Operations on global platforms strengthen a company's revenue
stream, facilitating it to capitalize on locational advantages
and resources and finally broaden its customer base. However, at
the same time, it is a known fact that an unfavorable situation
in any of the foreign platforms may hurt profitability of the
The overall U.S. stock market was volatile in the first quarter,
though major indexes showed strength. Apart from the Federal
Reserve's tapering of fiscal stimulus and sluggish economic
activities in emerging markets, the volatility stemmed from the
geopolitical tension that took place when Russian troops advanced
towards Ukraine's Crimean Peninsula.
What Made Matters Worse?
In order to end the Russian military intrusion in Crimea and
bring stability in eastern Ukraine, the US and EU enforced
sanctions on Russia. In compliance with such U.S. sanctions,
three major banking giants -
JPMorgan Chase & Co.
Bank of America Corp.
) - lowered their exposure to Russia in the first quarter of the
According to their latest filings, Citigroup's exposure in Russia
fell 8.7 % to $9.4 billion, while Bank of America reported a 22%
decline in its exposure, largely in the form of loans to Russian
energy companies and banks. Similarly, JPMorgan reduced its
exposure in Russia by 13% to $4.7 billion.
Notably, JPMorgan recently blocked money transfer from a Russian
embassy to an insurance agency. The required amount was to be
transferred from a Russian embassy in Kazakhstan to Russian
insurance firm Sogaz, which is partially owned by Abros. Abros is
a subsidiary of Bank Rossiya, which has been blacklisted by the
U.S. government. This prompted JPMorgan to stop the remittance.
Among others, in Dec 2013,
) signed a deal with Russia-based Rosneft Oil Company's wholly
owned subsidiary to vend Morgan Stanley's Global Oil Merchanting
unit. The finalization of the deal, which is yet to close, may be
affected if U.S. imposes sanctions on Russia's core sector - Oil
Earnings Reflect Sector Headwinds
Nearly 68.4% of the total companies in the Finance sector have
reported first-quarter results so far with an earnings beat ratio
(percentage of companies coming out with positive surprises) of
66.7% and revenue beat ratio of 59.3%.
Notably, the Major Banks are expected to report 13.6% earnings
decline in the quarter and earnings of Banks & Thrifts are
expected to be down 6.6% year over year.
The banking industry is encountering a setback owing to several
issues. These include a slower pace of consumer and corporate
activities, still dismal mortgage market and mounting legal
costs. Further, the banks are witnessing weak loan growth and
continuous pressure on net interest margin amid a persistently
low interest rate environment.
The stringent regulatory landscape is another burden on the
financials of banks. We believe the latest revelation of
reduction in exposure by the sector leaders will further add to
the woes, as it will put some pressure on their top line.
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis
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Notably, on Friday, President Obama and German Chancellor Angela
Merkel indicated at imposing additional sanctions against Russia
if it intervenes in Ukraine's elections scheduled on May 25. We
suggest additional sanctions by the U.S would further add to the
concerns of banks with exposure in Russia.