Bank Stock Roundup: Rate Hike Expectations Instill Optimism, Wells Fargo In Focus

Major banking stocks continued their rally over the last five trading days. After Donald Trump’s victory, nomination of Steve Mnuchin as Treasury secretary seems to be a driving factor for banking stocks, as he recommended turning over certain Dodd-Frank financial rules.

Further, investors’ confidence received a boost on expectations of a rate hike in December, as the labor market is getting stronger and the inflation is trending toward the Federal Reserve’s target rate of 2% on improved economic data and Trump's proposed infrastructure spending plans.

New data reflects that the U.S. economy is getting better. Though higher borrowing costs might disappoint homebuyers, an improving job market might lead to rise in housing demand.

Nonetheless, litigations and regulatory related issues dominated headlines. However, the recently released earnings data for the FDIC-insured banks in the third-quarter supported the performance of banking stocks to some extent.

Banks - Major Regional Industry Price Index

Banks - Major Regional Industry Price Index

(Read: Bank Stock Roundup for the week ending Nov 25, 2016)

Important Developments of the Week

1. Wells Fargo & Company (NYSE:WFC) announced that it will continue offering individual fee-based retirement accounts to clients. However, the company will make some adjustments in its procedures to comply with the U.S. Department of Labor’s (DOL) new fiduciary rule which is expected to come into effect from April next year. Per a memo sent by Wells Fargo, the company is likely to offer such commissions-paying accounts in a way that complies with the rule's "best interest contract exemption." Under this, firms are allowed to offer commissions-paying products, provided they give better disclosure about fees to their clients.

Additionally, after the cross-selling scandal, which has been in the news for quite a long time now, Wells Fargo decided to separate its Chairman and CEO roles. The bank announced that its Board of Directors has approved the amendments in the Company’s By-Laws.

Also, per a legislation introduced by lawmakers recently, customers at Wells Fargo will be allowed to go to the court to settle their claims about cross selling, instead of engaging in private arbitration.

2. Troubles heap on the U.S. banking giants. Wells Fargo faces a new class action lawsuit, alleging the bank of enriching itself at the cost of its employees’ retirement savings by including costly, in-house target date funds in its 401(k) plan. The plan has nearly $35 billion in assets and more than 350,000 participants, as mentioned by the plaintiff. The lawsuit accuses Wells Fargo of "self-dealing and imprudent investing" by misrouting more than $3 billion of 401(k) contributions to its Wells Fargo Dow Jones Target Date funds.

The bank intentionally boosted its proprietary mutual funds’ assets by making its target date funds a default investment option through an "easy" and "quick" enrolment process. These funds carried fees 2.5 times more than its peers such as Fidelity Investments and Vanguard Group, and consistently underperformed them. The lawsuit seeks to recoup unrealized profits and extra fees generated from the bank’s breach of fiduciary duties to all 401(k) participants over the last six years (read more: Wells Fargo Sued by Plaintiff Over Target Date Funds).

3. The Consumer Financial Protection Bureau (CFPB) cautioned financial companies about creating incentives programs for employees and service providers to meet aggressive internal sales goals. According to the CFPB, such goals can lead to the employees taking illegal steps, ultimately affecting customers.

Employees and service providers could violate consumer financial law through misrepresentation of benefits of the products offered to the clients, openings accounts without their consent, and steering them toward less favorable terms. Therefore, the CFPB has directed banks to take some steps to make their compliance management systems strong, in order to prevent and detect any violation of law (read more: Banks Under CFPB's Purview for Employee Incentive Programs).

4. Following Brexit, some of London-based equity and interest-rate derivatives traders of Citigroup Inc. (NYSE:C) might be moved to Frankfurt. However, depending on negotiations between the UK and the European Union (EU), the plan might take a turnaround. Brexit might lead to the termination of the passporting rights to the UK.

Therefore, with a majority of European employees in London, Citigroup, JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) are planning to move their staff from London. Citigroup is in talks with the German financial regulator – BaFin – to get regulatory approvals for moving the operations (read more: Citigroup Plans to Move Derivatives Traders to Frankfurt).

5. The regulator of securities firm in the U.S., the Financial Industry Regulatory Authority (FINRA) – has imposed a fine of $7 million on Merrill Lynch, a unit of Bank of America Corporation (NYSE:BAC) (NYSE:C) , for inadequate supervision of securities-backed leverage in their clients’ brokerage account. Merrill Lynch will pay $6.25 million in fine and around $780,000 in restitution to settle the charges.

Merrill Lynch’s clients used leverage to buy Puerto Rican municipal bonds and other securities. The regulator separately found that from Jan 2010 through Jul 2013, the company’s systems lagged in ensuring the suitability of such securities for its customers (read more: BofA Faces $7M Fine from FINRA for Inadequate Supervision).

6. Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported third-quarter 2016 earnings of $45.6 billion, up 12.9% year over year. Notably, community banks, constituting 93% of all FDIC-insured institutions, reported net income of $5.6 billion, up 11.8% year over year. Banks’ earnings were driven by higher revenues, partially offset by rise in loan-loss provisions. Moreover, improved trading revenue was another positive. However, expenses increased read more: FDIC-Insured Banks: Q3 Earnings Strong, Revenues Improve).

Price Performance

The overall performance of banking stocks was bullish. Here is how the seven major stocks performed:

In the last five trading sessions, JPMorgan and Wells Fargo were the major gainers, with their shares increasing 3.8% and 3.3%, respectively. Moreover, BofA shares increased 3.1%.

BofA and PNC Financial (NYSE:PNC) were the best performers in the last six months, with their shares surging 44.7% and 25.5%, respectively. Moreover, JPMorgan’s shares jumped 24.5%.

What's Next in the Banking Space?

Over the next five trading days, banking stocks are expected to continue performing in a similar manner unless any unforeseen incident crops up.

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