Bank Stock Roundup: Weak Q2 Trading Outlook Raises Concern, BofA & Citi In Focus
Zacks Investment Research | Jun 02, 2017 04:54AM ET
Over the last four trading days, performance of banking stocks remained bearish. Dismal trading revenue outlook provided by some of the major banks indicates that the earnings picture will be bleak in the second quarter. This is because, market activity was weak in the first two months of second-quarter 2017, on lower fixed-income client activity. Additionally, weak loan demand is expected to add to the woes.
Further, weakened expectations of a rate hike in June after the release of the last FOMC meeting minutes, shaken investors’ confidence. Uncertainty over further interest rate hikes has cropped on mixed U.S. economic data and increasing signals of rising political commotion in the White House.
Mortgage rates declined this week, hitting 3.94%, representing a new low in 2017, on weak inflation. In addition, the benchmark 10-year Treasury yield declined to 2.198%, underlining the second lowest level in 2017.
Nevertheless, strategies to enhance profitability through streamlining operations, acquisitions, and resolution of litigations and probes related to legacy matters and business misconducts persisted over the last four trading days.
(Read: Bank Stock Roundup for the week ending May 26, 2017 )
Important Developments of the Week
1. The top executives of JPMorgan Chase & Co. (NYSE:JPM) , Bank of America Corp. (NYSE:C) and Morgan Stanley (NYSE:MS) have hinted at weakness in the second-quarter trading revenues. At a Deutsche Bank (DE:DBKGn) investor conference, Marianne Lake, the chief financial officer at JPMorgan stated that the company’s trading business for the first two months of second quarter was down roughly 15% year over year. Specifically, lower fixed income trading weighed on the overall trading income, while equities were up marginally.
In a separate conference call, held by Sanford Bernstein, BofA’s chief executive – Brian T. Moynihan – warned investors that the bank’s earnings in the second quarter will be hit by decline in trading income (down 10–12% from the prior-year quarter), along with lower-than-expected interest rates, and the divestiture or shuttering of certain assets (these two factors are expected to reduce net interest income by $100–$110 million).
Additionally, Morgan Stanley’s CEO – James Gorman – hinted that the projections from JPMorgan and BofA reflect reality. In an interview with Bloomberg Television in Beijing, he said, “I don’t think we’re very different. We all have similar clients, if not the same clients.”
Get The News You Want
Similarly, Goldman’s Co-President David Solomon did not provide any direct view about the trading scenario. But he did say, “...volatility and client activities, which were more subdued in the first quarter, have continued in comparable fashion in the second quarter.” (Read more: Wells Fargo Sees Municipal Business Ban in New York City )
5. As part of its efforts to transform into “a single-brand business serving core retail customers in the United States,” BofA closed the deal to divest its UK consumer credit card operations, MBNA Ltd. to Lloyds Banking Group (LON:LLOY) plc (LYG). The transaction was announced in Dec 2016. The transaction completes BofA’s efforts to exit international consumer card operations, as part of its strategy to focus on core domestic business. At the time of the announcement, the deal was valued at $2.35 billion. With the closure of the deal, BofA is expected to record a decline in net interest income.
The transaction should lead to a marginal after-tax gain for BofA, which is expected in the second quarter. Further, in the current quarter, the sale should enhance the bank’s Basel 3 risk-based capital ratios by nearly 11 basis points (bps) under the Advanced approaches and 15 bps under the Standardized approach.
6. In order to lure new advisers, Wells Fargo has planned to give higher recruitment bonuses to financial advisers. The bank is planning to give three times the annual revenues generated by the brokers as bonus. The bonus has been designed in the form of a loan, which will be considered settled if the broker reaches the stipulated target and continues to work with the bank.
The advisors will receive bonus at the time of joining the bank and will get higher deferred compensation, which they are entitled to receive after some years of working in the bank. Another reason that led to the hike was the increasing rate at which the brokers were leaving the bank’s brokerage arm following the revelation of fake accounts scandal in Sep 2016. (Read more: Wells Fargo Counters its Rivals by Raising Recruitment Bonus )
Price Performance
Here is how the seven major stocks performed:
Company | Last Four Trading Days | Last 6 months |
JPM | -2.7% | 1.6% |
BAC | -2.6% | 5.3% |
WFC | -0.6% | -4.2% |
C | -1.6% | 6.7% |
COF | -2.3% | -10.0% |
USB | 0.2% | 2.3% |
PNC | -1.0% | 6.7% |
In the last four trading sessions, JPMorgan and BofA were the major losers, with their shares declining 2.7% and 2.6%, respectively. Moreover, Capital One Financial Corp. (NYSE:C) descended 2.3%.
The PNC Financial Services Group, Inc. (NYSE:PNC) and Citigroup were the best performers over the last six months, with their shares surging 6.7%. However, Capital One Financial’s shares declined 10.0%.
What’s Next?
In the coming five days, price performance of bank stocks is likely to follow a similar trend, unless there is any unprecedented event.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
Zacks Investment Research
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.