over-year basis. The growth will be driven by strength in fixed income and currencies (read more: Citigroup Projects Trading Revenue to Improve in Q3).
5. Wells Fargo has agreed to sell Wells Fargo Global Fund Services (GFS) – its fund administration business – to SS&C Technologies Holdings, Inc. The transaction awaits regulatory approvals and is expected to close in fourth-quarter 2016. The terms of the deal remain undisclosed (read more: Wells Fargo to Sell its Fund Administration Unit).
6. BB&T Corporation BBT has announced an early termination of its loss share agreement with the Federal Deposit Insurance Corp. (FDIC). It had entered the agreement in 2009 through its subsidiary Branch Bank (Branch Banking and Trust Company). The agreement was related to BB&T’s acquisition of selected assets and liabilities of Alabama-based failed Colonial Bank.
The Branch Bank has agreed to pay $230 million in cash to terminate the agreement. Further, FDIC will no longer have a share in future benefits resulting from the covered assets.
Early termination will result in elimination of indemnified assets and liabilities by FDIC, which resulted in a net liability of approximately $210 million at the end of second-quarter 2016.
Pursuant to the termination, BB&T will incur a pre-tax expense of around $20 million during the third quarter. Further, removal of FDIC’s amortization expense that amounted to $124 million for the first half of 2016 will have a positive impact on future earnings. The gain-sharing provision on securities totaling $943 million will also be eliminated.
Further, since BB&T will retain ownership of all related securities, assets and loans, it will solely recognize all future benefits and expenses resulting from those previously covered assets. As of Jun 30, the bank owned $1.7 billion in assets acquired from the agency.
Here is how the seven major stocks performed:
In the last five trading sessions, Wells Fargo declined 5.3%, while both Capital One Financial Corporation COF and U.S. Bancorp inched down 0.9%. On the other hand, The PNC Financial Services Group, Inc. PNC shares edged up 0.4%.
Over the last six months, BofA and JPMorgan were the best performers, with their shares surging 15.5% and 12.6%, respectively. However, Wells Fargo declined 7.7%.
What's Next in the Banking Space?
Over the next five trading days, all eyes will be on the Federal Reserve’s policy meeting on Sep 20–21 for any concrete decision on rate hike. The performance of banking stocks will depend on the outcome of the meeting. Until the outcome is known to the market, marginal volatility is expected.
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