Financials Weekly Notes: JPMorgan, Morgan Stanley, BNY Mellon And RBS

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Bank of New York Mellon

Bank shares had a rather lukewarm week this time around, with small gains seen over the beginning of the week due to the ECB’s efforts to improve the region’s economic condition being wiped out completely by growing fears of the situation in Ukraine on Thursday. The trend was evident across the equity market, as the S&P 500 reached 2,000 points for the first time ever on Monday, August 25, only to end the week at almost the same level as the prior week. Growing uncertainty over the unrest in Ukraine figured higher in investors’ minds than the positive impact of a better-than-expected Q2 growth figure of 4.2% for the U.S. economy. [1] An improving job situation in the country was also unable to alleviate fears of global repercussions of an armed conflict between Russia and Ukraine.

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

Morgan Stanley

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Morgan Stanley (NYSE:MS) is reportedly looking to build and operate a compressed natural gas (CNG) export facility – making the investment bank one of the first companies to do so in the U.S. [2] The move by the bank comes as a surprise given the increasing pressure on banks by the government to exit the physical commodities trading business. Although Morgan Stanley and Goldman Sachs are the only two banks in the country that are permitted to own and run infrastructure for the manufacture, storage and operation of physical commodities, this move appears to contradict Morgan Stanley’s decision to sell its global oil business to Rosneft earlier this year (see Regulator Pressure Causing Goldman, Morgan Stanley To Scale Back Physical Commodities Businesses), which was seen as a step by the bank to fall in line with regulators. Notably, Morgan Stanley’s physical commodities business already includes a gas and power unit as well as a metals unit besides the oil business.

We maintain a $38 price estimate for Morgan Stanley’s shares, which is about 10% ahead of the market price. This represents a market cap of just under $75 billion for the investment bank. We estimate revenues of $34.5 billion for Morgan Stanley in 2014, and EPS of $2.44.

See our full analysis for Morgan Stanley

JPMorgan

The FBI launched an investigation into a targeted cyber-attack on JPMorgan (NYSE:JPM) and at least four other banks last week, after it was found that hackers gained access to these banks’ servers. [3] There is, however, no clarity on how much data the hackers gained access to in the process, with JPMorgan commenting that it has yet to see any unusual activity which can be linked to the attack. For its part, the country’s largest bank is working towards strengthening its network further, and will contact clients affected by the breach once they have more information about the breach.

JPMorgan shares gained slightly over the week to close at $59.45. We maintain a price estimate of $65 for the bank’s shares – nearly 10% higher than the Friday close. This points to a market cap of $245 billion for JPMorgan. We estimate that the banking giant will report EPS of about $5.50 for the year, on revenues of just under $95 billion.

See our full analysis for JPMorgan’s stock

Bank of New York Mellon

BNY Mellon (NYSE:BK) is facing heat from the Argentine government as well as investors in the country’s debt offerings for failing in its duties as the trustee. The global custody bank has refused to disburse the $539 million in interest payments which it is holding on behalf of Argentina pending a U.S. court verdict. In retaliation, Argentina revoked BNY Mellon’s rights as a trustee and is looking to appoint the state-run Banco De La Nación Argentina as the financial intermediary. The country has also threatened to sue BNY Mellon if the bank does not return its money soon. At the same time, a group of investors who own €1.3 billion ($1.7 billion) of restructured Argentine bonds filed a lawsuit against the bank in London for their share of the interest payment – claiming that their euro-denominated bonds are outside the jurisdiction of U.S. courts.

We value BNY Mellon’s shares at $37, slightly below the market price – indicating a market cap of $42 billion. Our analysis of the bank shows an estimated EPS of $2.42 for the year on revenues of almost $15 billion.

See our full analysis for BNY Mellon

RBS

The last remaining lawsuits by the FHFA against HSBC (NYSE:HBC), Nomura and RBS (NYSE:RBS) over faulty mortgages is finally set to begin in late September, with a U.S. court deciding to quash the banks’ appeal to dismiss the lawsuits. [4] The FHFA had filed lawsuits against 18 global financial institutions in 2011, seeking damages for the losses incurred by government-sponsored enterprises Fannie Mae and Freddie Mac from mortgages mis-sold to them by the banks. Over the years, all financial institutions besides these three have settled with the FHFA. RBS, which is named in the lawsuit against Normura, partially settled its differences this June. [5]

We believe that these three banks will likely settle with the FHFA over coming months. The potential settlement represents a downside to our $0.53 estimate for RBS’s EPS this year from revenues of $32 billion. We maintain a $13 price estimate for RBS shares, which is slightly higher than the Friday close.

See our full analysis for RBS

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Notes:
  1. Q2 2014 GDP, U.S. Bureau of Economic Analysis (BEA), Aug 28 []
  2. Exclusive: Morgan Stanley plans natural gas export plant in new commodities foray, Reuters, Aug 29 2014 []
  3. FBI Probes Possible Hacking Incident at J.P. Morgan, The Wall Street Journal, Aug 28 2014 []
  4. HSBC, Nomura lose bid to avoid U.S. agency’s mortgage lawsuits, Reuters, Aug 28 2014 []
  5. FHFA Announces Settlement with RBS, FHFA Press Releases, Jun 19 2014 []