Central Banks' Coordinated Effort Provides Temporary Relief to Major US Banks

Strategic Insights -

The coordinated effort by central banks to reduce the cost of U.S. dollar funding has provided a short-term boost to major U.S. banks such as Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup. However, experts believe that this move will not have a lasting impact on the long-term outlook for these institutions. According to Paul Miller, analyst at FBR Capital Markets, the concern lies not in the individual country-by-country loan exposures but in the potential effect of a European recession on the U.S. economy.

Key Takeaways:

  • The coordinated effort by central banks has provided a short-term boost to Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup, leading to a rally in their shares.
  • Citigroup and JPMorgan shares were up by more than 6% on Wednesday morning, while Bank of America shares were up by roughly 5.5%.
  • Wells Fargo shares were up by 4.78%, the least internationally focused of the largest four U.S. banks.
  • The central bank moves have addressed liquidity issues but have not addressed the growth concerns, as highlighted by Paul Miller.
  • The European recession would have a significant impact on the U.S. economy, with the potential for a 12% unemployment rate, as emphasized by Paul Miller.
  • Long-term funding remains a concern for Europe, as stated in a note from Keefe, Bruyette and Woods.
  • The actions by the central banks do not address solvency issues in European sovereigns or European banks, and should not directly relieve the long-term funding costs on European sovereigns.
  • Analysts such as Marty Mosby and Richard Bove believe that the liquidity injection is a positive step, but a guarantee of private banks' obligations in Europe would be necessary for long-term stability.
  • The banks' underlying fundamentals are currently strong, with Richard Bove stating that they should be able to regain price stability reflecting their fundamentals.

Statistics:

  • Citigroup shares were up by 6.2% on Wednesday morning, with a closing price of $38.29.
  • JPMorgan shares were up by 6.7% on Wednesday morning, with a closing price of $39.99.
  • Bank of America shares were up by 5.5% on Wednesday morning, with a closing price of $17.15.
  • Wells Fargo shares were up by 4.78% on Wednesday morning, with a closing price of $34.21.
  • The European unemployment rate has been steadily increasing, with a current rate of around 10%.
  • A European recession would have a significant impact on the U.S. economy, with potential job losses and a 12% unemployment rate.

Sources:

  • TheStreet
  • FBR Capital Markets
  • Keefe, Bruyette and Woods
  • Guggenheim Securities
  • Rochdale Securities
  • Twitter (@dan_freed)