Bank Stock Roundup: Upbeat Trading Outlook And Likely Rate Hike Bring Optimism, Citigroup In Focus

Over the last five trading days, major banks showed a bullish trend. Heightened expectations of a rate hike this month have boosted investors’ optimism. All economic indicators point to a rate hike decision by the Fed in its meeting during Dec 13–14. Further, Janet Yellen, speaking at the Congress’s Joint Economic Committee in November, said an increase in interest rates could come “relatively soon.”

An interest rate hike will aid top-line expansion for banks, making way for improved results in the upcoming quarters. Further, positive trading revenue outlook provided by some of the major banks indicates that the earnings picture will be bright in the fourth quarter. Uncertainties related to Brexit in June and the U.S. presidential election in November have resulted in a trading boom. This is expected to be reflected in the fourth quarter trading revenues.

Meanwhile, the law-enforcement agencies are trying to resolve issues pertaining to banks’ past business conduct in order to avoid lengthy litigations.

(Read: Bank Stock Roundup for the week ending Dec 2, 2016)

Important Developments of the Week

1. At the Goldman Sachs Group Inc (NYSE:GS).’s financial services conference in New York, Citigroup Inc.’s (NYSE:C) Chief Financial Officer, John Gerspach, announced the recent outlook for the fourth quarter. The bank expects fourth-quarter 2016 trading revenues to climb by 20% year over year, driven by higher trading activities. Broadly, the positive outlook comes on the back of solid trading activities in the first three quarters of 2016. Per Mr. Gerspach, both corporate clients and investor clients’ trading demand have witnessed an upswing during Q4.

Earlier this week, at the same conference, JPMorgan Chase & Co.’s (NYSE:JPM) CEO James Dimon revealed his expectation of a 15% year-over-year increase in the company’s fourth-quarter trading revenues. Bank of America Corp (NYSE:BAC).’s (NYSE:C) CEO, Brian Moynihan, also anticipates 15% rise in fixed-income trading revenues (read more: Citigroup Projects Q4 Trading Revenues to Climb 20% Y/Y).

2. Regions Financial Corporation (NYSE:RF) is likely to witness a rise in revenue in 2016, as inferred from its revised outlook for this year, presented at the Goldman Sachs U.S. Financial Services Conference. In the presentation, the company maintained its expected growth range of 2–4% for net interest income (NII) and other financing. However, it revised the adjusted non-interest income growth projection for 2016 to over 6% (read more: Regions Revises 2016 Outlook, Aims $400M Cost Cut by 2019).

3. Troubles continue for global banks. U.S. banks’ regulator, Office of the Comptroller of the Currency (OCC), might downgrade Wells Fargo & Company (NYSE:WFC) on a national scorecard for community lending. The U.S. lender might be downgraded by two notches to "needs to improve" from "outstanding" under the Community Reinvestment Act (CRA). Notably, the CRA Act was created for promoting lending to poor neighborhoods, under which Wells Fargo had been rated "outstanding" since 2008. The OCC’s decision is due in early Jan 2017 for downgrade.

Following the financial crisis in 2008, the OCC has faulted several national banks for their community lending. Among others, BofA was downgraded from "outstanding" to “satisfactory” grade in 2011 for "discriminatory or other illegal credit practices." Further, JPMorgan was down one notch from "outstanding" to "satisfactory" in 2013 (read more: Will Wells Fargo's Community Lending Rating be Downgraded?).

Price Performance

Here is how the seven major stocks performed:

In the last five trading sessions, BofA and Citigroup were the major gainers, with their shares increasing 8.1% and 7.4%, respectively. Moreover, Wells Fargo shares increased 6.9%.

BofA and Citigroup were the best performers in the last six months, with their shares surging 59.0% and 32.0%, respectively. Also, JPMorgan’s shares jumped 30.5%.

What's Next in the Banking Space?

The stock price performance of the banks will depend on the outcome of the Federal Open Market Committee (FOMC) meeting next week (Dec 13–14).

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