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Bank Stock Roundup: Some Reasons for Optimism, BofA & Citi in Focus

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Over the last five trading days, performance of banking stocks has been bullish. Though a tepid trading revenue outlook from some of the major banks indicates a bleak earnings picture, the rising 10-year Treasury bond yields supported bank stocks. Lesser-than-expected losses from the hurricanes primarily helped yields rise.

Further, interest rate is expected to remain unchanged in next week’s Fed meeting. However, details on the Fed’s plans to shrink its portfolio of treasury bonds and mortgage-backed securities worth $4.5 trillion are likely to unwind.

Nevertheless, strategies to enhance profitability through cost-control efforts persisted over the last five trading days.



(Read: Bank Stock Roundup for the week ending Aug 18, 2017)

Important Developments of the Week

1. At the Barclays Plc Investors Conference in New York, earlier this week, many big banks unveiled their outlook and plans for the coming period. Top executives of JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and The Goldman Sachs Group, Inc. (GS - Free Report) hinted at weakness in third-quarter trading revenues. Banks expect low volatility in equity and bonds markets to impact trading activity. (Read more: Big Banks See Slump in Q3 Trading Revenues on Y/Y Basis)

At the same conference, Citigroup Inc.’s (C - Free Report) chief financial officer, John Gerspach, also announced the company’s latest outlook for the third quarter. The bank expects third-quarter 2017 trading revenues to fall 15% year over year, affected by low volatility in markets. (Read more: Citigroup Projects Weak Q3 Trading Revenues on Y/Y Basis)

At the global conference held by Barclays, Wells Fargo & Company’s (WFC - Free Report) CEO Tim Sloan announced plans to regain the trust which the bank has lost due to its involvement in several malpractices. Also, he noted that the bank is planning to achieve an additional $2-billion reduction in expenses by the end of 2019.

The bank is in the process of achieving its previous savings goal of $2 billion by year-end 2018. It seeks to achieve the target majorly by streamlining human resource, marketing, technology and operations departments. Further, it aims to close about 450 branches by 2018. (Read more: Wells Fargo's Focus on Expense Management Might Lend Support)

2. Wells Fargo recently acquired mortgage servicing rights (MSRs) worth $51 billion from Seneca Mortgage Investment. The financial terms of the deal were not disclosed. The loans underlying the servicing rights have been guaranteed by Fannie Mae or Freddie Mac. Also, the MSRs will be included in Wells Fargo’s third-quarter results.

The company also assured that the customers will receive detailed welcome information at the time of transfer. As of Jun 30, 2017, Wells Fargo had a servicing portfolio of about $1.5 trillion, which made it the leading servicer of mortgage loans. (Read more: Wells Fargo Boosts Mortgage Business, Buys MSRs Worth $51B)

3. Citigroup recently announced 100% redemption of its outstanding 4.650% Fixed Rate/Floating Rate Subordinated Notes due October 2022. The principal amount of the notes was C$481.5 million. The notes are redeemable on Oct 11, 2017. Citigroup stated that this redemption is in accordance with its liability management strategy. Also, it is in line with the company’s efforts to boost efficiency of funds and capital structure.

Further, its Basel III Tier 2 Capital is expected to remain unaffected by the redemption. In order to reduce funding costs, Citigroup has successfully redeemed or retired about $25.6 billion worth securities since 2015. (Read more: Citigroup to Redeem Subordinated Notes Worth C$481.5 Million)

4. Moody's Investors Service, the rating services arm of Moody's Corporation (MCO), placed the long-term ratings of BofA and its subsidiaries, including the principal bank subsidiary, Bank of America N.A., on review for a possible upgrade. Also, BofA’s counterparty risk assessments have been placed on review for probable upgrade.

Notably, the rating agency affirmed all short-term ratings of the company. The primary reason for placing BofA’s ratings under review is the continuous improvement in profitability and conservative risk profile. These support Moody’s belief that the company will be able to sustain its profits over the long term. (Read more: BofA Ratings Put Under Review for Upgrade by Moody's)

Price Performance

Here is how the seven major stocks performed:
 

Company

Last Week

6 months

JPM

3.0%

0.6%

BAC

5.9%

-3.5%

WFC

3.5%

-11.4%

C

4.6%

13.5%

COF

0.6%

-13.4%

USB

3.3%

-5.1%

PNC

4.6%

1.8%



In the last five trading sessions, BofA, Citigroup and The PNC Financial Services Group, Inc. (PNC - Free Report) were the major gainers, with their shares increasing 5.9%, 4.6% and 4.6%, respectively. Furthermore, Wells Fargo moved up 3.5%.

Citigroup and PNC Financial were the best performers over the last six months, the banks’ shares jumping 13.5% and 1.8%, respectively. However, shares of Capital One Financial Corp. (COF - Free Report) and Wells Fargo fell 13.4% and 11.4%, respectively.

What’s Next?

In the coming five days, performance of bank stocks is likely to follow a similar trend, unless there is any unprecedented event.

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