Bank Stock Roundup: Fines, Legal Issues Rule Headlines; Citi, BofA & JPMorgan in Focus - Analyst Blog

Over the last five trading days, performance of banking stocks remained bullish on the back of their efforts to move past the legal issues. Investors took the fines and legal settlements announced by the banks well in their stride. Despite causing one-time expenses, removal of legal hassles always acts as a positive catalyst.

Apart from this, Citigroup Inc. (C) announced that bonus pool for its traders would remain unchanged from the 2013 level. This, we believe, is in response to the subdued trading performance over the past nine months and also the disappointing outlook for fourth-quarter 2014. Nonetheless, a continued focus of banks on expansion plans to boost revenues from alternative sources remained a major positive.

(Read last to last week's developments here: Bank Stock Roundup for Dec 12, 2014)

Recap of the Week's Most Important Developments:

1. Banks continue to move past their legal headwinds. The 2011 case against divisions of 7 banks, for providing misleading statements related to the presently bankrupt MF Global Holdings Ltd.'s certain debt offering as underwriters, has been partially settled.

The banks will have to pay $74 million in aggregate to settle the allegations. Nonetheless, the settlement still requires the approval of a federal judge. Banks, whose units are part of the settlement, are Citigroup, Deutsche Bank AG, The Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), The Royal Bank of Scotland Group plc and Sandler O'Neill and Partners. (Read More: Banks to Pay $74M for Settling MF Global Underwriting Case)

2. Major American banks continue to be embroiled in legal hassles related to the sale of risky residential mortgage backed securities (“RMBS”). The U.S. regulator for credit unions – National Credit Union Administration (NCUA) – has sued BofA and U.S. Bancorp (USB) for recovering losses on $5.8 billion worth of RMBS that turned bad. (Read More: BofA, U.S. Bancorp Sued by NCUA over Sale of Risky RMBS)

3. Citigroup was recently fined $3 million by the Financial Industry Regulatory Authority (FINRA) on its failure to send prospectuses for exchange-traded funds (ETFs) to more than 250,000 brokerage clients. The bank failed to convey prospectuses for approximately 160 ETFs among 1.5 million ETF purchases from 2009 through Apr 2011. (Read More: Citigroup Fined $3 Million by FINRA for Negligence)

Further, two brokerage divisions of Wells Fargo & Co. (WFC) – Wells Fargo Advisors (‘WFA') and Wells Fargo Advisors Financial Network (‘WFAFN') – have been penalized with a joint fine of $1.5 million by FINRA for failure in the anti-money laundering (AML) procedures. FINRA stated that for a period of nine years (2003-2012), the firms did not fulfill a major AML requirement by failing to verify around 220,000 new customer accounts.

Broker-dealers are required to set up and maintain written Customer Identification Program (‘CIP') as per the AML compliance program. However, as per FINRA's findings, the CIP system of the two concerned units of Wells Fargo “was deficient, as the electronic systems supporting it contained a design flaw.”

On several occasions, the firms' system assigned new customer accounts with recycled identifiers that were previously assigned for closed accounts. Hence, the firms' CIP system failed to verify the new accounts since they were assigned recycled identifiers.

Further, when the issue came to the forefront, around 120,000 accounts that never came under such identification process were already closed. Notably, such compliance failure affected over 3% of the 6.9 million customer accounts that the two Wells Fargo brokerage units opened in the abovementioned period.

4. U.S. Bancorp is set to shell out $6 million to settle a complaint filed as a class-action by Oklahoma Police Pension and Retirement System in 2011, per a Reuters report. The company's banking subsidiary, U.S. Bank is alleged to have failed in its role as a trustee for mortgage-backed securities that were sold by Bear Stearns (acquired by JPMorgan in 2008) in the period before the financial meltdown.

It was alleged that U.S. Bank breached contract and violated the 1939 U.S. Trust Indenture Act that specifies the duties of trustees. The bank is accused of not reviewing mortgage-loan files on a regular basis in order to check the possibility of loss of documents or keep tab of any documents that were incomplete. As a trustee, the bank grossly neglected its duty of checking whether any defective loans were eliminated from the pools which supported the mortgage-backed bonds.

Per the lawsuit, the mortgage loans that backed the securities were of poor quality as these loans incurred heavy delinquencies and credit losses, which ultimately resulted in huge losses for the investors. This could have been prevented if U.S. Bank was true to performing its duties.

5. JPMorgan expands into the Asia Pacific area by purchasing a property platform in Australia, Japan and Singapore. The asset management division of the largest U.S. bank acquired the real estate investment business from Aviva plc. Financial terms and conditions of the deal were not divulged. (Read More: JPMorgan Expands in Asia, Buys Aviva's Real Estate Business)

Price Performance

Overall, the performance of banking stocks remained skewed toward the optimistic side with removal of legal headwinds being the key trend, which gained investors' confidence. Most banking stocks showed an uptrend.
 

Over the last five trading sessions, The PNC Financial Services Group, Inc. (PNC) and U.S. Bancorp were the major gainers, with their share prices increasing 5.3% and 3.3%, respectively.

Over the last six months, Citigroup and BofA were the top performers, with their shares advancing 12.9% and 12.7%, respectively. Also, JPMorgan witnessed a 7.9% price rise over the same time frame.

What Next in the Banking Universe?

With nothing major expected over the next week, banking stocks are expected to perform in a similar fashion. Further, with the Cuban economy opening up for the U.S. banks, a chance of expansion is there.

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