Financials Weekly Notes: Citigroup, BofA and Deutsche Bank

Bank shares started the week on a weak note, with concerning economic trends in the U.S. as well as Germany hurting investor sentiments. While U.S. home sales figures for the month of September did not improve as much as expected, the U. S. Services PMI (Purchasing Managers’ Index) also fell to a six-month low of 57.3. ^[1] At the same time, Germany’s economic data indicated deflation – casting doubts about the pace of recovery in Europe as a whole. But investors remained hopeful about a positive outcome from the Federal Reserve’s two-day policy meeting over Tuesday and Wednesday (28-29 October), and when the central bank announced plans to wind-up its asset purchase program, share prices across sectors saw a notable jump. ^[2] Bank shares outperformed the larger equity market over the latter part of the week as the Fed’s move was seen as precursor to an increase in benchmark interest rates in early 2015 – something that will help ease the growing pressure on banks’ net interest margins next year. The KBW Bank Index gained roughly 3% over the week through Thursday.

Citigroup

Citigroup (NYSE:C) restated its results for the third quarter on Thursday, October 30, to include an additional $600 million it is setting aside as legal reserves. ((Citigroup Adjusts Third Quarter 2014 Financial Results, Oct 30 2014)) The reported legal charge is most likely aimed at covering settlement costs from the ongoing talks over the bank’s involvement in manipulating forex rates. The move cuts the bank’s net income for Q3 2014 from the earlier reported figure of $3.4 billion to $2.8 billion, and also shaves off 8 basis points (0.08%) from its Common Equity Tier 1 (CET1) capital ratio to bring it to 10.66%.

The globally diversified banking group is also reportedly making sweeping changes in the top management of its Mexican banking subsidiary, Banamex. ^[3] Banamex has been under tight scrutiny from investors and regulators since February, when the bank announced that it had lost $400 million due to accounting fraud. Citigroup has already replaced 7 of its 22 top executives in Banamex, and is likely to shuffle more of them over coming months.

• Trefis has a $58 price estimate for Citigroup’s shares, translating into a $176 billion market cap. This is about 10% ahead of the market price between $51-53 seen over the week.
• We estimate the company’s FY 2014 revenues to be around $78.5 billion for an earnings per share of $3.59, compared to a consensus of $3.48 according to Reuters

See our full analysis for Citigroup

Bank of America

Bank of America’s (NYSE:BAC) multi-billion dollar mortgage settlement with regulators has reportedly been stalled due to disagreements among the four SEC commissioners over certain clauses included in the deal. ^[4] The bone of contention here is the waiver of three penalties – namely a ban on managing mutual funds, restrictions on raising money for private companies, and increased SEC oversight when the bank issues its own shares or bonds. The disagreement here is seen as a political stand-off, as two Democratic commissioners are opposed to the waiver while the two Republican commissioners have already signed off on the deal.

• Trefis has an $18.50 price estimate for Bank of America’s shares, translating into a $195 billion market cap. This is about 10% ahead of the market price of around $17 seen over the week.
• We estimate the company’s FY 2014 revenues to be $87 billion for an earnings per share of $0.44, compared to a consensus of $0.47 according to Reuters

See our full analysis for Bank of America’s stock

Deutsche Bank

Deutsche Bank’s (NYSE:DB) shares took a hit over trading on Wednesday and Thursday after the German banking giant reported a loss for the third quarter of the year, when it set aside another €894 million ($1.14 billion) in reserves to cover its swelling legal backlog (see Legal Costs Drag Down Deutsche Bank’s Q3 Results). The one-time charge hurt results for what was seen as a lukewarm operating quarter for the bank. The bank’s shares lost more than 5% of their value since they reached a high of almost $32.50 at the end of trading on Tuesday.

Deutsche Bank also announced several changes to its management team, including plans to replace CFO Stefan Krause with the Goldman Sachs partner Marcus Schenck next May. ^[5] Krause will take on a newly created role of Head of Strategy and Organisational Development in the banking group.

• Trefis has a $41 price estimate for Deutsche Bank’s shares, translating into a $60 billion market cap. This is more than 30% ahead of the market price between $30-32 seen over the week – something we largely attribute to the sharp selling in the bank’s shares over recent weeks following concerns about the bank’s legal overhang.
• We estimate the company’s FY 2014 revenues to be $42.5 billion for an earnings per share of $2.52, compared to a consensus of $2.97 according to Reuters

See our full analysis for Deutsche Bank

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1. U.S. Services PMI, Trading Economics [↩]
2. Federal Reserve issues FOMC statement, Federal Reserve Website, Oct 29 2014 [↩]
3. Banamex Overhauls Management, The Wall Street Journal, Oct 27 2014 [↩]
4. BofA Mortgage Settlement Stalls Over SEC Political Fight, Bloomberg, Oct 27 2014 [↩]
5. Deutsche Bank expands Management Board, Deutsche Bank Press Releases, Oct 28 2014 [↩]