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Bank Stock Roundup: Restructuring Continues; Fifth Third, Wells Fargo in Focus

Over the last five trading days, performance of banking stocks remained muted, mirroring the overall equity markets. Global concerns such as slowdown in China and downward pressure on oil prices have also been adversely impacting the banking stocks. Energy lending, which once happened to aid the U.S. oil boom, now seems to give jitters to banks in the form of continuous regulatory pressure to limit exposure in the sector.

Additionally, with no hike in rates anticipated in the near term, banks are resorting to restructuring measures. Sale/closure of branches for checking expenses continues to make headlines. As an example, Bank of America Corp. BAC is considering layoffs in Global Banking and Global Markets segments as its trading and investment banking revenues remain under strain.

Nonetheless, banks have been trying to boost top line by expanding further into lucrative sectors. Also, attempts to close the long-awaited merger deal between M&T Bank Corporation MTB and Hudson City Bancorp, Inc. ultimately materialized. After facing much delay, finally the banks received the Federal Reserve's approval to complete the deal on or around Nov 1, 2015.

Like always, a week never ended for banks without legal and regulatory matters cropping up. Past business misconducts continue to catch up with banks. The firms, on their part, continue to settle lawsuits for moving past their legal headwinds.

(Read the last Bank Stock Roundup for Sep 25, 2015. )

Recap of the Week's Most Important Developments:

1. BB&T Corporation BBT revealed the location of six branches, slated to be closed in association with its $1.8-billion acquisition of PA-based National Penn Bancshares, Inc. Though the exact date of the shutdown was not disclosed, it is expected to take place along with the completion of the acquisition in mid-2016.

Separately, another major bank, the Ohio-based Fifth Third Bancorp FITB , announced its exit from the St. Louis retail market. The bank agreed to sell 12 branches, retail and private banking deposits worth $261 million and consumer loans worth $155 million to Springfield-based Great Southern Bancorp Inc. (read more: BB&T Names Six Branches to be Shut in National Penn Deal and Fifth Third Continues with Restructuring; Vends 12 Branches ).

2. Wells Fargo & Company WFC inked yet another deal with GE Capital, an arm of Connecticut-based General Electric Company GE . First Union Rail - the railcar finance, leasing and fleet management business of Wells Fargo - has entered into an agreement to acquire GE Railcar Services from GE Capital. The deal is expected to close by first-quarter 2016 (read more: Wells Fargo Unit Pens Deal to Buy GE Railcar Services ).

3. The U.S. Securities and Exchange Commission ("SEC") has slammed a $4.1-million penalty on 22 firms for providing inappropriate and incomplete information regarding their compliance with disclosure obligations related to municipal bond offerings. The implicated underwriting firms include units of The PNC Financial Services Group, Inc. PNC , UBS Group AG, UMB Financial Corporation and Fifth Third Bancorp (read more: 22 Firms Face $4.1M SEC Fine in Municipal Bond Probe ).

4. Before JPMorgan Chase & Co. JPM could breathe a sigh of relief on the dismissal of three investor lawsuits related to the "London Whale" case, troubles again mounted for the banking behemoth. The U.S. District Judge George Daniels in Manhattan rebuffed the bank's arguments against class action certification, as reported by Reuters (read more: JPMorgan to Face "London Whale" Lawsuit; Troubles Ahead? ).

On the other hand, JPMorgan was able to get past a major legal matter. The company can now reduce its lawsuit count by one, after a federal judge ruled in its favor and ended a 5-year long dispute. The claim pertained to an $8.6-billion court case filed by creditors of Lehman Brothers Holdings Inc. against JPMorgan, accusing the latter of misuse of power.

Judge Richard Sullivan of the U.S. District Court in New York rejected the claims and rebuffed Lehman's creditors' "fundamental premise" that J.P. Morgan "was obligated to extend credit to Lehman under its credit agreement." However, he permitted six claims to seek trial, having no basis to reject them.

According to the Judge, JPMorgan had no contractual commitment to offer credit, which may have provided support to Lehman Brothers. Moreover, he stated that the bank had every right to demand collateral in order to secure obligations.

The lawsuit accused JPMorgan of wringing out an $8.6-billion "slush fund" from Lehman Brothers through illegal collateral demands in the final days before the latter collapsed. In short, creditors of Lehman Brothers blamed JPMorgan's actions for failure of the investment bank.

According to the plaintiffs, the bank exploited its leverage as Lehman Brothers' primary clearing bank and compelled the investment bank to shell out additional collateral ahead of other creditors before its downfall, thus resulting in the historic 2008 crisis.

5. As regulators are striving to wipe out discrimination against minority borrowers in the auto loan industry, Fifth Third Bancorp agreed to pay $18 million for settling the lawsuit under which it was sued for encouraging discriminatory indirect auto lending practices (read more: Fifth Third Agrees to Settle Suit on Unfair Practices ).

6. JPMorgan is likely to strike yet another deal with the UK Asset Resolution Limited (UKAR), the UK government's so called "bad bank". According to a Bloomberg report, JPMorgan intends to bid for around £12 billion ($18 billion) of mortgages being sold by UKAR.

UKAR, which was set up in October 2010 with the task of winding down the assets of two failed legacy banks that were bailed out during the crisis - Bradford & Bingley plc and Northern Rock Asset Management plc (NRAM) - is selling its 'Granite' portfolio, a securitization vehicle which was originally formed by NRAM in 2001. As of Jan 31, 2015, Granite held £13.22 billion of mortgage loans funded by £9.05 billion of securities and the remaining balance of £4.17 billion is funded by Northern Rock.

JPMorgan, which will partner with CarVal Investors LLC in the possible bid, is likely to face stiff competition as UKAR's proposed Granite sale has drawn attention from several other firms. Amid the gradual improvement of the UK economy, the Granite portfolio seems to be a lucrative investment that has lured several prospective buyers.

While we have to wait to see whether JPMorgan manages to outdo other prospective bidders, we believe a winning bid would help the company in diversifying its loan portfolio.

Price Performance

The overall performance of banking stocks reflected pessimism. Here is how the seven major stocks performed:

Company Last Week 6 months
JPM -0.1% 3.1%
BAC -2.1% 1.6%
WFC -0.1% -3.4%
C -1.3% -3.2%
COF -1.5% -7.8%
USB -0.7% -4.3%
PNC -0.3% -3.2%

Over the last five trading sessions, BofA, Capital One Financial Corp. COF and Citigroup Inc. C were the top losers, with their shares declining 2.1%, 1.5% and 1.3%, respectively.

Over the last six months, JPMorgan and BofA emerged as the top performers, with their shares up 3.6% and 1.6%, respectively. On the other hand, Capital One and U.S. Bancorp USB slumped 7.8% and 4.3%, respectively.

What Next in the Banking Universe?

The volatility in the equity market is anticipated to persist until the focus shifts entirely to Q3 results. Till then, we believe banking stocks will continue to perform in a similar fashion, unless some major positive development reverses the trend.

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JPMORGAN CHASE (JPM): Free Stock Analysis Report

BB&T CORP (BBT): Free Stock Analysis Report

PNC FINL SVC CP (PNC): Free Stock Analysis Report

CAPITAL ONE FIN (COF): Free Stock Analysis Report

US BANCORP (USB): Free Stock Analysis Report

M&T BANK CORP (MTB): Free Stock Analysis Report

FIFTH THIRD BK (FITB): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

GENL ELECTRIC (GE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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