Bank Stock Roundup: Litigation & Restructuring Continue; Citi, BofA, Wells Fargo in Focus

Efforts by major banks to conclude litigation issues pertaining to their past business conduct remained the key trend in the last five trading days. Litigations and probes dominated the headlines. The law-enforcement agencies are trying to resolve such issues in order to avoid lengthy litigations.

Nevertheless, the pessimism was somewhat offset by the restructuring initiatives announced by some banks during the week. Amid ongoing pressure on revenues, the strategy of streamlining operations and focusing on core businesses to drive operational efficiencies have been prominent.

(Read last week’s developments: Bank Stock Round up for Sep 19, 2014)

Recap of the Week’s Most Important Developments:

1. Caught between the Argentina government and a U.S. court order, Citigroup Inc. (C) is struggling for some reprieve. The bank is seeking U.S. District Judge Thomas Griesa to permit it to make payments on bonds, which were issued under Argentine law following the South American country’s default in 2001. The company said that it would face regulatory and criminal sanctions by the country and its Argentine banking license may be revoked upon failure to process the $5 million interest payment, which is due to bondholders by Sep 30. (Read more: Citigroup Seeks U.S. Judge to Halt Argentine Bond Order)

2. Bank of America Corp (BAC), the second-largest bank in the U.S., continues to hog the limelight, thanks to several litigations and legal issues that it is embroiled in. The major regional bank had appealed against the court verdict that imposed a penalty of $1.27 billion on it for selling dubious loans to Fannie Mae (FNMA) and Freddie Mac (FMCC) prior to the financial crisis. The U.S. government, after having failed to find any logic in BofA’s appeal, wants it to be rejected.

Notably, the penalty was levied by the U.S. District Judge Jed Rakoff at Manhattan in July. The Federal prosecutors charged the bank’s Countrywide unit for creating the program ‘high-speed swim lane’ (:HSSL) or ‘Hustle,’ which rewarded employees for quantity rather than quality of loans. (Read more: BofA Plea against $1.27B Penalty Shunned by US Government)

3. Wells Fargo Advisors LLC – the brokerage wing of Wells Fargo & Company (WFC) has been slammed with a fine of $5 million by the Securities and Exchange Commission (SEC.TO). The SEC alleged that the brokerage unit failed to maintain sufficient controls to prevent an employee from insider trading based on private information of a customer. The SEC also alleged that Wells Fargo made unreasonable delay in producing related documents in course of the SEC’s investigation and provided “an altered” document related to a compliance review of the broker’s trading.

Wells Fargo violated several federal securities laws that “require broker-dealers and investments advisers to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information.” The company also violated laws that make necessary for broker-dealers and investment advisers to produce correct documents and records to the SEC in due time.

Notably, Wells Fargo has accepted its wrongdoing and agreed to the penalty payment. Also, it has agreed that an independent consultant would review its policies and procedures. (Read more: Wells Fargo Accepts Control Failure Charges, to Pay $5M)

4. U.S. Bank National Association – the core subsidiary of U.S. Bancorp (USB) is set to shell out $57 million to resolve regulators’ claims of for unfair billing practices on “add-on products” for of some of the bank’s customers. Of the total amount, the company will pay $48 million to the more than 420,000 affected customers, $5 million as penalty to the Consumer Financial Protection Bureau (:CFPB) and $4 million penalty charges to the Office of the Comptroller of the Currency (OCC). Apart from the monetary settlement, U.S. Bank is required to improve its oversight on third-party vendors. The bank neither accepted nor denied the claims.

5. JPMorgan Chase & Co. (JPM) signed a definitive contract with Webster Financial Corp. (WBS) to sell the health savings account (:HSA) business managed by its subsidiary – JPMorgan Chase Bank, N.A. The price and terms of the deal were not divulged by the company. Per the agreement, JPMorgan will transfer around 700,000 HSAs to Webster’s subdivision HSA Bank. Though the purchase price was not revealed, the cash transaction comprises roughly $1.3 billion in deposits and $175 million in investments. Moreover, the deal is subject to regulatory approval and customary conditions. (Read more: JPMorgan's Streamlining Continues: Sells HSAs to Webster)

Price Performance

Amid legacy issues and legal hassles, banking stocks depicted a downtrend. The subdued performance was due to the existing concerns.

In the last five trading sessions, Capital One Financial Corporation (COF) and Wells Fargo were the major losers, with their share prices declining 3.6% and 3.7%, respectively.

Over the last six months, Capital One Financial and Wells Fargo were the top performers, with their shares gaining 8.4% and 6.5%, respectively. However, BofA and U.S. Bancorp witnessed a price decline of 1.7% and 2.5%, respectively, over the same time frame.

What Next in the Banking Universe?

Since no major development is expected next week, the performance of banking stocks should not change significantly.

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