Coronavirus continued to wreak havoc on investor sentiments over the past five trading days. All the major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed a roller coaster ride, swinging from new highs to record lows. Bank stocks did not remain untouched.
In a major and unexpected development, the Federal Reserve cut interest rates by half a percentage point. Now, the benchmark interest rate is in the range of 1% to 1.25%. This ‘emergency’ step spooked the markets, with investors seeing this as an indication that the U.S. economy is likely to be more adversely impacted than previously expected.
Banks, one of the biggest beneficiaries of higher rates, will be adversely impacted by this move. Net interest income and margins are now likely to decline more than previously expected,given the lower interest rates and coronavirus-related disruptions in supply chains and sales generation in several industries, whichwill lead to lower business activities and less demand for loans.
On the other hand, lower rates will lead to a rise in refinancing activities in the mortgage business. This, along with a slight rise in origination volume driven by lower mortgage rates, will support banks’ mortgage banking income. Also, increased volatility seems have resulted in a rise in equity and bond trading activities.
In other developments, the Fed has approved the simplified capital rules for large banks effective 2020 stress test, keeping intact the strong capital requirements. Under the new framework, capital requirements for the largest and most complex banks would increase, while less complex banks will face lower capital requirements.
Now coming to the company-specific headlines, banks continued with their restructuring and streamlining initiatives. These efforts are anticipated to attract more business and fuel revenue growth. Also, with advancement in technology, increase in digital offerings by major banks remains in focus.
(Read: Bank Stock Roundup for the Week Ending Feb 28, 2020)
Important Developments of the Week
1. With an aim to limit overdraft fees for customers, Wells Fargo WFC has announced plans of launching two new bank accounts by early next year. The accounts that the company intends to launch arelikely to offer convenient and secure banking services to customers with limited or no overdraft fees. (Read more: Wells Fargo to Launch Two Accounts to Limit Overdraft Fees)
Separately, per a Congressional report released recently,Wells Fargo is not complying satisfactorily withthe multiple settlement terms imposed on it as a consequence of the sales scandal.
The report published by U.S. House Financial Services Committee is a result of a year-long research on Wells Fargo’s compliance with five regulatory orders issued in response to widespread consumer abuses and compliance breakdowns.
The report has questioned regulators for not making aggressive efforts to ensure thatWells Fargo meets the terms. In fact, the report mentioned that regulators were aware that the bank was lagging at correcting past mistakes, as recently as December.
Chairman AL Green said, “This report demonstrates not only that Wells Fargo is failing to comply with the terms of multiple settlement agreements dating back to 2016 and 2018, but also that our federal regulators have simply failed to enforce those agreements, despite having ample tools and authorities under existing law to do so.”
Further, the report specifically mentions instances of various communications between Wells Fargo’s representatives and regulators, which show that the bank’s board and management did not take the settlementseriously.
As a conclusion drawn from the report, the committee finds that Wells Fargo still has the potential to cause widespread consumer harm. Also, it said that the former CEO Timothy J. Sloan gave inaccurate and misleading testimony to the Congress during March 2019 hearing.
Keeping in mind welfare of consumers, the committee has recommended regulators to strengthen authority and enhance bank management and board accountability. Also, it has asked to improve transparency.
Chairwoman Maxine Waters has convening three hearings on Wells Fargo to be held this month. She said, “Wells Fargo has clearly demonstrated an unwillingness and inability to stop harming its customers, so this Committee is working overtime to make sure consumers are never subjected to the types of abuses and failures committed by this megabank again.”
2. Citigroup C seeks to hire about 500 tech-related employees at its Tampa Bay area unit by 2020-end to stay ahead in the digitization race. The news was reported by Biz Journals. The new jobs will majorly be technology-focused while some will be operational, such as data engineers, software engineers and business and data analysts. (Read more: Citigroup to Hire 500 Tech Employees in Tampa Bay Area)
3. U.S. Bancorp’s USB banking subsidiary, U.S. Bank, has entered into an agreement with State Farm to buy the latter’s deposit and credit card accounts. The deal is expected to close by 2020-end on in early 2021.
State Farm is a property and casualty insurance provider, based in Bloomington, IL. The company serves about 84 million policies and accounts, of which 81 million are related to auto, fire, life, health and commercial policies and remaining are bank and investment planning services accounts.
Per the terms, State Farm will be able to provide U.S. Bank deposit products and co-branded credit cards to its customers. Also, both the companies are looking for ways to provide State Farm customers with access to vehicle loans and business banking products.
Andy Cecere, CEO of U.S. Bank, said, "It is a terrific opportunity to combine U.S. Bank products, services and digital capabilities with State Farm's coast-to-coast network of agents. This relationship will provide State Farm customers with enhanced product options while expanding U.S. Bank's reach into new and existing markets."
Here is how the seven major stocks performed:
Over the last five trading sessions, U.S. Bancorp and Bank of America BAC were the major decliners, with their shares depreciating 5.7% and 5.4%, respectively. Moreover, shares of Wells Fargo fell 4.8%.
In the past six months, shares of JPMorgan JPM have appreciated 2.9%. On the other hand, shares of both U.S. Bancorp and Wells Fargo have plunged 16.6%, while PNC Financial PNC declined 6.8%.
Over the next five trading days, unless there is any change in the situation related to coronavirus concerns, bank stocks are likely to perform ina similar fashion.
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