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Bank Stock Roundup: Senate Tax Bill Raises Investors' Confidence, WFC & BofA in Focus

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Over the last five trading days, the performance of banking stocks has been bullish. The U.S. Senate passed an amended tax bill last Saturday, driving investors’ optimism over bank stocks. A significant drop in the corporate tax rate — from 35% to 20% — is one of the major changes proposed in the tax bill.

Though low client activities and less volatility across capital markets are expected to hurt banks’ trading revenues in Q4, overall earnings performance is likely to improve on the back of lower taxes.

Further, expectations of another rate hike soon, backed by improving U.S. economic data, have boosted investors’ confidence. Mortgage rates increased last week on a bonds sell-off, hitting 3.94%, but remained historically low. In addition, the benchmark 10-year Treasury yield jumped to 2.367%.

Nevertheless, strategies to enhance profitability through streamlining operations, acquisitions and resolution of litigations and probes related to legacy matters and business misconducts prevailed over the last five trading days.



 (Read: Bank Stock Roundup for the week ending Dec 1, 2017)

Important Developments of the Week

1. Major banks expect weak trading revenues in the fourth quarter. At the Goldman Sachs U.S. Financial Services Conference in New York, top executives of JPMorgan Chase & Co. JPM and Bank of America Corp. BAC hinted at continued weakness in trading revenues. This is the third time in 2017 that both companies have provided dismal outlook for trading revenues.

Marianne Lake, the chief financial officer at JPMorgan, stated that the company’s trading business so far this quarter has been down nearly 15% year over year. Lake noted that “there haven’t been that many catalysts” and volatility remains "low across the spectrum."

Likewise, BofA CEO Brian Moynihan predicted the same decline for his company. Both executives cited discouraging comparisons to last year, when volatility was significantly high following the U.S. Presidential election results. Notably, remarks by these executives echo similar comments made in November by Goldman Sachs GS CFO Martin Chavez, who said, “The market backdrop that has been in place since the beginning of the year has continued into the fourth quarter. Volatility continues to be low, and client activity continues to be subdued.” (Read more: Banks Appear Unlikely to Benefit From Trading Turnaround)

John Gerspach, chief financial officer (CFO) at Citigroup Inc. C, also foresees a decline in the company’s trading revenues by high teens in the fourth quarter. Also, Trump’s tax reform move is likely to affect the bank’s earnings by a solid $20 million as a one-time charge, after it is enforced as law. He also expects credit card revenues to remain flat in the fourth quarter due to pressure from the recent marketing costs.

However, the CFO seemed hopeful about return on tangible common equity, expecting it to rise in 2019 and 2020 due to lower taxes that will result in higher income. (Read more: Citigroup to Witness Lower Trading Revenues in Q4)

2. Moody's Investors Service — the rating service arm of Moody's Corp. — affirms or upgrades the major banks’ ratings based on performance and earnings strength. Recently, JPMorgan received rating action from Moody’s. The rating agency affirmed the ratings of the bank and kept its outlook stable. The company’s A3 long-term senior debt rating and Aa2 deposit rating have been affirmed.

The ratings are based on JPMorgan’s earnings strength and performance of different business lines. Furthermore, the company’s great liquidity and capital position boosted its credit profile. (Read more: JPMorgan's Ratings Affirmed by Moody's, Outlook Stable)

Also, Moody's upgraded the long-term issuer rating of BofA from Baa1 to A3. Additionally, the deposits and senior debt rating of its subsidiary, Bank of America N.A., has been upgraded from A1 to Aa3. Its baseline credit assessment has also been upgraded to baa1 from baa2.

On the other hand, short-term ratings and assessments of the company and its subsidiaries have been affirmed by Moody's. Notably, the rating outlook is stable. BofA has witnessed improvement in its profitability in the last few years. Moody’s expects the company to sustain this bottom-line growth in the future as well. (Read more: BofA's Long-Term Ratings Upgraded by Moody's, Outlook Stable)

3. The California Department of Insurance plans to revoke or at least suspend Wells Fargo & Company’s (WFC - Free Report) insurance license due to its illegitimate practices relating to the online insurance referral program. The regulator noted that about 1500 fake insurance policies were opened by the company without customers’ knowledge. Wells Fargo is said to have wrongly charged them with premiums.

Earlier this week, the banking giant’s CEO Tim Sloan commented on the regular screening of its operations during the conference hosted by Goldman Sachs. He had said, “I think actually that we’ll never say it’s finished.” This adds to the many other problems the bank has been facing since the fake accounts scandal surfaced in late 2016.  (Read more: Wells Fargo's Insurance License Likely to Get Revoked)

4. Capital One Financial Corp. COF has been accused of charging illegal overdraft fees from customers. Per a Reuters report, a federal appeals court recently revived the proposed class-action lawsuit, which had been filed against the company earlier for its wrongdoing. According to the 2nd U.S. Circuit Court of Appeals in Manhattan, the rules for charging overdraft fee of Capital One were quite confusing and ambiguous.

Thus, a lower court judge had wrongly dismissed a breach of contract claim. Ideally, if a bank pays its merchant for purchases made by customers, who do not have enough money in their accounts, it charges an overdraft fee of nearly $35. (Read more: Capital One Accused of Charging Illegal Overdraft Fee)

5. SunTrust Banks, Inc. STI closed the deal to divest its commercial lines insurance premium finance subsidiary — Premium Assignment Corporation (“PAC”) — to Kansas City, MO-based IPFS Corporation. Financial details of the deal, announced in September, were not revealed. The sale is part of SunTrust’s strategy to focus on core Wholesale Banking operations. SunTrust intends to improve profitability by focusing on Wholesale Banking business. (Read more: SunTrust Closes Insurance Premium Finance Subsidiary Deal)

6. Amid ongoing developments in the U.S. banking sector, CEO Tim Sloan of Wells Fargo is optimistic on the loan scenario in the fourth quarter based on improved customer activity. During the conference hosted by Goldman Sachs, Sloan commented on the regular screening of the bank’s operations. He said, “I think actually that we’ll never say it’s finished.” According to him, some other areas of mistakes might standout as the bank continues to make improvements.

Further, growth in economy is likely to have spurred some customer activity on the consumer and commercial front during the quarter. He expects consumer activity to gain momentum when Trump becomes successful in enforcing the tax bill. In the third quarter, the bank reported nearly 1% drop in its loan portfolio, year over year.

He anticipates the commercial and industrial (C&I) lending scenario to be better in the fourth quarter. However, he expects the mortgage segment to be impacted by seasonality during the last quarter, resulting in sluggish growth. Sloan anticipates the auto lending segment to improve late next year. (Read more: Wells Fargo CEO Looks Optimistic About Q4 C&I Loans Scenario)

Price Performance

Here is how the seven major stocks performed:
 

Company

Last Week

6 months

JPM

-0.2%

26.1%

BAC

2.4%

28.5%

WFC

5.6%

15.6%

C

-0.7%

22.3%

COF

2.5%

21.6%

USB

0.0%

8.5%

PNC

1.7%

21.0%



In the last five trading sessions, Wells Fargo and Capital One Financial were the major gainers, with the companies’ shares increasing 5.6% and 2.5%, respectively. Furthermore, BofA moved up 2.4%.

BofA and JPMorgan were the best performers over the last six months, with the banks’ shares jumping 28.5% and 26.1%, respectively. Also, shares of Citigroup climbed 22.3%.

What’s Next?

In the coming five days, performance of bank stocks will depend on the outcome of the Federal Open Market Committee (FOMC) meeting scheduled to be held on December 12-13.

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