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Big Banks: Inflation Fear Losers

NEW YORK ( TheStreet) -- The nation's largest banks on Tuesday took a breather from their extended stock rally.

The broad indices all ended lower, after the Bureau of Labor Statistics reported the consumer price index rose by 0.5% in June, after rising just 0.1% during May. Economists polled by Thomson Reuters had expected the CPI to increase by just 0.3% in June.

This left investors even more certain that the Federal Reserve was ready to curtail its stimulus efforts as early as September, by lowering its monthly purchases of long-term securities from the current $85 billion.

The KBW Bank Index (I:BKX) was down 1% to close at 64.33, with all but four of the 24 index components ending the session with declines. Shares of Zions Bancorporation (ZION) were down 2.5%. Large banks showing 2% stock declines included Regions Financial (RF) of Birmingham, Ala., SunTrust (STI) of Atlanta, KeyCorp (KEY) of Cleveland and Comerica (CMA) of Dallas, which beat the consensus second-quarter earnings estimate, but also reported slowing loan growth.

'The Word of the Day Is "Comfortable".'

Goldman Sachs (GS - Get Report) reported second-quarter earnings of $1.9 billion, or $3.70 a share, soundly beating the consensus estimate of $2.89, according to Bloomberg.

The earnings beat was driven by $1.42 billion in revenue from its Investing & Lending unit, with rising marks on the company's private equity investments and its portfolio of equity and debt market securities. These key areas of Goldman's business are expected to be de-emphasized over coming years as the Volcker Rule and other new rules derived from the Dodd-Frank Wall Street Reform and Consumer Protection Act are finalized.

Another important question for investors and analysts is how the bank's efforts to comply with the Federal Reserve's final rules to implement Basel III, and federal regulators' new leverage capital requirements may affect the return of capital to shareholders.

After the Fed finalized its enhanced capital rules on July 2, the Fed, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed a minimum Basel III supplementary Tier 1 leverage ratio of 6% for U.S. banks with total assets above $700 million, along with a 5% minimum ratio for the nation's largest bank holding companies, including Goldman. The new leverage ratio required is expected to be phased in starting in 2015, full compliance required by January 2018.
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