Over the last five trading days, the banking sector made headlines with resolution of legal matters and efforts to expand market shares. We believe continued efforts to settle legacy legal issues will make the journey smooth for banks in the long run.
As organic growth has remained muted for long, banks are making efforts to ramp up profitability through acquisitions and expansion into lucrative areas like auto and healthcare lending. Also, in order to curb costs, banks are increasingly spending on technological development so as to substitute labor and manage higher volumes.
However, in order to avoid a considerable expansion in their cost base, global banks have started collaborating. These efforts are likely to improve efficiency amid rising operational and compliance expenses.
While these initiatives should have cheered investors, the banking stocks witnessed a downtrend. The primary reasons behind this were global issues including sluggish Chinese economy, continued weakness in Europe and Brazil, and fall in oil prices. These issues more than offset the positive economic indicators in the domestic market.
Taking into account the abovementioned negatives, analysts now see a dim possibility of rate hike by the Federal Reserve in the next few weeks.
(Read the last Bank Stock Roundup for Aug 14, 2015)
Recap of the Week’s Most Important Developments:
1. BB&T Corporation BBT is on an acquisition drive. By announcing its third transaction within a year, the company has shown that its appetite for inorganic growth is still strong.
BB&T signed a definitive agreement to acquire Allentown, PA-based National Penn Bancshares, Inc. in a stock-and-cash deal worth $1.8 billion. National Penn, with $9.6 billion in assets and $6.7 billion in deposits, has 124 banking offices in Pennsylvania, New Jersey and Maryland (read more: BB&T on Buying Spree: National Penn Next).
2. The booming automobile industry has attracted attention from Wall Street biggie Wells Fargo & Company WFC, which is reportedly opening new branches for offering auto dealer financing as well as car loans, according to a Reuters report. However, the company seeks to expand its auto lending portfolio without compromising on credit quality.
Per the report, Wells Fargo recently opened a new branch in Cherry Hill, NJ, dedicated to auto financing. This takes the total number of such branches to 56. Moreover, the bank is set to open more branches, including one in the Southwest region by the end of 2015. Also, all these branches will have an appointed credit officer, responsible for maintainingthe credit quality of its auto lending portfolio (read more: Wells Fargo Expands to Tap Booming Auto Loan Market).
3. Citigroup Inc. C announced the sale of its Alternative Investor Services business to Connecticut-based SS&C Technologies Holdings, Inc. for $425 million. The sale of the unit includes Hedge Fund Services and Private Equity Fund Services. Upon meeting all conditions and receiving regulatory approvals, the deal is expected to close in the first quarter of 2016 (read more: Citi to Vend Alternative Investor Services for $425M to SS&C).
4. Apart for news related to divestiture of non-core operations, Citigroup was in headlines for legal issues and probes pertaining to business misconducts. The first news concerned the U.S. Justice Department’s (“DOJ”) probe into the company’s dealings with firms related to Mexican billionaire Carlos Hank Rhon. First reported by Bloomberg, the news also stated that the DOJ’s probe comes as part of an expanding investigation into the bank’s money-laundering controls.
The second news pertained to Citigroup’s agreement to settle charges for defrauding fund investors in two hedge funds – the ASTA/MAT fund and the Falcon fund – by paying $180 million. According to the U.S. Securities and Exchange Commission (“SEC”), investors accused the bank of issuing misleading statements with misrepresented documents that concealedthe risks associated with these hedge funds.
The third and final news about Citigroup in the last five days again pertained to a settlement with the SEC. The company’s unit, Citigroup Global Markets, agreed to pay $15 million as penalty to settle allegations of compliance and surveillance failures in executing securities transactions during 2002–2012. However, though the charges have not been admitted or denied by Citigroup, the bank is fully cooperating with the regulator to avoid such errors in future. (read more: Citi Probed Over Dealings Linked to Mexican Billionaire; Citigroup Settles Hedge Fund Fraud Charges for $180M and Citigroup Continues to Bear the Brunt of Malpractices)
5. As per a Wall Street Journal report, JPMorgan Chase & Co. JPM is undergoing advanced discussions with the SEC to resolve an investigation over the sale and use of proprietary products for its private-banking clients. The bank plans to settle the matter for $150 million in the coming weeks (read more: JPMorgan to Settle Product Manipulation Probe for $150M?).
6. The Bank of New York Mellon Corporation BK agreed to shell out $14.8 million to resolve the federal civil charges related to a bribery case over interns. The company became the first bank to be penalized by the SEC under the U.S. foreign bribery law for offering improperly influenced internships.
In a separate development, the Federal Deposit Insurance Corp. (“FDIC”) recently filed cases against BNY Mellon and U.S. Bancorp USB concerning the sale of residential mortgage-backed securities (“RMBS”) that soured afterwards. The regulator accused the companies of breaching their fiduciary duties as bond trustees to protect investors.(read more: BNY Mellon Resolves Bribery Probe Over Interns for $14.8Mand BNY Mellon & U.S. Bancorp in Trouble: FDIC Sues Both).
Price Performance
Overall, the performance of banking stocks remained bearish. Here is how the seven major stocks performed:
Company | Last Week | 6 months |
JPM | -2.9% | 11.7% |
BAC | -5.5% | 2.7% |
WFC | -2.1% | 3.7% |
C | -3.9% | 7.0% |
COF | -2.7% | -0.7% |
USB | -3.3% | 0.0% |
PNC | -2.6% | 4.2% |
In the last five trading sessions, Bank of America Corporation BAC, Citigroup and U.S. Bancorp were the major losers, with their shares falling 5.5%, 3.9% and 3.3%, respectively.
Over the last six months, JPMorgan and Citigroup were the top performers, with their shares surging 11.7% and 7%, respectively. On the other hand, Capital One Financial Corporation COF edged down 0.7%.
What's Next in the Banking Universe?
Unless global turmoil abates and investors look forward to growing domestic market, we believe the bearish stance in the market will persist over the coming five trading sessions. Hence, the banking stocks too, will likely be affected.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report JPMORGAN CHASE (JPM): Free Stock Analysis Report BB&T CORP (BBT): Free Stock Analysis Report CAPITAL ONE FIN (COF): Free Stock Analysis Report US BANCORP (USB): Free Stock Analysis Report BANK OF NY MELL (BK): Free Stock Analysis Report WELLS FARGO-NEW (WFC): Free Stock Analysis Report CITIGROUP INC (C): Free Stock Analysis Report BANK OF AMER CP (BAC): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research