Bank Stock Roundup: Settlement, Restructuring Continues; Wells Fargo in Focus

Zacks Equity Research

Updated 12 February 2016 at 2:39 pm

Most of the stocks are trending lower on increased investors’ fears of a slowdown in the economy following weak economic data. Moreover, over the last five trading days, continued tumult in oil prices and persistent market volatility impacted the performance of banks.

Further, earlier this week, Standard & Poor's ("S&P") downgraded the credit ratings of some banks due to their huge exposure to energy loans. S&P expects rising loan losses for these banks over the next two years, despite a slight rebound in energy prices from the current level.

Efforts by banks to move past the legal issues pertaining to their shoddy malpractices and restructuring activities continued. The law enforcement agencies have also set to work to resolve such issues and avoid lengthy litigations.

(Read: Bank Stock Roundup for the week ending Feb 5, 2016)

Recap of the Week’s Major Developments:

1. S&P have downgraded the credit ratings of four U.S. regional banks by one level due to their huge exposure to energy loans. Notably, credit quality of such loans has worsened following the consistent decline in oil prices, which led to the downgrade in rating. These banks include BOK Financial Corp. BOKF, Comerica Inc. CMA, Cullen/Frost Bankers, Inc. CFR and Texas Capital BancShares Inc. TCBI.

For BOK Financial and Comerica, S&P’s long-term issuer rating was cut from A- to BBB+, while Cullen/Frost Bankers was downgraded by one notch to A- from A. Further, Texas Capital was lowered to BB+ from BBB- (read more: S&P Lowers Ratings on 4 Banks Leveraged to Energy).

2. Wells Fargo & Company WFC is set to shell out $16.2 million to customers as it reached an agreement to resolve claims over a kickback scheme with the now-defunct Owings Mills title company. The agreement filed in the U.S. District Court for Maryland, covers over 9,000 customers and awaits court approval.

The concerned class-action lawsuit was brought by borrowers from 2009 through 2014. The suit alleged that Genuine Title offered kickbacks to Wells Fargo loan officers. In return, the loan officers referred homebuyers to Genuine Title for closing services (read more: Wells Fargo to Pay $16.2M Over Genuine Title Kickback Suit).

3. U.S. Bancorp USB has been hit with a $10 million penalty by The Office of the Comptroller of the Currency (OCC) as the bank failed to correct shortcomings identified in the 2011 consent orders related to mortgage practices in a “timely fashion.” The OCC noted that the bank violated the 2011 consent order from Oct 1, 2014, through Aug 30, 2015.

On similar violations, the OCC imposed a penalty of $3.4 million on Banco Santander, S.A. Regarding the settlement, U.S. Bancorp spokesperson Dana Ripley stated "We are pleased to have this matter with the OCC resolved and remain committed to providing exceptional service to our residential mortgage customers.” (read more: Why U.S. Bancorp (USB) Faces $10M Fine by the OCC).

4. Wells Fargo is set to eliminate 581 employees in its mortgage operations as the company has been seeing reduced delinquencies and foreclosures. Wells Fargo spokesman Ruben Pulido said, “Delinquency and foreclosure rates for mortgage loans have declined to the lowest level in four years and are expected to continue to move closer to historical averages in the coming year.” Pulido noted that driven by such improvement, home lending servicing business functions including collections, foreclosure and bankruptcy, are witnessing decrease in overall volumes.

Also, the demand for mortgage financing has experienced “modest” improvements. Amid such a backdrop, considering current market conditions and customer needs, Wells Fargo is lowering staff “to better align with current volumes.” (read more: Wells Fargo Slashes 581 Jobs in Mortgage Operations).

5. KeyCorp.’s KEY deal to acquire First Niagara Financial Group Inc. FNFG seems to be in trouble again. After the Federal Reserve extended the public comment period by a month in December 2015, Governor Andrew Cuomo has now officially urged the federal regulators to block the merger deal. The written statement by Governor Cuomo raised significant anti-trust concerns that the proposed acquisition of First Niagara by Key Bank would have a devastating impact on consumers and businesses.

The stock-and-cash deal, worth approximately $4.1 billion, was announced in October 2015. KeyCorp expects the deal to be accretive to earnings in 2017, excluding merger and integration costs of approximately $550 million. Also, the company anticipates saving $400 million in annual expenses (read more: Why KeyCorp-First Niagara Merger Deal is Facing Opposition).

Price Performance

Overall, the performance of bank stocks remained gloomy. Here is how the seven major stocks performed:

Company	Last Week	6 months
JPM	-8.1%	-21.1%
BAC	-13.8%	-36.9%
WFC	-5.6%	-19.9%
C	-12.2%	-39.2%
COF	-4.4%	-24.8%
USB	-6.6%	-16.5%
PNC	-6.5%	-19.2%

In the last five trading sessions, Bank of America Corp. BAC and Citigroup Inc. C were major losers, with their shares decreasing 13.8% and 12.2%, respectively. JPMorgan Chase & Co. JPM also declined 8.1%.

Over the last six months, Citigroup was the weakest performer, with its shares declining 39.2%. Also, BofA and Capital One Financial Corp. COF shares fell 36.9% and 24.8%, respectively.

What's Next in the Banking Universe?

Over the next five trading days, performance of banking stocks will likely continue in a similar manner unless anything surprising happens.

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Bank Stock Roundup: Settlement, Restructuring Continues; Wells Fargo in Focus