Financial Weekly Notes: BofA, Morgan Stanley & Barclays

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Bank stocks did not see much movement this week, with investors remaining cautious after share prices sank late last week over growing concerns of a slowdown in developing countries coupled with lukewarm U.S. unemployment figures. Small corrections in bank share prices over the beginning of the week were wiped out when the Fed announced on Wednesday that it will cut its asset purchase program further in February. [1] This marks the second round of cuts in the financial regulator’s economic stimulus program, which was trimmed from $85 billion a month to $75 billion a month beginning January.

Below are some significant events pertaining to major banks that were witnessed last week.

Bank of America

Bank of America’s legal liability from its Countrywide acquisition was raised several notches this week when the Department of Justice (DoJ) almost tripled the penalty it sought from the diversified banking group to $2.1 billion. [2] The DoJ had been pushing for a fine of $863.6 million for Countrywide’s mortgage-related fraud based on the losses incurred by the government-sponsored enterprises Fannie Mae and Freddie Mac from the mis-sold mortgages. But the new fine is calculated off the profits made by Countrywide through the malpractices.

This development potentially multiplies the amount Bank of America will shell out to close the long list of lawsuits filed by regulators and investors over Countrywide’s faulty operations in the years leading to the economic downturn of 2008. Bank of America acquired Countrywide at the peak of the downturn, and the acquired business has been the single biggest source of legal worries for the bank since.

See our full analysis for Bank of America

Morgan Stanley

Morgan Stanley sold its commercial real-estate loan servicing unit in Europe to London-based Mount Street earlier this week. [3] Morgan Stanley Mortgage Servicing oversaw roughly £4.5 billion ($7.4 billion) in commercial mortgages – more than the £3.5 billion ($5.8 billion) managed by Mount Street before the deal was signed.

The move comes as the latest step by the investment bank to trim its overseas presence to focus on its operations in the U.S. Morgan Stanley has kept itself busy consolidating its international units across business lines over the last few quarters to cut costs and meet the 10% return on equity (RoE) target it set for itself in late 2012.

See our full analysis for Morgan Stanley’s stock

Barclays

Barclays is reportedly cutting a total of 800 jobs in its investment banking and corporate banking divisions as a part of its organization-wide restructuring plan dubbed Transform. [4] An equal number of jobs are being slashed in each of the divisions. A bulk of the jobs are related to back-office operations, and many jobs will be eliminated as the reorganization will make them redundant.

Barclays reduced its headcount by 3,700 over 2013 in a bid to cut £1.7 billion ($2.8 billion) in annual recurring costs. With soft economic conditions continuing to put pressure on the U.K.-based banking group’s revenues, expense management has emerged as the best option for Barclays to improve its profitability.

See our full analysis for Barclays

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Notes:
  1. Federal Reserve issues FOMC statement, Federal Reserve Website, Jan 29 2014 []
  2. U.S. seeks $2.1 billion from Bank of America in fraud case, Reuters, Jan 30 2014 []
  3. Mount Street Acquires Morgan Stanley’s CMBS Servicing Business, Bloomberg, Jan 30 2014 []
  4. Barclays cuts 400 jobs in corporate banking, Reuters, Jan 30 2014 []
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