MarketWatch is reporting that Bank of America Corp. (BAC) is preparing to sustain a multibillion-dollar hit from the impending overhaul of U.S. financial regulations.
According to the financial giant, debit-card fee rules could trigger a $10 billion goodwill impairment in third quarter.
The bill, which was approved in the House and Senate on Thursday, will impose stricter consumer lending guidelines and lower transaction fees on debit cards. This is in addition to recent legislations that has already taken a bite out of bank revenue.
The fees are small charges that merchants pay Visa (NYSE:V) and MasterCard (NYSE:MA) for the right to accept cards run on their payment networks. Those fees are then passed on to card issuers such as major banks.
Bank of America, which reported second-quarter financial results before Friday’s bell, estimated this could knock as much as $1.8 billion to $2.3 billion off annual revenue generated by its Global Card Services business, starting in the third quarter of 2011.
That “seemed like a pretty big decline,” said Matt O’Connor, analyst at Deutsche Bank, during a post-results conference call conducted by company executives.
Bank of America’s card business carries $22 billion of goodwill on its books, partly from the $35 billion acquisition of MBNA, the Wilmington, Del.-based card giant, in 2005.
Based on the estimated revenue hit from interchange-fee regulation, Bank of America said this goodwill may be impaired by $7 billion to $10 billion in the third quarter of 2010.
Bank of America’s shares fell more than 8% in afternoon action, with disappointment over its results a catalyst for the move move broadly lower on Wall Street.
However, the impact of the bill would be felt by most, if not all card issuers including several of the infamously labeled “too-big-to-fail” banks.
Shares of General Electric Co. (NYSE:GE) declined 3.9% to $14.65, Citigroup Inc. (NYSE:C) shed 3.9% to $4 and J.P. Morgan Chase (NYSE:JPM) lost 3.4% to $39.10.
During Friday’s conference call, Morgan Stanley analyst Betsy Graseck asked about what assumptions Bank of America used to estimate the $1.8 billion to $2.3 billion annual revenue hit from the new debit-card regulations.
A Bank of America executive replied that the estimate was mainly driven by the company’s interpretation of the new law.
Interchange fees collected last year were worth nearly $50 billion, roughly 80% of which went to the 10 largest U.S. banks, including Bank of America, J.P. Morgan and Citi, according to the office of Sen. Dick Durbin (D., Ill.). The new rules limiting fees are known as the Durbin amendment.
The final version of financial reform awaiting Obama’s signature gives the Federal Reserve some leeway in how it regulates the fees. For instance, the Fed can adjust interchange fees if card-issuing banks can show that an increase is needed to cover fraud-prevention costs.
However, a Bank of America executive said Friday that the Fed’s rule-making flexibility on this amendment is “actually quite narrow,” according to a transcript of the conference call with analysts.
“They have some definitional opportunities there, but as we’ve assessed it, they don’t have a lot of wiggle room in terms of being able to modify what’s written in the amendment,” the executive said.
