Bank Stock Roundup: Streamlining Continues, Citigroup & BofA in Focus

Amid ongoing pressure on revenues, the trend of streamlining operations and focusing on core businesses continued the last five trading days. Citigroup Inc. (C) and Bank of America Corp. (BAC) lead the path of restructuring activities in the industry.

Efforts by major banks to conclude litigation issues pertaining to their past business conduct was also prominent. The law-enforcement agencies are trying to resolve such issues in order to avoid lengthy litigations.

(Read to last week’s developments here: Bank Stock Roundup for Nov 28, 2014)

Recap of the Week’s Most Important Developments:

1. The U.S. banks are presently focused on the increasing automation of banking services. The latest to jump on the bandwagon is Citigroup, which anticipates its digital banking client base in Asia to double by 2019. This was stated by Jonathan Larsen, the bank’s Asia-Pacific head of consumer banking.

Citigroup expects approximately 15 million of its Asian customers to use online and mobile banking facilities over the next five years, driven by a rise in wealth among the middle class. The increased use of digital banking will aid revenue growth and also boost the company’s client accounts.

Additionally, Citigroup will not have to incur extra cost in setting up brick-and-mortar branches. Hence, the number of retail branches is expected to remain roughly same at 450, going forward. (Read more: Citigroup Sees Digital Banking Up in Asia; Revenues Rising)

2. Amid heightened regulatory scrutiny over broker-run trading platforms to increase transparency, Citigroup has planned to close down its alternative stock trading venue – LavaFlow, the electronic communications network (:ECN). This strategic decision is expected to be executed in Jan 2015.

The decision is in line with the recent review of LavaFlow ECN, owing to which the bank decided to use capital, resources and efforts allocated to this trading avenue to other sections of Citigroup’s Equities Division. LavaFlow operates as an electronic communications network, which carries on stock trades on behalf of broker-dealers and other traders.

Contrary to dark pool venues, which are not accessible by the investing public and in which the price and the volume of trade are disclosed only after the trading is complete, LavaFlow reveals certain information about pending orders in the system, such as the best bid and offer prices. (Read more: Citigroup to Shut LavaFlow Trading Venue on High Scrutiny)

3. MBNA Ltd, a wholly owned subsidiary of BofA, sold a credit card portfolio worth $570 million (£363 million) to UK retail bank, Virgin Money PLC. The portfolio consisted of Virgin Money credit card assets, which MBNA has been marketing and distributing since 2002. Virgin Money, which recently got listed on the London Stock Exchange, had previously acquired its credit card customer balances worth £1 billion from MBNA in Jan 2013.

The latest additional purchase was made as the British bank has been working diligently to expand its own card business. Under the MBNA and Virgin Money partnership, all sold credit cards were recorded on MBNA’s balance sheet. However, Virgin Money now looks forward to managing and distributing its card business on its own from 2015. Till then, MBNA will continue to provide its services. (Read more: BofA-Owned MBNA Sells $570M of Card Assets to Virgin Money)

4. The legal battle over metal financing deals between Citigroup and Mercuria Energy Group Ltd still continues. In the London High Court, Cyprus-based commodities trader Mercuria Energy alleged that the New York-based bank tried to force Mercuria to make an early repayment of $270 million for the metals held at two scam-tainted Chinese ports.

The case revolves around repurchase deals, or "repo" agreements, between the two parties. According to such deals, traders sell commodities to banks and purchase them back from the bank on a later date at a higher price. Citigroup entered in such contracts wherein it agreed to purchase metals from Mercuria Energy. (Read more: Citi-Mercuria Legal Brawl Continues on Metal Finance Deals)

5. A lawsuit has been filed against Wells Fargo & Company (WFC) by Illinois-based Cook County. The lawsuit accused the bank of discriminatory lending practices towards black, Hispanic and female borrowers in the Chicago area. The complaint accused Wells Fargo of practicing discrimination against minority and female borrowers for more than a decade with the aim of recording higher earnings.

According to the suit, Wells Fargo was engaged in a practice called "equity stripping." Such a practice involves overcharged fees and interest rates along with penalties to refinance. Further, it increases profits of the lender based on the value of the underlying asset and loan terms, irrespective of a borrower’s ability to repay.

Hence, this led to a rise in foreclosures in Cook County during the financial downturn. Notably, the process has involved around 26,000 loans. The suit demands damages totaling around $300 million. (Read more: Wells Fargo Sued over Unfair Lending Practices)

Price Performance

Overall, the performance of banking stocks remained skewed toward the optimistic side with effective restructuring activities. Most of the banking stocks showed a positive price movement.

In the last five trading sessions, Citigroup and JPMorgan Chase & Co. (JPM) were the major gainers, with their share prices increasing 2.2% and 2.0%, respectively. However, Capital One Financial Corp. (COF) declined 1.3%.

Over the last six months, Citigroup and BofA were the top performers, with their shares advancing 15.3% and 13.9%, respectively. Moreover, JPMorgan witnessed an 11.8% price increase 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the Full Research Report on JPM
Read the Full Research Report on COF
Read the Full Research Report on WFC
Read the Full Research Report on C
Read the Full Research Report on BAC


Zacks Investment Research