This page has been archived and commenting is disabled.
S&P Estimate Of Dodd-Frank Costs On TBTF: Up To $22 Billion
- Bank of America
- Bank of America
- Barack Obama
- CDS
- Citigroup
- Consumer protection
- Covenants
- Credit Default Swaps
- default
- Fail
- Federal Deposit Insurance Corporation
- Federal Reserve
- Financial Regulation
- goldman sachs
- Goldman Sachs
- Grayson
- Great Depression
- headlines
- Illinois
- JPMorgan Chase
- Morgan Stanley
- Prop Trading
- ratings
- Recession
- Transparency
- Wells Fargo
S&P has released its first official estimate of what it believes the cost of Donk will be on the Too Vampiric To Fail. In a nutshell, the range of various costs could be as high as $22 billion, due to a drop in debit fees, lower derivative income, FDIC DIF replenishment, prop trading, and new compliance expenses. Additionally S&P expects another $85 billion in additional required Tier 1 Capital (which is a joke compared to its Tangible Common cousin). One thing is certain: just as Grayson yesterday said that nobody has any idea about what the charges associated with foreclosure and MERS-gate, and all are merely guessing, the same thing can be said of S&P. It is without doubt that the final outcome of Donk will either cost nothing or infinitely more. Yet for some reason this report made the headlines, so we present it for those 3 readers who actually care what S&P has to say.
What Financial Reform Could Cost The Largest U.S. Banks
Although the broad outlines of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Barack Obama signed into law in July, have been widely reported, estimating its impact on bank profitability is subject to significant uncertainties. Indeed, regulators are still finalizing and implementing the law's details. Because of Dodd-Frank's importance, however, Standard & Poor's Ratings Services has made its first projections of how bank earnings might fare in the next few years under this sweeping regulatory reform.
Based on our current understanding of the law, we estimate that profitability at the largest U.S. banks will likely come under pressure because of the effects of Dodd-Frank. We don't expect most of the reform's impact on earnings, however, to be fully realized until 2012 or 2013, when, in our view, an improvement in net charge-offs (NCOs) will likely offset its effects. As a result, we don't expect that the earnings impact from Dodd-Frank, by itself, will result in lower ratings for the largest U.S. banks.
Because it appears to us that Dodd-Frank will have the most impact on earnings at the nation's biggest banks, our focus in this commentary is on aggregate profits of the eight large, complex U.S. banks that we rate: Bank of America Corp., Citigroup Inc., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, PNC Financial Services Group, U.S. Bancorp, and Wells Fargo & Co.
Over the next one to two years, we expect to see lower aggregate earnings at these banks as a result of higher deposit insurance costs, a loss of proprietary-trading income, reduced derivatives-trading income, and lower debit card fees. But we think that these banks will eventually be able to offset these deficits by making smaller additions to loan-loss reserves and raising prices for some products and services. A return to more typical banking conditions would, in our view, mitigate most, or even all, of the financial costs of Dodd-Frank for these banks.
Banks are now facing substantial economic uncertainty and little clarity about the law's implementation; roughly 90 one-time studies still need to be prepared, and close to 300 rules remain to be written. With those caveats in mind, here are the key findings of our first pass at estimating Dodd-Frank's financial impact on the largest U.S. banks:
- The full impact on earnings from the Dodd-Frank legislation will likely be realized in 2012-2013.
- We estimate that the effects of Dodd-Frank will likely lead to a reduction in aggregate pretax earnings at the eight large, complex U.S. banks by roughly $19.5 billion to $22.0 billion annually before offsets, based on our projections for 2010 business activity. This loss represents roughly 18% to 21% of our forecast of 2010 complex-bank adjusted pretax earnings.
- We also estimate that the effects of the law will likely reduce pretax return on equity (ROE) at these banks by up to 270 basis points (bps) and pretax margins by up to 450 bps if applied against 2010 projected adjusted earnings.
- The Credit Card Accountability Responsibility and Disclosure Act of 2009 and Regulation E, which the Board of Governors of the Federal Reserve System issued pursuant to the Electronic Funds Transfer Act, will likely add additional headwinds in the form of operating costs, reducing large, complex U.S. banks' adjusted pretax earnings by roughly $8.7 billion per year, or about 8.1% of our forecasted 2010 complex-bank adjusted pretax earnings.
