Bank of America serves about half of the U.S. population with its mortgages, and it is trying to simplify its business dealings. By selling the residential mortgages, it is achieving one of its aims in this regard-selling assets. It recently sold a division that served the purpose of helping third-party home lenders, furthermore, which also demonstrates this strategy. The bank also plans to simplify by cutting costs and paying back its debt. It has to do something to recoup its losses. Recently, the company has experienced a run of bad luck, losing a substantial amount of money in its mortgage business. In addition, it has bought back soured loans from the government.
Bank of America is not the only bank that is attempting strategies like this, and it is not the only one feeling the pressure from regulatory, customer-service, and capital standpoints. In the current housing environment, financial institutions have to find ways to reduce the amount of home loans they administer. In addition, they need to reduce their overall servicing portfolio. In many cases, this situation is the fault of the banks themselves, as many of them have engaged in improper practices like signing off on foreclosure proceedings without proper documentation. This sparked numerous investigations in addition to the problems that I discussed previously. Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C) were among the other banks guilty of this wrongdoing. These stocks will likely struggle to bounce back from these events.
Following the announcement that it was divesting itself of a number of assets, Bank of America shares rose slightly. Whether or not this can be directly attributed to the sale is unclear. The deal gives Nationstar-which will service the loans-and Newcastle-which invested $44 million for the right to 65 percent of the monthly cash flow from the mortgage services-the rights to service loans in government-sponsored enterprise pools.
This is not the first deal of its kind that Nationstar has entered. In fact, the deal with Bank of America is relatively small in comparison to others. The company is trying to seize more shares from traditional banks that are feeling the pressure to scale back in the mortgage business.
It must be noted that this deal represents only a very small portion of Bank of America's mortgage-servicing portfolio. At this point, Bank of America does not wish to disclose how much of its mortgage-servicing portfolio is left on its books. I think that it is safe to assume, however, that it is a substantial amount. It may want to consider selling more though, as the MSRs that it has left count negatively towards its total capital ratio. These may, therefore, hinder the bank from reaching its capitalization goals. In general, therefore, things are not looking good for this banking stock. Most of its main competitors are in a similar situation though. Investors can at least take comfort in the fact that the bank is doing something about it.
Citigroup seems to be in a decent position compared to some of its competitors. It recently launched a new system of Renminbi Letters of Credits for Importers and Exporters to offer its Latin-American clients a trade services solution suite available in RMB. This will facilitate Latin-America's trade with China and optimize the entire process. I see this as an important move for Citigroup, as it marks the company as an innovator in the area of banking with a focus on emerging markets. This move will make a substantial difference to how investors and potential investors will view the stock, and as a result, I expect it to be going up.
Wells Fargo recently appointed Kent Christian as the president of FiNet, the company's financial network. I believe that this is a good time for the company to start focusing on its independent brokerage business, and it believes this appointment will help it. This is in the best interests of the business. Now is the best time for the company to be thinking about how to expand this aspect of its functioning, as the potential for growth is extremely high at present. All-in-all, I feel that it is a sound business strategy that will serve the company well. It may not have much impact on the stock, but it will help offset some of the other problems facing the company.
JPMorgan is facing a lot of problems at the moment. In fact, as far as bank stocks go, I believe that it is one of the least desirable options at present. The regulators in charge of monitoring the bank's activities have come under close scrutiny following the $2 billion loss the company reported. The loss could get as high as $5 billion before very long. This has led many investors to believe that the bank has simply been too reckless in its response to the financial crisis so recently experienced. This shows the intensity of JPMorgan's problems, and I expect this to continue pulling the stock down.
A bank stock that I would definitely back is U.S. Bancorp (USB). The company is aware that in order to gain clients, it needs to make banking solutions far easier for them. As a result, it has recently released a number of banking applications that can be used from the mobile devices of its clients. This will increase the interest that people have in using the bank and its services. In addition, it will also increase the amount of merchant transactions that pass through the bank, increasing the bank's revenue in the process. As far as strategies go, this is the best one for banks to adopt in the current environment, and I expect U.S. Bancorp stock to be rising.
Bank of America certainly is not in the best of positions, as it is selling off its residential mortgages and working to rebound from past issues. It is simplifying though, and this is a reason for optimism with the company. In the long run, this will probably prove to be a good move, and as I mentioned, it is comforting that the company is taking action to remedy its problems. For the moment though, I believe the stock will maintain a stable price at best and will still face some losses before things can get better.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.