Bank Stock Roundup: Stress Test Brings Hope Amid Ongoing Legal Issue; Citi In Focus

Over the last five trading days, the biggest news in the banking industry was the announcement of stress test results by the Federal Reserve. This time, all 31 bank holding companies ("BHCs"), including certain U.S. units of foreign banks with consolidated assets worth $50 billion or more, cleared the stress test.

Actually, this indicates that the U.S. banking giants are adequately capitalized to survive under a tremendously difficult economic scenario. The clearance of the stress test does not automatically mean that the banks qualify for additional capital deployment. The banks will have to wait til March 11 to know whether their capital plans have been approved or not.

Among 31 BHCs that submitted their capital plans to the Fed in Jan 2015, Zions Bancorporation (ZION - Analyst Report) and The Goldman Sachs Group, Inc. (GS) have their capital ratios near to the minimum requirements. This might put their capital plans at stake.

Other headlines marked the usual resolution of legal issues and restructuring activities. Also, Citigroup Inc. (C - Analyst Report) came up with a bleak trading revenue outlook for the first quarter of 2015. This, to some extent, made investors wary about the industry’s overall near-term prospects.

(Read  last week’s developments here: Bank Stock Roundup for Feb 27, 2015)

Recap of the Week’s Most Important Developments:

1. Citigroup announced the sale of its consumer-lending business OneMain Financial to Springleaf Holdings, LLC in a cash deal valued at $4.25 billion. The agreement, which is subject to regulatory approval, is expected to close in third-quarter 2015.

Part of the proceeds from the deal will be used by Citigroup to pay off certain funds, which were supporting Citi Holdings. Moreover, withdrawal of funds, along with the sale, is predicted to increase earnings before income taxes by about $1 billion (read more: Citigroup Sheds OneMain for $4.25B to Springleaf).

In a separate move, Citigroup sold its 9.9% equity stake in Akbank through an equity offering for TRY7.45 per share, amounting to $1.15 billion in total. The sale will have no material impact on the company’s financials.

Back in 2007, the company had bought 20% equity stake in Akbank. Notably, in May 2012, Citigroup had sold 10.1% equity stake or over 4 million shares of Akbank for $1.15 billion, resulting in an after-tax loss of roughly $243 million. Further, at that time, the bank had declared retaining its 9.9% stake in Akbank for another three years.

Despite selling its stake in Akbank, Citigroup remains committed to serving its corporate and commercial clients in Turkey through its 500 employees.

2. At an investor conference in Florida, Citigroup’s Chief Financial Officer, John Gerspach, came up with its latest revenue outlook. The bank expects a drop in the first-quarter 2015 fixed-income and equities trading revenues, impacted by the subdued start in spread products and loss incurred in January from price fluctuations in the Swiss franc (read more: Citigroup Anticipates Bleak Q1 Trading Revenues).

3. JPMorgan Chase & Co. (JPM - Analyst Report) announced the redemption of trust-preferred securities (TruPS) worth $1.5 billion. The securities to be fully redeemed include 6.70% Capital Securities, Series CC. The redemption is scheduled to take place on Apr 2, 2015.

In separate news, JPMorgan agreed to settle allegations brought by the U.S. Department of Justice, related to mishandling of bankruptcy filings of more than 25,000 homeowners. The company will pay roughly $50 million that would include cash payments, mortgage loan credits and loan forgiveness, to over 25,000 homeowners who are or were bankrupt. The company will also make changes in internal operations and submit to oversight by external compliance reviewer (read more: JPMorgan to Redeem $1.5B Worth of TruPS and JPMorgan to Settle Robo-Signing Charges for $50 Million).

4. After a challenging year dominated by legal issues and settlements, Bank of America Corporation (BAC - Analyst Report) now has reasons to rejoice. The bank finally left the multi-year $8.5 billion mortgage settlement deal behind after the Manhattan appellate court approved the settlement entirely in its favor.

The court decision put an end to the opposition faced by the Charlotte-based bank since 2011 on account of investors being dissatisfied with the compensation paid to them. BofA can now focus on reviving its profitability by concentrating on core operations with all the major litigations resolved.

Price Performance

Overall, investors remained optimistic about the performance of banking stocks in the near term, with all major banks clearing the 2015 stress test. Further, restructuring plans and resolution of legal issues drew cheer from stakeholders.
 

In the last five trading sessions, JPMorgan and BofA were the major gainers, with respective price increases of 2.2% and 1.5%. However, U.S. Bancorp (USB - Analyst Report) dipped 0.1%.

Over the last six months, The PNC Financial Services Group, Inc. (PNC - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) were the top performers, with their shares advancing 9.5% and 8.0%, respectively. However, BofA witnessed a 1.5% price decline over the same time frame.

What Next in the Banking Sector?

In the coming five days, approval of major banks’ 2015 capital plans will rule the headlines. We believe the majority of banks’ capital plans will get approved this time, and this would definitely enhance shareholder value.