Assuming that the U.S. doesn't enter into a double-dip economic recession, and that U.S. banks generally contain foreclosure costs, it is probable that by 2012-2013 the banks' provisions could be significantly lower than they are currently, mitigating most, if not all, of the legislation's negative impact to earnings. Nonetheless, given the weakness of the economic turnaround, the risk remains that a return to more typical provision levels may be a more protracted event than we had originally thought.
- Bank mitigation efforts, such as cost cutting and higher fees for some services, could in our view offset much of the earnings impact of legislation and lift pretax ROE to more than 15% (once provisions reach average 2001-2006 levels) and pretax margins to more than 25%.
- Based on our current earnings assumptions, and a first-pass assessment of the impact of the legislation, we don't believe Dodd-Frank financial regulation will, in and of itself, affect ratings for the eight largest U.S. banks.
Debit Fees: What's 'Reasonable And Proportional'?
Estimated aggregate annual impact: $4.5 billion to $5.0 billion
The law, under an amendment Sen. Dick Durbin of Illinois sponsored, grants the Federal Reserve the authority to prescribe regulations on payment card network and transaction fees, stipulating that they be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction." However this requirement is ultimately defined, it will very likely cost banks more money. The Fed is to apply new rules within nine months after passage of legislation--by April 2011.
To quantify the potential impact of the law on debit interchange fees, we reviewed 2009 debit volume according to The Nilson Report, an industry newsletter. We separated debit volume into transactions that require a personal identification number (PIN), and off-line transactions that require signatures. We assumed that PIN-verified transactions have a lower margin (0.25%) than signature-verified transactions (1.0%). We next assumed that the implementation of the law will reduce the margin on PIN business by 50% and decrease the margin on signature transactions by 75%. These assumptions attempt to quantify the wording of the legislation as "more proportional to the cost incurred by the issuer."
Derivates Income: Less Pain Than Expected
Estimated aggregate annual impact: $5.5 billion to $6.0 billion
The impact of Dodd-Frank on derivates-trading revenue and profits appears less severe than many bankers first expected. Specifically, the law allows banks to continue to serve as dealers for interest rate, foreign-exchange, and credit default swaps (CDS) transactions on investment-grade ('BBB-' and above) entities, and for gold and silver contracts. The major change, however, is that liquid, standard swaps are now required to transact through a clearinghouse. Also, speculative-grade CDS, commodities, and equity-related swaps will, pursuant to the law, need to be capitalized and traded through a nonbank affiliate.
To calculate the impact of legislation as it pertains to derivatives, we first estimated banks' current derivatives revenue. Based on a composite of industry research, we assumed that 35% of their trading revenue is made up of derivatives, and that derivatives generate a 35% operating margin. The high operating margin assumption reflects the lack of extensive competition and pricing transparency in this business. Based on historical derivative transaction flow, we assumed that 97% of derivatives can remain in the bank, and that a large portion of these transactions will move to a clearinghouse. We next assumed that greater pricing transparency will cut in half the margins on the derivatives moving to the clearinghouse. But we don't anticipate that derivative volume will pick up significantly. Companies needing to hedge activities through the use of derivatives are likely already engaged in this activity. Incremental cost savings the banks achieve through the lower prices of derivatives, in our view, aren't likely to generate significant new business.
Deposit Insurance: Replenishing The Fund
Estimated aggregate annual impact: $3.5 billion to $4.0 billion
The Federal Deposit Insurance Corp. (FDIC) adopted its Amended Restoration Plan in 2009 to rebuild its depleted Deposit Insurance Fund (DIF) and raised its base assessment rates by 3 bps, effective Jan. 1, 2011. Title III of the Dodd-Frank Act includes further changes to deposit insurance for banks, including a permanent increase of FDIC insurance to $250,000 from a previous $100,000 limit. Title III also mandated an increase in the minimum reserve ratio for the DIF to 1.35% from 1.15%, which led us to believe that a rate hike would be necessary.
