Today's Market: Banking, Insurance And Government Moving Financials

Includes: BAC, BBT, JPM, PRU, RF
by: Matthew Smith

This week will see a lot of the "old" economic news trickle out due to the government reopening. This will keep the government in the spotlight throughout the week, but probably to a lesser extent than this morning. We say this because there are two tentative deals regarding settlements between the banks JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC) and federal regulators that could total almost $20 billion. A third potential case, this time brought against one of the regulators by a financial institution will be dropped as Prudential Financial (NYSE:PRU) will simply accept its designation as systemically important.

The fines are huge figures to be sure, but we suspect that they could boost the financial sector as a whole, including regionals such as Regions Financial (NYSE:RF) and BB&T (NYSE:BBT) - even though they have disappointed with their overall performances recently.

Chart of the Day:

Why are we bullish on the regional and smaller banking names, too? Take a look at the Nasdaq Bank Index and it becomes pretty clear. It appears that a breakout is underway and earnings across the sector seem to be picking up.

(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • Existing Home Sales (10:00 a.m. EST): Est: 5.3 million
  • Crude Inventories (10:30 a.m. EST): Est: N/A

Asian markets finished higher today:

  • All Ordinaries -- up 0.57%
  • Shanghai Composite -- up 1.62%
  • Nikkei 225 -- up 0.91%
  • NZSE 50 -- up 0.92%
  • Seoul Composite -- up 0.03%

In Europe, markets are trading mixed this morning:

  • CAC 40 -- down 0.31%
  • DAX -- down 0.16%
  • FTSE 100 -- up 0.03%
  • OSE -- up 0.52%

Big Settlements Coming in Banking Sector ...

This morning investors get news that both JP Morgan and Bank of America are close to settlements with the government that could see a significant amount of their litigation liabilities wiped away. To be clear though, in JP Morgan's case their potential deal will not clear any potential criminal prosecution in the future so that is certainly something to keep an eye on. As it stands right now, JP Morgan should settle their mortgage related cases with the Justice Department, New York Attorney General and the Federal Housing Finance Agency for an amount in the $13 billion neighborhood. It is a big number, but well within the parameters of the $20 billion+ already set aside by the company for litigation purposes.

JP Morgan shares have lost their premium with all of the government regulators coming after them, however as they reach settlements watch the premium factor reinflate. This is a $60/share stock right now trading below where it should be.

(Click to enlarge)

Source: Yahoo Finance

Bank of America is also in the news as the Federal Housing Finance Agency is said to be seeking $6 billion from the company for their mortgage backed security sales to Fannie Mae and Freddie Mac. The settlement would cover civil charges and if $6 billion does end up being the final figure, it would be 50% higher than the $4 billion JP Morgan is set to pay the FHFA as part of its $13 billion comprehensive settlement.

Regional Banks Mixed Though ...

The big banks putting a lot of these litigation headaches behind them will be good for the industry as a whole, but could pose some risks for the regionals. We are still bullish the regional names, but do recognize that they themselves have some underlying issues which we hope to correct themselves in the coming quarters.

Last week we were pleased to see Regions Financial once again move north of $10/share as investors rotated back into the financials. It has been one of our top picks in the sector due to its continued cleaning of the balance sheet and improved margins, but more will have to be done in the future. We thought that mortgage origination/refis would be a potential bright spot, however after seeing BB&T's results this past week we have some doubts about whether that segment can deliver the growth for the regionals we once thought. Based off of what we read from the company's conference call (located here) the bank will focus on managing expenses better, much like Regions has. This should serve BB&T well, especially as the yield curve moves to favor the banks in either the 1st or 2nd quarter of 2014. The financials are an area investors need to be right now, especially in the premier names - both nationally and regionally.

Our view is BB&T is a buy on pullbacks. The closer one can get the shares to $30/share the better, because long-term this name will prove to be a winner and a huge earnings and dividend generator.

(Click to enlarge)

Source: Yahoo Finance

One Case The Government Will Avoid ...

Prudential Financial announced that they will drop their fight to oppose the government's labeling them a systemically important institution. The company will accept the tag and the added capital requirements and oversight by the Federal Reserve rather than ask a U.S. court to overturn the designation. Our view was that it would have been a tough case to argue, let alone win and the company is probably taking the right path at this time. A few years down the road the tag might be dropped, but right now is most certainly not the time to fight regulators, as Jamie Dimon has shown us.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.