Investors in Wells Fargo (WFC), Citigroup (C) and, to a lesser degree, Back of America (BAC) have put money in the bank (cheap pun, I know), betting on the financial recovery. There is nearly zero reason to believe anything is about to change.
Some concern over the housing fallout and mortgage handling is expected, and a few states are becoming more aggressive, but it doesn't change the overall landscape of support from the central banks. For example, the largest bazooka for major U.S. banks is the Federal Reserve's $85 billion QE3 with no end in sight.
QE3 might more accurately be described as the "Bank Investors Protection Act" because regardless of where the economy travels from here, the banks will make money. If we drop into another full-blown recession, we already know the Fed will keep buying paper, propping up housing and removing deflation as the printing presses run full speed.On the other hand, if the Fed slows down the presses, it's only because the economy is expected to improve. Investing in banks is the closest you can come to "Heads I win, tails I break even." As The Street's Philip van Doorn smartly points out, not only are the major banks ready for Basel III, but as expected, they are adjusting for the new post Dodd-Frank regulatory environment. Actually, it may be more accurate to write that banks are ready for the "adjusted" Dodd-Frank environment. Not all the regulations from Dodd-Frank have been implemented, and some that were expected have been put on hold. More are expected (on paper) to arrive in 2014, but don't count on full implementation, because Wall Street isn't. At least not to the extent profits will take a hit. Banks will simply shift their focus from low-margin business into high-margin business. Although there's only so much gravy to go around, the largest banks are in the best position to exploit the opportunities. It's the smaller, regional banks that can expect to experience margin compression.