A more recent assessment plan the FDIC released repeals the rate hike that we believed likely under Title III but subsequently raises its target for the DIF to 2%. Rather than hike rates in the near term to build the fund quickly, the FDIC has signaled that it will take longer to reach its target, mitigating the near-term impact on the big banks. Over the long term, we expect this means that FDIC assessments will be a small but meaningful ongoing cost for the banks. We expect the new method for calculating assessments, based on assets net of tangible equity, will have a greater impact on larger depositories, which, in our view, is likely to lead to reduced risk taking.
To assess the impact of a change in the methodology of fee assessment, we first calculated the FDIC's current charge on a deposit basis. Our assumptions on current fees include an estimate that 95% of deposits are assessed a fee at what we believe to be the current rate of 0.13%. We then collected data for assets within the banks, as disclosed by the FDIC, subtracted tangible equity, and assumed a fee of 0.13% for what remained. The difference between the two charges is the cost of the new deposit insurance premiums.
Proprietary Trading: Important For Only A Few
Estimated aggregate annual impact: $3.5 billion to $4.0 billion
The new law will limit the degree to which banks can trade for their own accounts. As a result, some companies deeply involved in proprietary trading have already announced the divestiture of their proprietary-trading desks. But most of the large, complex banks either don't engage in proprietary trading or are already curtailing these activities. Therefore, the law's impact in this area, we think, will be limited to only a few banks.
Dodd-Frank defines proprietary trading as a bank engaging as a principal for its trading account in any transaction to purchase, sell, or otherwise acquire or dispose of any security, derivative, or other financial instrument. It appears that regulators will not consider market making--taking inventory positions to abet customer activity--to be proprietary trading. Investment in private-equity or hedge funds will be limited to 3% of the fund's ownership and 3% of the bank's total Tier 1 capital.
Banks now disclose limited data about their proprietary-trading revenue and earnings. We have assumed that proprietary trading made up 1% to 4% of 2009 revenue at select banks. Besides reducing the revenue stream, we also removed from our analysis related expenses, which we assumed totaled roughly 40% of proprietary-trading revenue.
Expenses: A New Law, Bringing New Costs
Estimated aggregate annual impact: $2.5 billion to $3.0 billion
The scope of the law is significant and will likely entail additional legal and compliance procedures and therefore a new set of costs. Expenses will likely rise as banks build new technology, particularly for derivatives trading. With this in mind, we are assuming that expenses will rise by roughly 0.5% of 2009 revenue, which we believe is a conservative estimate.
Less Hybrid Capital: Already, Preparations At Some Banks
Estimated aggregate capital impact: Approximately $85.0 billion, or a roughly 1.5% reduction in Tier 1 capital ratios
Banks will no longer be able to count cumulative-preferred stock and trust-preferred stock as Tier 1 capital, under the legislation. This rule will phase in from 2013 to 2016 and will likely reduce banks' regulatory capital ratios. In anticipation of this, some banks are opting to retire some of their hybrid securities immediately. The decision to act before legislation goes into effect seems to hinge on the strength of a bank's existing regulated Tier 1 capital ratio, and on the covenants of the securities in question, which require a bank to replace this capital.
To determine the potential capital impact of the section of Dodd–Frank dealing with capital requirements--the Collins amendment--we assumed that Dodd-Frank will disallow all of the trust-preferred and enhanced trust-preferred securities that we allow in our capital calculation, total adjusted capital. Although this may seem like a conservative assumption, we note that Standard & Poor's excludes some hybrid securities from its capital calculation that a regulatory calculation includes. The aggregate capital figure we use, therefore, is already lower than the regulatory figure.
A Respite From High Loan-Loss Provisions?
Although NCOs for banks seem to have peaked for some asset classes, provisions are still historically high. Based on three quarters of results, we look for large, complex U.S. bank provisions to total roughly $96 billion in 2010, $76 billion of which the banks already reported through third-quarter 2010. Assuming NCO rates return to their average for 2001-2006 and that loan balances stay steady at third-quarter 2010 levels, NCOs would total roughly $37 billion. Assuming a 30% reserve build, provisions would total roughly $48 billion.
The difference between 2010 projected provisions and the average for 2001-2006 is about $48 billion, which we currently expect to be more than enough to cover the impact of financial regulation. However, it is unlikely that provision levels will return to an average 2001-2006 run rate by the time we expect legislation to start affecting earnings in 2012-2013. Assuming provisions total 50% of that, additional earnings should in our opinion still be enough to cover the impact of the Dodd-Frank legislation.
