Bank stocks could rise as forex cloud lifts

May 26 08:30 2015

When a company cops to criminal charges, it might as well wave a bright red flag warning investors to stay as far away as humanly possible. But the nation’s largest banks could buck that trend. Their guilty pleas this week tied to charges of market manipulation — whileembarrassing for the industry and the nation — hardly suggest the companies, or their stocks, are on the decline, experts say. In fact, the opposite is true.Citigroup-building-in-New-007

Large banks like Citigroup and JPMorgan Chase could see their stocks rise in the coming months, especially if they can prove they have put the bulk of their regulatory and legal woes behind them. “It’s a black mark and a sad day for the banking industry,” said CLSA banking analyst Mike Mayo. But it’s also “the ninth inning for the major bank fines,” Mayo said of the $5.5 billion in fines tied to the guilty pleas.

On Wednesday, four major banks — Citigroup, JPMorgan, Barclays and Royal Bank of Scotland — pleaded guilty to felony charges for conspiring to manipulate currency prices, including U.S. dollars and euros. UBS pleaded guilty to a lesser wire fraud charge. Traders, who dubbed themselves “The Cartel,” were accused of rigging foreign exchange prices from December 2007 to January 2013. Bank of America was fined $205 million for failing to catch traders who had discussed the possibility of agreements around manipulating currency prices.

But the fines had very little impact on bank stocks. One reason: The banks had already warned that the forex anvil would drop. The other reason is that banks have increasingly vowed to put their naughty ways behind them. Last November, JPMorgan shocked investors when it added a massive $2.4 billion to its legal cost estimate in part due to the currency-rigging probe. A few months later, in April, CEO Jamie Dimon sought to assure investors that eye-popping legal bills are in the company’s past.

“Though we still face legal uncertainty (particularly around foreign exchange trading), we are determined to reduce it,” Dimon said in a recent letter to shareholders. “The good news is that our legal costs are coming down and, we hope, will normalize by 2016,” he added. JPMorgan shares closed Friday at $66.47, up 0.9% for the week. For the year, shares are up 6.2%.

Citigroup, meanwhile, has signaled change ahead in the form of a new soft-spoken CEO, Michael Corbat, who took the reins in 2012. Corbat won kudos for helping the international bank pass its government “stress test” — a measure of the bank’s ability to weather a financial storm — earlier this year. Now investors are hoping Corbat can also help the bank keep a lid on the growing cost of bad behavior. Citigroup has undergone “the most cultural change” thus far, Mayo said. “We think Citi will hit a post-crisis high by the end of the year,” he said of the company’s stock. Shares closed Friday at $54.97, up 1.3% for the week. For the year, shares are up 1.6%.