The shares of the top 25 global banks witnessed a revival in Q2 2020 as their aggregate market cap grew 4.2% to US$2,710bn in Q2 2020, up from US$2,601bn in Q1 2020. Of the 25, 18 reported quarter-on-quarter (Q-o-Q) growth, with six banks – Citigroup, HDFC, Morgan Stanley, Goldman Sachs, Truist Financial, and BNP Paribas – growing by over 20%, according to GlobalData, a leading data and analytics company.
Parth Vala, Company Profiles Analyst at GlobalData, comments: “Markets have been witnessing a V-shaped recovery after the historic low witnessed in Q1 2020 as governments across the globe have been rolling out massive fiscal and monetary measures along with a phased reopening of economic activities. Recent economic data, especially in the US and EU, also promises a continued recovery path.”
Vala continues: “Furthermore, the relaxation in the Volcker rule, which restricted banks from investing in their own funds such as venture capital, mortgage-backed securities and other riskier financial instruments, brought cheers from the leading banks, which resulted in a stock rally. The relaxation is likely to generate a substantial amount of capital and liquidity in the market.”
Of the seven banks that reported a decline in market cap, the major losers were HSBC and Wells Fargo. HSBC’s substantial goodwill impairment related to its European commercial banking, and global banking and markets businesses took a heavy toll on the company’s profits. As part of its restructuring, the bank intends to undertake a slew of measures, including large layoffs and asset sales of around US$100bn in the US and Europe over the course of the next three years.
Factors that affected Wells Fargo included a continued balance sheet cap of US$1.95 trillion – imposed by the Fed related to the opening of millions of unauthorized accounts – and consistent rise in quarterly operating expenses. The bank, which was not long ago one of the largest mortgage originators, has been reporting a decline in mortgage originations and mortgage income. The COVID-19 pandemic has made the matter worse for the bank’s investors as there is likely to be a cut in the quarterly dividend following Fed’s decision to restrict payouts.
Vala concludes: “The second half of 2020 is unlikely to return to pre-COVID-19 normality, however, after strengthening its capital structure and implementing several other regulations post-2008 crisis, the banking sector appears to be adequately prepared to face the prevailing uncertainty in the financial markets.”