Bank of America Corp, Citigroup: Big Banks In Hot Water
This is a bidnessetc.com article.
Bidness Etc reviews big banks and what experts have to say on the threat they pose to the economy.
In the past six months, XLF Select Sector Bank Index lost around 2%, Citigroup Inc (NYSE:C) shed 0.5% of its value, while JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) witnessed a surge of around 1% and 6%, respectively. With the dips and surges throughout the time period, the recent uplift in Bank of America stock represents the positive sentiments around the interest rate hike.
Financial Times reported former CEO of Citigroup, John Reed’s statement that banks in the US once enjoyed the operations of a universal bank. With the cancellation of Glass-Steagall Act, banks had the privilege to operate in a way that they met the financial needs of investors and customers. Banks moved past the regular borrowing and started tapping capital markets; efficiency of transactions increased as costs went down. However, in the light of the financial crisis, authorities implemented regulatory requirements that involved strict rules and led to the downsizing and restructuring of banks.
The Dodd-Frank Act was implemented and banks were tested on their capital and liquidity levels. The Federal Reserve’s stress test — Comprehensive Capital Analysis and Review (CCAR) — was introduced for banks. Banks with assets over a certain amount are tested for capital levels and internal controls. The stress test is designed in a way to ensure that the banks can survive a severe economic downturn, and if that is the case, they are then allowed to increase their dividends and conduct share repurchase schemes.
Former Florida governor and presidential candidate, Jeb Bush believes that the capital requirements for large banks should be increased in order to reduce the threats they pose to the US economy. Capital cushions allow banks to take on more risks and conduct activities that they would not be able to with low capital reserves. It is important to note that the capital levels of banks remain low, in current times. According to the International Accounting Standards (IAS) study, for every $100 in assets, large institutions have less than $5 in equity.
Bidness Etc believes that raising capital requirements for banks would only benefit the financial institutions and the system that revolves around them. Banks can manage their operations in different segments, which can prove to be more manageable and less risky. Consolidation has become a common practice observed in the industry of late. Citigroup has cut down the number of assets it manages; the bank aims to focus on affluent customers by shrinking the size of its operations in certain locations.
Dividing the risk can also render the regulatory requirements that banks find hard to cope with; regulators are likely to simplify their requirements for more manageable risk.
An interest rate hike is equally anticipated by banks and investors alike; the likelihood of the steepening yield curve is higher with an improvement in the rate situation. Banks are likely to benefit from the difference in long-term and the short-term rates. The Federal Reserve has signaled that a lift-off in rates in the upcoming meeting in December might still be on the cards. Banks’ stocks have benefited from the announcement; SPDR S&P Bank ETF is up around 3% since the start of the month.
According to the data on Bloomberg, majority of the analysts covering Citigroup and Bank of America remain bullish on both stocks. 29 out of 35 analysts recommend a Buy on Citigroup, whereas 27 out of 40 analysts advocate a Buy on Bank of America stock. The 12-month mean target prices for the two stocks are $63.72 and $18.87, respectively.
Bank of America and Citigroup stocks closed down over 2% yesterday.