U.S. Banking Weekly Notes: JPMorgan, Citigroup and Morgan Stanley

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It was a mixed week for bank shares, as the notable gains they made over the first four days were erased quickly over trading on Friday, May 15. Investors started the week on an optimistic note thanks to a better-than-expected jobs report for the month of April released at the end of the previous week. Improving confidence in the European economies also helped boost share prices across sectors, and this helped the S&P 500 post record highs on Thursday. But investor sentiment took a hit towards the end of the week as a string of economic indicators raised concerns about the pace of growth in the U.S. While retail sales and producer data was underwhelming, the country’s industrial production figure for the month of April unexpectedly declined. Also, consumer confidence levels dropped to a seven-month low.

The news did not have a notable impact on the larger equity market, though, as investors concluded that the Fed will compensate for the slowing economic momentum by maintaining the interest rates at their current record low. This conclusion did not bode well for the banks, who have been struggling to grow their revenues over recent years, and this triggered a sell-off in bank shares. As a result, the KBW Bank Index lost all the value it gained from Monday through Thursday on Friday – ending the week at the same level as the previous period.

JPMorgan

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JPMorgan (NYSE:JPM) is adding a portfolio of mortgage servicing rights (MSRs) worth $45 billion from Ocwen to its own books. [1] The country’s largest banking group is acquiring the rights to service 266,000 performing mortgages owned by Fannie Mae – a move that will consolidate JPMorgan’s second-spot position in the mortgage servicing business with just under $1 trillion in MSRs – behind Wells Fargo (NYSE:WFC), which has $1.75 trillion in MSRs. Ocwen announced plans to sell the portfolio in early March, with the company being under strict scrutiny from investors and regulators over recent months for mishandling distressed borrowers. [2]

  • Trefis has a $67 price estimate for JPMorgan’s shares, translating into a $250 billion market cap. This is slightly ahead of the market price of $65-66 seen over the week.
  • We estimate the company’s FY 2015 revenues to be $103 billion for earnings per share of $6.15, compared to a consensus of $5.78 according to Reuters.

See our full analysis for JPMorgan

Citigroup

Citigroup (NYSE:C) has reportedly pulled the plug on its exclusive credit program which allowed some of its clients avoid the bank’s normal risk-management checks to make large bets in the currency market. [3] The program, called the “Alternative Credit Program,” targeted hedge funds and effluent clients seen as low risks due to their track records. But the $150 million in currency losses for Citigroup from the Swiss central bank’s unexpected move to remove the cap on the Swiss franc forced the bank to shutter the unit. Notably, the credit program was unique to Citigroup, with none of its rivals offering a similar service to clients.

  • 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 around $54 seen over the week.
  • We estimate the company’s FY 2015 revenues to be around $79.2 billion for an earnings per share of $5.24, compared to a consensus of $5.35, according to Reuters.

See our full analysis for Citigroup

Morgan Stanley

Morgan Stanley has finally confirmed the sale of its oil merchandising unit to Castleton. [4] Although financial details of the deal were not disclosed, reports over recent months suggest a figure around $1 billion. [5] Morgan Stanley had inked a deal with Rosneft in December 2013 to sell the unit which includes oil terminal storage agreements, inventory, agreements pertaining to physical oil, oil-related equity investments and freight shipping contracts, but the deal was blocked by federal regulators (see What’s In Store For Morgan Stanley’s Oil Merchandising Unit After Failed Rosneft Deal?).

  • Trefis has a $40 price estimate for Morgan Stanley’s shares, translating into a $79 billion market cap. This is about 5% ahead of the market price of around $38 seen over the week.
  • We estimate the company’s FY 2015 revenues to be $36 billion for earnings per share of $2.87, compared to a consensus of $2.89, according to Reuters.

See our full analysis for Morgan Stanley

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Notes:
  1. Ocwen to sell servicing rights on $45 billion loans to JPMorgan, Reuters, May 14 2015 []
  2. Ocwen Financial Corporation Provides Significant Updates, Ocwen Press Releases, Mae 2 2015 []
  3. Citigroup Closes Exclusive Credit Program Following Swiss Franc Losses, The Wall Street Journal, May 14 2015 []
  4. Morgan Stanley to Sell Global Oil Merchanting Business to Castleton Commodities International LLC, Morgan Stanley Press Releases, May 11 2015 []
  5. Castleton Emerges as Leading Bidder for Morgan Stanley Oil Business, The Wall Street Journal, Apr 14 2015 []