Many of the financial stocks including Citibank (NYSE: C) and Bank of America (NYSE: BAC) have had powerful rebounds since their March lows, but new federal regulations and non-performing assets will continue to haunt some of the major financials through 2010.
When the market hit bottom in March of 2009, many wondered if the financial sector would recover any time in the near future. Skeptics continued to divest themselves from financials, but those who stayed in have enjoyed spectacular rallies. Bank of America is up 610%, Citibank is up 400%, Barclays is up 640% and RBS is up 475%. Although the financial sector hasn’t returned its pre-financial crisis market caps, they have been riding a very steep yield curve and have been benefiting from government support.
Unfortunately, the upswing will likely be short lived and the profitability of banks will be hampered for years to come by new capital requirements and non-performing loans. The new capital requirements that the G-20 agreed upon to prevent a second financial crisis will almost certainly cause banks to take a significant hit. Some analysts are predicting that the new requirements could decrease profits of some of the financial giants such as JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley by as much as 30%.
With a total of 94 bank failures in 2009, the FDIC’s deposit insurance fund is quickly being depreciated. Some analysts have estimated that the FDIC will need to charge fees commensurate to about 25% of the U.S. banking industry’s total profit to pay depositors for the continuing string of failed banks. The FDIC currently has 400 banks on its troubled list and some are estimating that 1000 to 2000 additional banks could close through 2010. The deposit insurance fund is funded by FDIC member banks and unless the US Treasury bails out the FDIC, banks will be paying much higher insurance premiums next year.
Finally, Congress’s newly proposed debit card regulations will likely also make another significant hit on Bank of America, Citibank, Wells Fargo and others. The new legislation, introduced by Rep. Carolyn Maloney (D-NY) would likely end the massive amounts of overdraft fees that the banks collect from their customers each year.
With greatly increased FDIC insurance premiums, non-performing commercial real estate loans and new consumer protections, banks will have a very hard time maintaining their profitability in the next 12 months as the market re-orients itself.
