Early market reaction to the financial services reform bill, which the Senate passed, 60-39, on Thursday, July 15, was one of relief that the political wrangling is over at last, and banks and companies could now get down to the business of figuring out how the bill's details would affect them and how they could comply while earning profits.
The bill seemed to favor big banks like Citigroup, led by Vikram Pandit, although JPMorgan Chase & Co., led by the seemingly bullet-proof Jamie Dimon, was seen as taking a hit because of its giant consumer base. But smaller community banks, too, are expected to benefit from exemptions on certain provisions and escape relatively unscathed. Either way, finance experts agreed that the worst is over and that markets have already priced in the bill's passage.
Kevin Fitzsimmons, an equity analyst with New York-based Sandler O'Neill + Partners, noted that bank stocks rallied on June 25 when the bill won approval in the congressional conference committee. "This has been looming over the group for the best part of the last few months. For whatever concern there was, banks are getting this behind them," Fitzsimmons said.
In an analysis by large-cap banks titled "Dodd-Frank Act – Could've Been Worse," Barclays Capital took a positive view of the sector, saying the largest banks–including Citigroup, Bank of America, JPMorgan, Wells Fargo, and USB–have the best value despite being the most affected by the reform bill. But, Barclays analysts warned, U.S. banks may lose as much as $17.6 billion in 2013 profits.
"We believe the valuations of the larger banks, generally speaking, are attractive," Barclays stated in its June 28 note. "This is supported by our economists' views of 3.6% GDP growth this year and 3.5% next, with unemployment falling below 8% by the end of 2011."
JPMorgan, Morgan Stanley to Take Biggest Hit
At Goldman Sachs, analysts said the new financial regulations will hit JPMorgan and Morgan Stanley the hardest, and they anticipate a drop in earnings at both banks.
"We believe that passage of this bill represents an important milestone that will go some way to alleviating the uncertainty that has been weighting on the sector," the Goldman analysts wrote. "We now forecast that the large banks could see a 13% hit to normalized earnings."
Analysts expect the bill to have a negative impact on the banking industry's earnings through higher costs and new restrictions, in addition to tying up capital and causing unintended consequences. Still, they say, both derivative reform and the Volcker Rule that restricts banks' involvement in proprietary trading and hedge funds were eased in the final bill, and will hurt only the largest banks.
"Some of the specific provisions came in either as expected or watered down from what some might have feared," Fitzsimmons said. "At first glance it seems like more regulation, which tends not to be a positive development for the banks. It increases their costs, but all that said, it appears to be manageable."
