The proposed regulatory reform for the U.S. financial sector, if adopted, will have a material impact on firms’ revenues and earnings, UBS Financial Services Inc. concludes in a new report.
The report looks at the major elements of the final reform bill being considered by Congress. It has already passed the lower house vote, but still has to get through the Senate, and the president, before it becomes law. UBS says that it expects to see the bill passed by the Senate by mid-July.
“We expect these reforms to lower acceptable risk levels, increase transparency and increase regulation,” it says. “We believe these changes will likely reduce bank earnings in the mid-teens through lower revenues and higher compliance costs, but could result in less volatility, which could help consumers regain trust in these companies once more.”
While a double digit impact on earnings is not to be ignored, UBS also says that it believes this fact is largely priced into the sector, and it maintains a neutral weight on financials, and an overweight on banks within the sector. Moreover, it notes that the projected impact is a very rough estimate, that some provisions of the bill call for studies that could yield other reforms, and that it will likely take several years before the effects of the reforms are fully understood.
On a first glance it notes that the bill requires the spin-off of certain types of derivatives businesses, most derivatives will be required to trade through an exchange, and the US Securities and Exchange Commission and Commodity Futures Trading Commission will be given authority to regulate over-the-counter derivatives. These new rules will mostly affect the universal and investment banks, it says, including Goldman Sachs, Morgan Stanley, J.P. Morgan, Citigroup and Bank of America; and it estimates that the restrictions could reduce pre-tax earnings by 3%-5%, although there could be offsets, including the re-investing of resulting excess capital. Major beneficiaries of these rules would likely be the derivative exchanges, CME Group and IntercontinentalExchange, as well as NASDAQ OMX, all of which could see increased trading and clearing volumes, UBS says.
The so-called Volcker Rule, which limits financial firms’ proprietary trading, also mostly affects the universal and investment banks, UBS notes. “Overall, we think the Volcker Rule could adversely impact pre-tax profits between 5%-15%, with Goldman Sachs at the higher end of the scale,” it says, although, again this would also free up capital for other businesses. And, it notes that asset managers could benefit if large banks and brokers are forced to getout of alternative asset management.
The proposed new Consumer Finance Protection Bureau would impact all banks and other companies that deal with consumers, UBS notes, including both the universal banks and the regional banks. The investment banks, with limited consumer business, would be less impacted, it says. Overall, it is not possible to estimate a financial impact at this time, it says.
On the question of whether brokers will be held to a fiduciary standard, the bill only requires the SEC to study the issue. “The biggest impact will be on the large banks with brokerage operations and regional brokers, as well as on large insurance companies with captive agents or financial advisors. The financial impact is unclear, as any negative impact from selling lower-margin products could be offset by increased sales resulting from clients’ belief that the financial representative is always acting in their best interests,” the report says.
A consumer protection provision that is more quantifiable would require the Federal Reserve to set guidelines for reasonable interchange fees on debit transactions. “This affects all banks, with a larger impact on the regional banksthan the universal banks. We estimate that debit interchange fees are less than 2% of revenues at the universal banks and range from 3-5% at the regionals,” it says.
Conversely, a change in how deposit insurance fees are calculated would impact the universal banks more than the regionals, it notes because the universals have more non-deposit liabilities related to investment banking and more foreign deposits. “Citigroup, with its extensive overseas banking operations, would be most affected. We estimate theimpact on regional banks to be 2%-5% of pre-tax earnings, with the universal banks somewhat higher, especially Citigroup,” it says. Although it notes that this is a potential short-term hit to earnings, but not a long-term problem, as deposit insurance fees are currently elevated anyway.
Finally, it suggests that changes to capital requirements and leverage limits and securitization rules aren’t likely to have big impacts on the industry as it stands now, although they could impede future growth.
U.S. financial reform will reduce bank earnings by double digits: UBS
Derivative exchanges could see increased trading and clearing volumes
- By: James Langton
- July 4, 2010 July 4, 2010
- 14:25