Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • Nikkei

    40,168.07
    -594.66 (-1.46%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Bitcoin USD

    70,629.55
    +2,035.46 (+2.97%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,257.58
    +9.09 (+0.17%)
     
  • Dow

    39,806.88
    +46.80 (+0.12%)
     
  • Nasdaq

    16,396.16
    -3.37 (-0.02%)
     
  • Gold

    2,240.80
    +28.10 (+1.27%)
     
  • Crude Oil

    83.02
    +1.67 (+2.05%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • FTSE Bursa Malaysia

    1,530.60
    -7.82 (-0.51%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

Bank Stock Roundup: Capital Surcharge & Q4 Outlook Raise Concerns; Citi, BofA & JPMorgan in Focus

Over the last five trading days, performance of banking stocks remained bearish. Subdued trading revenue outlooks from Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) again drew investors’ attention to persistent pressure on top line. Also, concerns related to additional capital cushion persist.

Further, increased legal costs continue to haunt large banks and will drag down their profits in the subsequent quarters. The law-enforcement agencies, with an aim to avoid lengthy litigations, are also trying to resolve such issues.

The delay in the long awaited merger deal between M&T Bank Corp. (MTB) and Hudson City Bancorp, Inc. raises further disappointment. The closing date of the proposed merger has again been extended to Apr 30, 2015 from the prior deadline of Dec 31, 2014. This is the third time that these two banking entities have agreed to extend the deadline.

(Read last to last week’s developments here: Bank Stock Roundup for Dec 5, 2014)

Recap of the Week’s Most Important Developments:

1. If the Federal Reserve has its way, big American banks will have to meet an additional capital requirement beyond the minimum international standards. The banking regulator is contemplating the levying of additional capital surcharge on the U.S. Globally Systematically Important Banks (GSIBs).

Currently, 8 U.S. banks are categorized as GSIBs, namely, BofA, The Bank of New York Mellon Corp. (BK), Citigroup, The Goldman Sachs Group, Inc., JPMorgan, Morgan Stanley, State Street Corp. (STT) and Wells Fargo & Co. (WFC).

The estimated capital surcharge under the proposal will range between 1.0 – 4.5% of the GSIB’s total risk-weighted assets (RWAs).The international rule calls for surcharge between 1.0 – 3.5% for GSIBs.

At present, almost all banks are required to meet the common equity capital requirement of 7% of RWAs. The latest surcharge will come over and above this requirement. Therefore, if the proposal is implemented, the highest capital requirement for GSIBs will amount to 11.5% of RWAs. (Read More: Banks May Face Additional Capital Surcharge: Time to Shrink?)

2. At an investor conference sponsored by Goldman Sachs in New York, BofA provided a weak forecast for trading revenues in the final quarter of this year. This fueled the market observation that major banks have been moving away from the previous money-making business of trading stocks, bonds, commodities and derivatives.

BofA expects sales & trading revenues in the fourth quarter to fall below the prior-quarter as well as the year-ago quarter figure. (Read More: Why BofA Offers Lower Trading Revenues Outlook for Q4).

3. Considering the ongoing regulatory inquiries and investigations, Citigroup announced expected legal and related costs of about $2.7 billion, which will be recorded in the fourth-quarter 2014 results. This will impact the bank’s profits. Moreover, repositioning costs of about $800 million are anticipated in the quarter. Notably, after giving effect to such costs, marginal profit is expected in the fourth quarter. (Read More: Citigroup Q4 Results to Record $2.7B Legal Charges).

4. A day after it was disclosed that JPMorgan will have to increase its capital levels by nearly $22 billion owing to the additional capital surcharge proposed by the Federal Reserve; Marianne Lake, the chief financial officer (CFO) of the company, expressed hopes to meet the requirement with minimal operational changes.

The CFO stated that the new proposed rule will place JPMorgan in the highest bracket of an additional cushion of 4.5% of total risk-weighted assets (RWAs). This will come over and above the common equity capital requirement of 7% of RWAs. (Read More: Is Filling Balance Sheet Gap a Major Concern for JPMorgan?)

5. The Financial Industry Regulatory Authority (:FINRA) penalized top 10 investment banks with a $43.5 million fine. These firms were accused of seeking profitable investment banking business in the Toys “R” Us initial public offering (IPO) in lieu of providing equity research analysts’ favorable reports of the national toy retailer.

As per FINRA, conflict-of-interest rules were violated by the banks as their analysts were intimated to issue positive reports about the toy retailer for soliciting business. Notably, eight of the total accused banks were listed as underwriters of the Toys “R” Us IPO. Though the toy retailer filed for an IPO in 2010, the plan was not executed.

The 10 investment banks neither denied nor admitted the wrongdoings. Among these banks, Barclays PLC, Citigroup, Credit Suisse Group AG, Goldman Sachs and JPMorgan were fined with $5 million each, while Deutsche Bank AG, BofA, Morgan Stanley and Wells Fargo were fined $4 million each. Moreover, independent investment bank – Needham & Co. was charged with $2.5 million.

Additionally, 6 of the 10 alleged firms – Barclays, Citigroup, Credit Suisse, Goldman, JPMorgan and Needham were accused by FINRA for deficient supervisory procedures over equity research analysts’ participation in investment banking pitches.

Price Performance

Overall, the performance of banking stocks remained skewed toward the pessimistic side with muted trading outlooks and legal expenses shaking investors’ confidence. Further, the additional capital surcharge requirement added fuel to the fire. Most of the banking stocks showed a downward price movement.

Company

Last Week

6 months

JPM

-2.5%

8.2%

BAC

-1.2%

12.8%

WFC

-1.1%

5.6%

C

-2.8%

11.7%

COF

-0.7%

2.7%

USB

-1.0%

5.2%

PNC

-1.4%

2.2%


In the last five trading sessions, Citigroup and JPMorgan were the major losers, with their share prices decreasing 2.8% and 2.5%, respectively.

Over the last six months, BofA and Citigroup were the top performers, with their shares advancing 12.8% and 11.7%, respectively. Also, JPMorgan witnessed an 8.2% price increase over the same time frame.

What Next in the Banking Universe?

With investors slowly coming to terms with muted revenue guidance from banks, we believe that banking stocks will slightly regain lost ground. We expect that banks will meet all the challenges upfront and continue to find new avenues to boost growth.

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 >>

Read the Full Research Report on JPM
Read the Full Research Report on MTB
Read the Full Research Report on BK
Read the Full Research Report on STT
Read the Full Research Report on WFC
Read the Full Research Report on C
Read the Full Research Report on BAC


Zacks Investment Research