Bank Stock Roundup: Lawsuit Resolutions Dominate, Wells Fargo, Citigroup In Focus

Over the last five trading days, performance of the banking stocks was relatively bullish. On macroeconomic front, the recently released Fed minutes point toward a potential rise in interest rates in June. This was enough for the banking stocks to be optimistic about future growth.

Also, resolution of lawsuits pertaining to business mishandling cheered the investors to some extent. Further, improved earnings for Federal Deposit Insurance Corporation-insured commercial banks and savings institutions reflected strengthening economy and resilience of banks amid easing margin pressure.

On the other hand, continued concerns related to the promised policy changes associated with tax and banking sector reforms, along with infrastructure spending somewhat prevented investors from becoming overtly positive about the future prospects of banks.



(Read: Bank Stock Roundup for the week ending May 19, 2017)

Important Developments of the Week

1. Citigroup Inc. (NYSE:C) and the U.S. Department of Justice entered into a settlement agreement related to the criminal investigation at the bank's Banamex USA (BUSA) unit. The unit was probed for violating anti-money laundering rules and the Bank Secrecy Act.

The settlement agreement is non-prosecution and includes an amount of $97 million to be paid by Citigroup. The bank will meet the expenses from the existing reserves. (Read more: Citigroup Settles Money Laundering Probe, To Pay $97M)

2. Following a three-week trial in a federal court in Minnesota, the jury passed a verdict on Wells Fargo & Company (NYSE:WFC) . The bank has been penalized with a 20% negligence fine in relation to the foreign tax credits claimed on the basis of Structured Trust Advantaged Repackaged Securities (STARS), a tax shelter that secures U.S. companies’ profits from double taxation.

Despite the bank’s assurance of STARS being a single and low cost funding based transaction, the court found two different transactions, a loan and a trust structure. The loan was a $1.25 billion contribution by Barclays PLC (NYSE:C) to the Wells Fargo trust, which the bank had to repay after five years. It was found that the bank entered into it for tax-related purposes only.

Whereas regarding the trust, the jury found that it contained potential for pretax profit and that the bank entered into it solely for tax reasons. However, Wells Fargo has to pay the penalty for the underpayments of the foreign-tax credits disallowed by the Internal Revenue Service.

3. Moody's Investors Service, a rating arm of Moody's Corp. (NYSE:C) , affirmed all the ratings of Wells Fargo and its subsidiaries. The rating firm’s outlook for the bank remains “stable.” (Read more: Wells Fargo's Ratings Affirmed by Moody's, Outlook Stable).

4. As a consequence of the fake accounts scandal Wells Fargo was involved in last year, its business in the U.S. municipal bond market has seen a fall, per a report issued by Thomson Reuters. Last year, Wells Fargo was barred for a one-year period from conducting city business in several states. This significantly hurt the company’s underwriting business. (Read more: Wells Fargo's Underwriting Business Suffers a Decline).

Price Performance

Here is how the seven major stocks performed:

In the last five trading sessions, The PNC Financial Services Group, Inc. (NYSE:PNC) and U.S. Bancorp (NYSE:USB) were the major gainers, with their shares rising 2.3% and 1.3%, respectively. However, Capital One Financial Corp. (NYSE:C) declined nearly 1%.

Bank of America Corp. (NYSE:C) and Citigroup were the best performers over the last six months, with their shares rallying 11.5% and 9.1%, respectively. However, Capital One’s shares decreased 6%.

What’s Next?

In the coming five days, price performance of bank stocks is likely to follow similar trend, unless there is any unprecedented event.

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