Banks Stocks Remain Under Dark Cloud

NEW YORK ( TheStreet) --With the bank earnings season complete, investors now await fresh catalysts for the sector. There are plenty on the horizon, though not all of them are positive for bank stocks.

In a report Wednesday, Deutsche Bank analysts identified several catalysts for the industry and for specific stocks as well.

One looming threat for the industry in the immediate term is the potential downgrade of Moody's ( MCO), which could cost Bank of America ( BAC), Citigroup ( C), Goldman Sachs ( GS), JPMorgan Chase ( JPM) and Morgan Stanley ( MS) as much as $20 billion.

Analysis compiled by Nomura shows that a worst case ratings-based cost would represent less than 2% of banks' available capital. Still, the downgrades would be a further reflection of the challenging environment that confronts banks, according to the analysts.

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Potential legal action from mortgage bondholders over the $25 billion mortgage settlement between the industry and the states could be another catalyst, according to Deutsche. Investors in mortgage-backed securities have objected to terms of the settlement that allow banks to get partial credit for reducing the principal on loans owned by investors.

There could also be more clarity on regulations that seek to restrict a bank's exposure to other firms and governments as well as a new rule from the Consumer Financial Protection Bureau requiring lenders to verify a borrowers' ability to pay a mortgage.

Banks are also seeking more detailed feedback from the Fed on the annual stress tests. Banks have complained that the Fed's assessment of possible losses in a hypothetical adverse scenario differ significantly from their own and have asked for more information on the regulator's models.

The feedback might help banks and investors understand how the Fed evaluates risks for different banks.

Later in the year, the industry also could see more rules on overdraft fees as well as a verdict on the interchange-litigation case that is expected to cost Bank of America, Citigroup and 11 other large banks billions of dollars.

Here are some catalysts facing the biggest banks in the near term, as identified by Deutsche Bank.

Bank of America

Bank of America will hold its annual shareholder meeting on May 9, which could serve as a potential catalyst for the stock. It also begins its next phase of expense reduction- Project New BAC phase II- in the third quarter, the details of which is expected to be disclosed in the second quarter.

Later in the year, we could hear more from the bank about its mortgage-to-lease program and plans to sell its international wealth management business. On the legal front, developments on the MBIA-litigation over mortgage-backed securities and results from New York Attorney General Eric Schniderman's request to intervene in the $8.5 billion settlement with Bank of New York Mellon could be further catalysts.


For Citigroup, the primary catalyst in the immediate term would be a resubmission of its capital return request in June and the sale of its stake in the Morgan Stanley Smith Barney joint venture. Morgan Stanley has the option to buy 14% in the venture in May, but can choose to buy the entire stake upfront.

Sales of assets in Citi Holdings particularly OneMain Financial could also help lift shares.

JPMorgan Chase

JPMorgan is best positioned to benefit from lower expenses in second quarter due to lower litigation expenses. Later in the year, MBIA securities litigation, results of OCC investigation into credit card robosigning could impact the stock.

Wells Fargo

Wells Fargo is also poised to benefit from a material decline in expenses thanks to the elimination of merger and integration expenses and ongoing efficiency initiatives. Deutsche expects expenses to decline $500 million-$700 million in the second quarter.

--Written by Shanthi Bharatwaj in New York

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