A Likelihood Of Increased Fees For Customers
Because banks believe that Dodd-Frank will probably hurt their bottom line, they're already working on a range of offsets. These initiatives will likely take the form of additional charges for products and services that are currently now either free or at a lower cost for the consumer. For example, some checking accounts, which are now free, may soon have a cost. We also expect that banks will reduce their expenses, particularly to offset the loss of proprietary-trading revenues and derivative revenues.
The Fall And Rise Of Return On Equity And Pretax Margins
We expect the industry to show an aggregate pretax ROE for large complex banks of roughly 13% and pretax margin of 22% in 2010, well below the 23.5% pretax ROE average they achieved from 2000 through 2006. Returns in this period were boosted by extraordinarily high investment-banking and trading revenue and high leverage, all of which are unlikely to return soon.
Based on the assumptions we've outlined, full implementation of financial regulation in 2010 would likely reduce ROE by up to 270 bps and adjusted pretax margins by up to 450 bps. But most of the negative impact of financial regulations isn't likely to phase in fully until 2012-2013. By that time, provisions could be significantly lower than they are today. Assuming provisions reach 50% of the 2001-2006 average, pretax ROE would rise to more than 13% and adjusted pretax margins to nearly 23%. If the banks reached 100% of 2001-2006 average provisions, pretax ROE would rise to approximately 16% and adjusted pretax margins to almost 27%. This is still below historical levels but may be understating potential pretax ROE and pretax margin. We see two main reasons for this: We're assuming that loan growth doesn't rise from the low level of second-quarter 2010, and that banks won't redeploy or return to shareholders what they consider any excess regulatory capital. More business growth or higher shareholder returns would boost ROE.
Large Banks Aren't Sitting Still
The Dodd-Frank law is the most sweeping change in U.S. financial regulation since the Great Depression. Because of this, we will closely monitor the implementation of its provisions and the effect on banks. Even though many rules remain unwritten, banks are already adjusting their business models to cope with the changing economic and regulatory landscape.
»
- 4769 reads
- Printer-friendly version
- Send to friend
- advertisements -
Voting against Schumer & Gillibrand this morning was about the most fun I have had in months.
i hope u pulled the lever for jimmy:
http://www.youtube.com/watch?v=x4o-TeMHys0
when did we start rounding to the nearest billion?
All replaced by sleeving transactions for energy providers and other commodity producers.
I wonder if $22 billion is enough that citizens will eventually hang Bahney Fwank?
$22bil.? Joke.
Jamie, Lloyd and the boyz have $22bil. chunks in their stool...
LOL, they actually have nothing.
Was watching CNN earlier and they were going around New York asking people on the street what they thought about regarding the $25 Billion profits we made on the bailouts. People were like, then where is the money? They don't even realize they paid for the bailouts, then paid for the profits, out of their own pockets. LOL The scams this government runs never ceases to amaze me. They know the public is collectively stupid as hell, and they use it to their advantage every time.
Last month I said the I-bond fixed rate would be ZERO and low and behold that is exactly what happened.
Current rates for a new bond. Valid November 2010 - April 2011
How much more crooked does this country get?
Grayson is the burr under their saddle for sure. I like a pain in the ass and he is certainly a pain for the right people!
We have all cheap uggs for sale in our website http://www.salesuggs.org ! You can meet all your needs for UGG hot sale here and will certainly be satisfied with the top quality at low price. All UGGs on sale are made with the 100% genuine sheepskin from Australia and are hand-made in our own factory completely. So you need no to worry about the quality and the cheap UGGs for sale are all to be delivered in free shipping. Enjoy the large discount!
1.
UGG Amberlee
|UGG Kensington
|UGG Elsey
|UGG Langley
|UGG Roxy Short
|UGG Roseberry
|UGG Oliviya
|UGG Raya
UGG Brookfield Short
Welcome to our website-- http://www.ugghots.com , we are making the promotion for many uggs now.Here is a chance for you that you want to buy good ugg classic boots by cheap price.At present our hot sale snow boots has :
| UGG Delaine Boots
| UGG Gaviota Boots
| UGG Gissella Boots
| UGG Evera Shoes
| UGG Upside Boots