Bank Stock Roundup: FX Fines Take a Toll; Citi, JPMorgan, Wells Fargo in Focus

Efforts by major banks to resolve litigation and probes pertaining to their business conduct remained the key trend over the last five trading days. As part of the widespread investigation by the U.S., British and Swiss regulators into alleged foreign exchange (:FX) market manipulation, five major global banks were fined $3.4 billion for their misdoings. This resulted in an overall pessimistic mood in the banking sector.

Nonetheless, banks continued with their restructuring activities with the primary aim to boost operational efficiency. Such efforts were able to offset negative investor sentiments related to FX fines to some extent.

(Read last to last week’s developments here: Bank Stock Roundup for Nov 7, 2014)

Recap of the Week’s Most Important Developments:

1. In a major blow to the global financial institutions, the U.S., British and Swiss regulators fined Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), The Royal Bank of Scotland Group plc, HSBC Holdings plc and UBS AG an aggregate amount of $3.4 billion for alleged FX market rigging. The U.S. Commodity Futures Trading Commission (:CFTC), the U.K. Financial Conduct Authority (:FCA) and the Swiss Financial Market Supervisory Authority (:FINMA) entered into settlements with these banks. (Read More: Another Blow to Global Banks: Fined Billions for FX Manipulation)

2. In tune with its efforts to focus more on private student lending business, Wells Fargo & Company (WFC) is set to sell $8.5 billion of its Federal Family Education Loan Program (:FFELP) loans to Navient Corporation. Notably, the companies did not reveal the terms of the transaction.

The deal is expected to close via a series of transactions by the end of 2014. The transaction comprises entire loans originated under the FFELP, before the program ended in 2010.

Wells Fargo stated that the sale of student loans is immaterial to its earnings. As of Sep 30, 2014, Wells Fargo EFS served 1.3 million customers with $11.9 billion of balance outstanding. On Navient’s part, the deal will undoubtedly enhance its business that started operating independently as a loan management, servicing and asset recovery company following the separation of Sallie Mae into two distinct publicly-traded entities in Apr 2014.

Separately, Wells Fargo also cancelled its proposed sale of mortgage servicing rights (:MSRs) to Ocwen Financial Corp. The deal was announced in Jan 2014.

The cancellation followed, superintendent of New York’s Department of Financial Services (:DFS), Benjamin Lawsky’s restriction on the proceedings of the cash-deal in Feb 2014. Driven by concerns over the mortgage servicer's ability to handle the increase in servicing volume, Lawsky halted the Ocwen deal indefinitely. Therefore, Ocwen put the deal on hold at regulator’s request and was cooperating to resolve his concerns regarding its ability to service portfolios.

3. Major banking bellwethers like Bank of America Corp. (BAC) and U.S. Bancorp (USB) settled a Securities Class Action lawsuit for $69 million. Investors accused both these banks of failing their responsibility as trustees for securities backed by Washington Mutual Inc. home mortgages from 2005 to 2007. Notably, the settlement awaits the federal judge’s approval in Manhattan before it becomes effective. (Read More: BofA and U.S. Bancorp Settle Lawsuit for $69M).

4. With an aim to expand its footprints in the Mid-Atlantic region, North Carolina-based BB&T Corp. (BBT) is set to acquire Susquehanna Bancshares, Inc. in Lititz, PA. The cash-cum-stock transaction is valued at $2.5 billion.

BB&T will incur pre-tax integration and merger charges of $250 million. Nevertheless, upon closure of the acquisition (expected in the second half of 2015), the company will save nearly $160 million annually. Additionally, the company expects the deal to be accretive to its earnings in the first full year excluding one-time expenses. (Read More: BB&T to Buy Susquehanna for $2.5B: Will it be Accretive?)

5. In a bid to reduce expenses and improve efficiency, JPMorgan intends to slash another 3,000 jobs in its Consumer and Community Banking (:CCB) segment by the year end. At an industry conference in Boston, the bank disclosed its plan to cut 7,000 jobs in its mortgage-banking segment and 4,000 in other divisions of the CCB arm, including the merchant services, cards and auto units by end-2014. Notably, earlier in February, the company had announced the curtailment of 6,000 jobs in the mortgage banking unit and 2,000 in rest of the CCB unit. (Read More: JPMorgan to Cut Jobs in Consumer & Community Banking Unit)

Price Performance

Overall, a note of pessimism over the FX fines was prevalent in the banking stocks. Most of the banking stocks showed downward price movement.

In the last five trading sessions, U.S. Bancorp was the only gainer, with its share price raising 0.3%. On the other hand, JPMorgan and Capital One Financial Corp. (COF) were the major losers, with their shares falling 2% and 1.2%, respectively.

Over the last 6 months, BofA and Citigroup emerged as the top performers, with their shares advancing 16.5% and 13.5%, respectively. Moreover, JPMorgan witnessed a 12.3% price increase over the same time frame.

What Next in the Banking Universe?

With no major development expected next week and cynicism over the FX fines getting priced in, we believe that investors will gradually move on to focus on the banks’ fundamentals again. Unless any major negative headlines show up, banking shares are expected to gain in the coming days.

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