Bank Stock Roundup: Wells Fargo, Citi In Focus For Legal Matters & Restructuring Plans

Over the last five trading days, performance of the major banking stocks was bullish as lower than expected April trade deficit level, which is likely to drive up Q2 GDP and positive momentum in oil prices, reinforced the chances of the rate hike in June. Rise in the interest rates will support top-line growth for banks, paving the way for improved results in the upcoming quarters.

Coming to the industry-specific developments, legal matters dominated the headlines. Banks continue to be penalized for past business malpractices. Though they are fully reserved to meet these charges, such fines taint their brand image to some extent.

However, in a very rare occurrence, Bank of America Corp. (NYSE:C) was able to win a case against regulators, leading to the dismissal of fines. Though this is a setback for the U.S. government, it is definitely going to set precedence for other banks to challenge regulatory fines.

Additionally, slide in oil prices in the past few quarters had a significant adverse impact on the banks’ balance sheet. Hence, higher provisions are still likely in the upcoming results, despite rise in oil prices. Further, streamlining and restructuring activities persisted over the last five trading days.

(Read: Bank Stock Roundup for the week ending May 20, 2016)

Important Developments of the Week

1. A federal appellate panel reinstated the private antitrust lawsuits against 16 banks, including big ones such as JPMorgan Chase & Co. (NYSE:JPM) , BofA, Deutsche Bank AG (NYSE:DB) , Citigroup Inc. (NYSE:C) , related to the rigging of London Interbank Offered Rate (“LIBOR”), indicating no respite for the banks from their past wrongdoings (read more: LIBOR Lawsuits Revived Against 16 Banks, Fines to Follow?).

2. Wells Fargo & Company (NYSE:WFC) has been hit with a $70 million penalty by The Office of the Comptroller of the Currency as the bank failed to correct the shortcomings identified in the 2011 consent orders related to mortgage practices in a “timely fashion.” However, the OCC ended the mortgage servicing consent order against Wells Fargo as the bank was found to be compliant (read more: Wells Fargo Fined $70M by OCC, Servicing Limits Lifted).

Another major bank, Citigroup was levied a charge of $425 million by the Commodity Futures Trading Commission for manipulating certain key currency-valuation benchmarks. However, the bank neither admitted nor denied the allegations. Also, the settlement would be covered by Citigroup from the existing legal reserves (read more: Citi Settles Benchmark Manipulation Case for $425M).

3. The 2nd U.S. Circuit Court of Appeals in New York dismissed the $1.27 billion penalty imposed on BofA related to the sale of risky residential mortgage-backed securities by Countrywide Financial Corp. (acquired in 2008). The three-judge panel found the evidences inadequate to hold the bank responsible for the fraud. The appeals court stated the evidence provided by the regulators only proved that underlying mortgages were of lower quality than promised in the agreements (read more: BofA's $1.27B 'Hustle' Penalty Overturned: A Huge Relief).

4. On its Investor Day conference Wells Fargo announced the reduced financial targets in the wake of persistently low interest rates and stricter regulations. Moreover, per Chief Financial Officer John Shrewsberry, the bank was recording lower returns as compared to the set targets. “It looks very different frankly than we would have imagined a couple of years ago,” he said (read more: Wells Fargo Slashes Financial Targets on Macro Woes).

5. JPMorgan is said to eliminate around 100 employees in its private bank as part of the company’s restructuring strategy regarding the latter. The decision was announced internally and first reported by the Wall Street Journal. The layoffs, which will affect the staff in several locations and departments, come on the heels of previous rounds of layoffs in recent months (read more: JPMorgan Said to Cut 100 Staff to Condense its Private Bank).

6. Wells Fargo launched a new affordable mortgage program that allows the customers to make a down payment of just 3% for fixed-rate mortgages. Targeting first-time homebuyers and low-to moderate-income consumers, the new program, ‘yourFirstMortgage’ includes a key feature – it requires a minimum credit score of 620 on a typical scale of 300 to 850.

Among other features, it allows the borrowers to include income from family members, tuition and utility bill payments or renters to qualify for the loan. Also, by completing a homebuyer education course, a borrower with a down payment of less than 10% may receive one-eighth percentage interest rate reduction.

Interestingly, the new loan program partnered with Fannie Mae and Self-Help, is offering mortgage that is not obtained under a government program such as Federal Housing Administration program.

The latest move by Wells Fargo comes at a time when the housing market seems to be showing signs of robust improvement. Notably, new home sales hit a more than eight-year high in April. Also, home prices surged to record levels, signaling strong demand in the all-important spring selling season. Amid such backdrop, with its new loan program, the nation’s largest mortgage lender should be able to reap benefits.

Price Performance

Overall, the performance of banking stocks was positive. Here is how the seven major stocks performed:

In the last five trading sessions, Wells Fargo, Citigroup and JPMorgan were the major gainers, with their shares increasing 3.7%, 2.7% and 2.4%, respectively. Additionally, Capital One Financial Corp. (NYSE:C) shares rose 2.3%.

Over the last six months, BofA and Citigroup were the worst performers with their shares plunging 15.2% and 14.5%, respectively. Further, Capital One shares fell 7.1%.

What's Next in the Banking Space?

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