Bank Stock Roundup: Q2 Trading Outlook Positive With Likely Fed Rate Hike, BofA In Focus

Over the last four trading days, major banks showed a bullish trend. Heightened expectations of a rate hike in June after the release of the minutes from the April FOMC meeting raised investors’ confidence. Though the final decision of the rate hike by the Fed in its meeting during June 14–15 will depend largely on overall economic growth, labor market scenario and the inflation target of 2%, Federal Reserve Chair Janet Yellen in her most recent speech at Harvard University said that “Growth looks to be picking up from the various data we monitor.”

An interest rate hike will aid top-line expansion for banks, making way for improved results in the second quarter. Further, positive trading revenue outlook provided by some of the major banks indicates that the earnings picture will be bright in the second quarter. Market activity was weak in the first two months of 2016. However, market activity improved in March and higher fixed-income client activity continued in the subsequent months. This is expected to result in improved trading revenue in the second quarter.

On the other side, growing trend among large banks to shift focus on wealth management with an aim to improve revenues has been on upswing with Bank of America Corp (NYSE:BAC). (NYSE:C) leading the way. Wealthy clients usually generate steady revenues as fees are based on a percentage of assets under management rather than transactions.

However, oil prices slump in the past few quarters had a significant impact on the banks’ balance sheet. Hence, provisions are still expected to rise in the upcoming results, despite the uptick in oil prices.

Further, with the expectation of the annual stress test results in the coming weeks, Federal Reserve Board's top bank regulator Daniel Tarullo warned that major banks will be required to hold higher capital as a buffer to withstand another financial crisis. Though banks are striving to reap profits through restructuring, the efforts are getting thwarted by several issues including heightened regulations, intense competition and increasing legal costs.

(Read: Bank Stock Roundup for the week ending May 27, 2016)

Important Developments of the Week

1. Wall Street giants Citigroup Inc. (NYSE:C) and BofA are keeping alive the twinkle of optimism sparked by JPMorgan Chase & Co.’s (NYSE:JPM) upbeat views on trading revenues. At an investor conference in New York, Michael Corbat, Chief Executive Officer (CEO) of Citigroup said that trading and investment-banking revenue for second-quarter 2016 is likely to be “up slightly” compared with first-quarter 2016.

The rebound in trading revenue continues for BofA as well, with CEO Brian Moynihan stating that second-quarter trading revenue is on track for “mid-single digits” growth from the year-ago quarter. Daniel Pinto, CEO of the Corporate & Investment Bank at JPMorgan, also stated that trading revenue in second-quarter 2016 is expected to exhibit a mid-teens percentage increase on a year-over-year basis. According to Pinto, market activity was weak in the first two months of 2016. However, it saw a boost in March and higher fixed-income client activity continued in the subsequent months.

2. In a bid to boost wealth management revenue, BofA’s U.S. Trust business is planning to hire over 100 financial advisers as disclosed by Keith Banks, president of U.S. Trust, at a financial services conference in New York. U.S. Trust plans to increase the number of private client advisers to over 450 from the current 323 over the next three years.

Additionally, it looks forward to add around 20 to 25 experienced advisers. Further, U.S. Trust will hire portfolio managers and trust officers to support the advisers. Moreover, U.S. Trust has undertaken several key initiatives that will have a substantial impact on both assets under management as well as loan volume (read more: BofA's U.S. Trust to Add Advisers & Grow Wealth Management).

3. KeyCorp’s (NYSE:KEY) deal to acquire Buffalo, NY-based First Niagara Financial Group Inc. (NASDAQ:FNFG) might be in trouble again as U.S. regulators have launched a probe into the latter’s minority-lending practices. Notably, the investigation was initiated more than two years ago by the Justice Department. U.S. regulators are suspicious that First Niagara has been violating a federal law which bans companies from discriminating in issuing loans. However, the effect of the outcome of the investigations on the deal is uncertain (read more: Will the KeyCorp-First Niagara Deal Face Legal Trouble?).

4. Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported first-quarter 2016 earnings of $39.1 billion, down 1.9% year over year. Notably, community banks, constituting 93% of all FDIC-insured institutions, reported net income of $5.2 billion, up 7.4% year over year.

Banks’ earnings were impacted by weakness in the energy sector which led to a significant rise in provision for loan losses. Moreover, weak trading activities were an undermining factor. However, organic growth aided by higher revenues, improved loan and deposit balances were a few bullish factors (read more: FDIC-Insured Banks: Q1 Earnings Weak, Revenues Improve).

Price Performance

Overall, the performance of banking stocks remained bullish. Here is how the seven major stocks performed:

In the last four trading sessions, Citigroup and BofA were the major gainers, with their shares increasing 0.8% and 0.7%, respectively. Moreover, JPMorgan shares rose 0.6%.

On the other hand BofA and Citigroup were the worst performers over the last six months with their shares losing 14.6% and 13.1%, respectively. Moreover, Wells Fargo & Company (NYSE:WFC) shares fell 5.8%.

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.

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