Bank Stock Roundup: Aggressive Rate Hikes Likely, Citi, U.S. Bancorp in Focus

Over the last four trading days, volatility in the stock market has affected the banking stocks as well. The main highlight was the release of the Fed minutes of the January FOMC meeting. The latest report highlights that improving economic growth, stimulus from the recent tax cuts and rise in inflation support a more aggressive stance by the Fed in hiking rates.

Further, given the growth in economy, low unemployment rate and healthy consumer sentiment, the demand for loans and other related products of banks will rise. Overall, though these will be beneficial for the banks’ financials, the markets seem to be wary of such a scenario. Thus, this led to significant volatility and bank stocks’ performance turned bearish over the last four trading sessions.

Mortgage rates were also on an upswing, with 30-year mortgages averaging 4.40% (highest since April 2014), as money was pulled out of the bond market. However, homeowners seeking lower rates for refinancing are definitely big-time losers. Rise in mortgage rates will limit refinancing activity.

Coming to company-specific news related to banks, efforts to strengthen profitability persisted. Further, past business misconduct continued to haunt over the last four trading days. Moreover, banks are undertaking initiatives to pass on the benefits from lower tax rates to employees and shareholders.

(Read: Bank Stock Roundup for the week ending Feb 16, 2018)

Important Developments of the Week

1. Citigroup C is planning to serve clients in Asia with assets as low as $50,000, with services that it generally provides to the high-end clients. This was reported by Financial Times. The bank is providing portfolio diversification and wealth-planning services to the Citigold and Citi priority customers.

After having grown assets by 17% last year in the Asia-Pacific region, the company is seeking to achieve similar growth rate in the region in 2018. (Read more: Citigroup Aims to Extend Footprint in Asia-Pacific Region)

2. Citigroup’s chief executive officer (CEO) — Michael Corbat — received about 48% pay hike in his total compensation package. Per the Securities and Exchange Commission (SEC) filing, his annual salary has been increased to $23 million in 2017.

Though the CEO failed to meet the financial targets of achieving tangible return on common equity, or ROTCE — a key profitability ratio — to 10% within two years, Corbat’s extraordinary leadership quality and the company’s strong operating performance in the year led to this hike. (Read more: Citigroup CEO Corbat's Compensation Hiked by 48% in 2017)

3. U.S. Bancorp’s USB long-term ratings are under review for downgrade by Moody's Investors Service. In March 2017, the rating agency had rated U.S. Bancorp’s senior unsecured and subordinated debt as A1.

Moody’s initiated the review on account of the $613 million settlement that U.S. Bancorp had agreed upon with several U.S. regulatory bodies last week due to shortcomings in its anti-money laundering and willful violations of the Bank Secrecy Act.

Ratings for U.S. Bancorp’s subsidiaries along with its bank subsidiary, U.S. Bank National Association, have been placed for review. U.S. Bank’s long-term deposits rating of Aa1, issuer and senior unsecured debt rating of A1, baseline credit assessment (BCA) of aa3 and counterparty risk assessment of Aa2(cr) are also under review. However, short-term ratings of Prime-1 for short-term deposits and senior debts were affirmed and are not under review.

Following the legal settlement, Moody’s felt the necessity to review whether the company’s risk management system continues to be better in comparison to its competitors. Though, the settlement amount was beyond Moody’s expectations, it anticipates U.S. Bancorp’s earnings and capital position remains well poised to bear the impact.

The rating agency will be considering whether U.S. Bank’s BCA rating of aa3 is still justified. Also, the changes in board processes along with oversight and the ability to guide management in identifying and mitigating potential future risk will be reviewed.

U.S. Bancorp’s enterprise-wide risk governance, asset quality and operational risks will also be in focus of the review process. Notably, the company remains exposed to the risk of coming into light some other breach of law, which would lead to a violation of the two-year deferred prosecution agreement that the company had agreed upon with the regulators.

4. BB&T Corporation BBT in a bid to pass on tax reform benefits to its shareholders announced 13.6% dividend hike to 37.5 cents per share and a one-time dividend. Both capital actions have been approved by the Federal Reserve.

BB&T will pay 4.5 cents per share of one-time dividend on Mar 20 to shareholders of record as of Mar 6. This is in addition to the earlier announced quarterly dividend of 33 cents per share, which will be paid on Mar 1 to shareholders of record as of Feb 9.

The bank expects the dividend payment of 37.5 cents per share to be continued in the second quarter of 2018 as well. Further, BB&T intends to request for additional capital deployments including dividend raise while submitting the 2018 capital plan to the Fed for review.

Price Performance

Here is how the seven major stocks performed:
 

Company	Last Week	6 months
JPM	0.3%	27.0%
BAC	-0.9%	34.2%
WFC	-1.9%	14.1%
C	-0.7%	15.1%
COF	-2.9%	19.8%
USB	-2.4%	5.6%
PNC	-0.9%	24.9%

In the last four trading sessions, Capital One Financial Corp. COF and U.S. Bancorp were the major losers, with the banks’ shares declining 2.9% and 2.4%, respectively. On the other hand, JPMorgan JPM inched up 0.3%.

Bank of America BAC and JPMorgan were the best performers over the last six months, with their stock prices appreciating 34.2% and 27%, respectively. Further, shares of PNC Financial PNC surged 24.9%.

What’s Next?

Over the next five trading days, banking stocks are expected to continue performing in a similar manner.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
BB&T Corporation (BBT) : Free Stock Analysis Report
 
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Capital One Financial Corporation (COF) : Free Stock Analysis Report
 
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