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10 Banks With the Biggest Fee Worries

NEW YORK ( TheStreet) -- Although the industry was granted a reprieve last week when Federal Reserve Chairman Ben Bernanke said in a letter to Congress that new rules implementing the Durbin Amendment wouldn't be finalized until July 21, many banks appear set to take it on the chin when the inevitable clampdown on interchange fees occurs.

The Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act - signed into law by President Obama last July - limits the interchange fees that banks with over $10 billion in total assets can charge merchants for debit card purchases, to 12 cents per transaction, which the Fed said would be "more than 70 percent lower than the 2009 average" of 44 cents per transaction.

In his letter to Congress, Bernanke indicated that the Fed had received over 11,000 responses to its request for comments following its initial rule proposal in December, and would need time to analyze the comments.

Congress is also responding to the groundswell of protest, with Senator Jon Tester (D-Mont.) introducing the Debit Interchange Fee Study Act on March 15, calling for further study and delaying the implementation of the Durbin amendment by two years. A vote on Tester's bill is expected on April 21.

Led by TCF Financial (TCB - Get Report), which sued the Fed in October to forestall the new rules, with support from lobbying groups including America's Community Bankers, the industry is fighting back.

TCF sued the Federal Reserve and the Office of the Comptroller of the Currency last year, "challenging the constitutionality of the Amendment on the grounds that it violates TCF's due process rights as it requires TCF to offer the debit card product below cost and thus not earn a full return on invested capital," while also denying the company equal protection by exempting banks with less than $10 billion in total assets.

SNL Financial reported that on Monday, U.S. District Judge Lawrence Piersol in Sioux Falls denied TCF's petition for a preliminary injunction to keep the Durbin rules from going into effect, while also refusing to toss the case. The judge left the case open until after the rule is finalized.

So the Durbin Amendment is in play, and while the court decision against TCF means the momentum could be against the company since the Federal Reserve will have finalized its rule by the time Judge Piersol takes another look at the case, Congress may have acted in the meantime.

There's quite a difference of opinion among industry experts on whether the new rules based on the Durbin Amendment will ultimately go into effect.

Stifel Nicolaus analyst Chris Brendler told TheStreet that he doesn't "expect that the Durbin amendment will be delayed," saying opponents of the Durbin rules "need to get at least 18 senators to change their mind." The analyst also said that TCF Financial is "one of the highest exposed as 10% of their revenue comes from interchange," adding that "it would be difficult for them to compete and they don't have the synergy and scale."

Richard Bove of Rochdale Securities also thinks there won't be a political setback into putting the new interchange fee limits into effect, and that "the banks are going to have to direct the consumer anger away from themselves and toward the regulator."

Bove described the Durbin Amendment as "a bunch of hysterical politicians that are trying to help consumers in the wrong way," and that he doubted "if you walk into Walmart (WMT) you will see a 30 cent reduction on debit card transactions, as "merchants are just going to profit at the consumers expense."

Banks are looking for other ways to boost fee income, after the triple-whammy regulatory onslaught directed against the industry's fee revenue over the past two years.

New maintenance fee charges for checking accounts and savings accounts seem unlikely to fly with consumers, at least over the long haul, as it is pretty obvious to a customer earning no interest on a deposit account that a bank is already making money on the deposit.

Over time, it may be that "old fashioned" banking, where lenders seek to gather cheap deposits and earn a nice spread on their loan portfolios, along with loan origination fees and other fees for selling newly issued mortgages into the secondary market, will once again be an attractive business model.

In a March 25 report, Deutsche Bank analyst Matt O'Connor listed the reported 2010 debit card interchange revenue totals for large money center and regional banks. Based on those numbers and revenue and earnings estimates for 2011, the following 10 holding companies subject to the Durbin Amendment will derive significant portions of their 2011 earnings before provisions for credit losses and taxes, from interchange fee revenue.

Additional data was supplied by SNL Financial with consensus earnings estimates and price targets provided by FactSet.

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