Financials Weekly Notes: U.S. Bancorp, BofA, Goldman and RBS
Bank shares saw significant fluctuations in their prices this week, with the sharp decline over the beginning of the week being more than made up for by a jump in prices over the latter half of the week. The continuing decline in crude oil prices remained at the top of investors’ minds this week, with shares across sectors losing value as a direct consequence on Monday, December 15, despite strong U.S. industrial production data released that day. While investors remained cautious of the equity market on Tuesday, the largest U.S. banks took a hit after the investment bank Jefferies reported a loss for the quarter ended November. [1] Top management at some of the country’s largest banks had already lowered investor expectations from their trading units last week, but Jefferies’ results presented a bleaker picture of the bond trading market for the last quarter of the year.
Things began to look upbeat on Wednesday when the Federal Reserve reinforced investor sentiments of a steady improvement in the country’s economic outlook as a part of its Federal Open Market Committee (FOMC) meeting. [2] The Fed also eased concerns of a rapid increase in interest rates early next year by committing to “be patient in beginning to normalize the stance of monetary policy.” More good news in the form of better-than-expected employment figures and the highest consumer confidence figures since November 2007 helped shares across sectors jump on Thursday, allowing the market to register its largest two-day gains in more than three years.
U.S. Bancorp and Bank of America
U.S. Bancorp (NYSE:USB) and Bank of America (NYSE:BAC) have been sued by the National Credit Union Administration Board (NCUAB) for failing their duties as trustees for mortgage-backed securities (MBSs) that defaulted during the economic downturn of 2008. ((BofA Sued by Credit Union Regulator for MBS Oversight, Bloomberg, Dec 17 2014)) The NCUAB – a regulator that oversees federal credit unions – is suing the two banking groups on behalf of five credit unions it liquidated over MBS worth $5.8 billion which were spread across 99 trusts.
- Trefis has a $44 price estimate for U.S. Bancorp’s shares, translating into an $79 billion market cap. This is around the bank’s current market price. We estimate the company’s FY 2014 revenues to be around $19.8 billion for an earnings per share of $3.07, compared to a consensus of $3.10 according to Reuters
- 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 U.S. Bancorp
Goldman Sachs
Goldman Sachs (NYSE:GS) has filed a request with the SEC to launch as many as 11 exchange-traded funds (ETFs) (see Goldman Continues ETF Market Push With Proposal To Launch 11 New ETFs). Goldman has been keen on entering the rapidly growing ETF industry for several months now, with the investment banking giant also filing a request in September to launch active equity ETFs. The bank was also looking to acquire the ETF provider IndexIQ in October – a firm that was ultimately acquired by New York Life Insurance.
- Trefis has a $188 price estimate for Goldman’s shares, translating into an $85 billion market cap. This is roughly around the market price of between $182-192 seen over the week.
See our full analysis for Goldman Sachs
RBS
The Royal Bank of Scotland Group (NYSE:RBS) announced plans to sell a £4.8 billion ($7.5 billion) portfolio of Irish real estate loans to Cerberus Capital Management in a move aimed at getting rid of the poor quality loan portfolio off its balance sheet. [3] The high risk of default on loans in this portfolio is evident from the fact that RBS has agreed to sell it for £1.1 billion ($1.7 billion) – a discount of almost 77% on the face value of the loans. The deal is expected to close in the first quarter of 2015.
- Trefis has a $13 price estimate for RBS’s shares, translating into a $41 billion market cap. This is roughly 10% ahead of the market price of around $12 seen over the week.
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- Earnings Outlook Poor for Banks as Jefferies Swings to Loss, The Wall Street Journal, Dec 16 2014 [↩]
- Federal Reserve issues FOMC statement, Federal Reserve Website, Dec 17 2014 [↩]
- RBS Sells Property Loans to Cerberus for $1.7 Billion, Bloomberg, Dec 16 2014 [↩]