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Analyst Blog

Major banking stocks continued to rally over the last four trading days. This helped the Zacks categorized Major Regional Bank industry gain 14.5% since the Election Day versus the S&P 500’s gain of 2.8%. Optimism surrounding the Fed rate hike next month and strengthening of the domestic economy seem to be the primary reasons for the continued bullish trend being witnessed by bank stocks.

Nonetheless, litigations and regulatory related issues were visible in the headlines. It looks like Wells Fargo & Company (WFC - Free Report) will continue to be impacted by the after-effects of accounting scandal for a long time. The bank has been persistently facing regulatory scrutiny and litigations over the same matter. Other than Wells Fargo, a few major banks also continued to face legal hassles over past business misconducts.

Separately, the Financial Stability Board (FSB) came up with the updated list of globally systemically important banks (G-SIB). While the name and number of banks in the list remained the same, several banks’ categories related to required capital surcharge were revised. The changes announced will take effect in Jan 2018.

(Read: Bank Stock Roundup for the week ending Nov 18, 2016)

Banks - Major Regional Industry Price Index

Banks - Major Regional Industry Price Index

Important Developments of the Week

1. Amid mounting litigation issues, Wells Fargo has once again caught regulators’ eyes. The Office of the Comptroller of the Currency (OCC) has intimated the bank about taking regulatory approvals before making business decisions. Particularly, Wells Fargo is restricted from making “golden parachute” payments to its departing executives. Moreover, for hiring or laying off senior executives along with changes in business plans, the board of directors will require prior approval from the OCC. (Read more: Wells Fargo Slapped with New Regulatory Restrictions).

2. Wells Fargo filed a motion in the U.S. District Court in Utah to instruct customers who have sued the bank for fraud, breach of contract and invasion of privacy, to settle their disputes in private arbitrations rather than in court. This motion follows the lawsuit that emerged in association with the scandal and sought class-action status on behalf of thousands of customers in Sep 2016.

Notably, the lawsuit followed the bank’s $190-million settlement to resolve regulators’ claims of illegally opening millions of unauthorized accounts. Further, the company continues to come under fire from several quarters, which tarnishes its reputation.

Following its advertising campaign to gain again customers’ faith after the scandal, the bank has come up with the move of enforcing the mandatory arbitration clauses. Though the bank would stick to its arbitration policy, it is ready to offer mediation services to the affected clients.

3. A U.S. appeals court reintroduced a lawsuit against Bank of America Corporation (BAC - Free Report) , accusing it of selling millions of dollars of auction-rate securities (ARS) to Tutor Perini Corporation, at a time when such securities were on the verge of collapse. Tutor Perini accused BofA of forcing it to buy such securities in late 2007 and early 2008, despite being aware that dealers had stopped supporting such securities and that the market was "one step away from illiquidity." (Read more: BofA to Face Lawsuit for Sale of ARS to Tutor Perini).

4. Fifth Third Bancorp (FITB - Free Report) has been accused of breaking contract with S&P Global Market Intelligence. According to the lawsuit filed in the U.S. District Court in Cincinnati, S&P has asked the court to order the bank to pay no less than $3.885 million in damages, resulting from the termination of contract with S&P. (Read more: Fifth Third to Pay around $4M to S&P for Contract Damages).

5. Citibank Holdings Ireland, the Irish subsidiary of the Wall Street biggie, Citigroup Inc. (C - Free Report) , will now be under the direct supervision of the European Central Bank (ECB) since Brexit. The merger with UK-based Citibank International last year helped the unit to be added in the list of large banks qualifying for ECB regulations. Notably, Citigroup is the first global lender to be on this list. (Read more: Citigroup Irish Arm Under ECB Regulation Purview).

6. In other news from Fifth Third, the company is expected to recognize a pre-tax gain of approximately $9 million (around $6 million after-tax) in fourth-quarter 2016, from the partial sale of its stake in Vantiv Inc. (VNTV - Free Report) . The bank will also record about 4 basis points expansion in its Common Equity Tier 1 ratio. (Read more: Fifth Third to Gain $9 Million Post Vantiv Stake Sale).

Price Performance

The overall performance of banking stocks was positive. Here is how the seven major stocks performed:
 

Company

Last Week

6 months

JPM

1.5%

24.3%

BAC

2.8%

42.1%

WFC

-1.2%

7.1%

C

2.2%

25.7%

COF

3.2%

19.8%

USB

0.2%

18.5%

PNC

-0.1%

26.6%


In the last four trading sessions, Capital One Financial Corp. (COF - Free Report) and BofA were the major gainers, with their shares increasing 3.2% and 2.8%, respectively. However, Wells Fargo shares fell 1.2%.

Over the last six months, BofA and The PNC Financial Services Group, Inc. (PNC - Free Report) have been the best performers, with their shares surging 42.1% and 26.6%, respectively. Also, Citigroup’s shares jumped 25.7%.

What's Next in the Banking Space?

In the next five trading days, banking stocks are expected to continue performing in a similar manner unless any unforeseen incident crops up.

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