"Put simply, the reforms we are putting in place raise the cost for a bank to be large, requiring firms to internalize their risks, and together, with resolution authority and living wills, make clear that shareholders, creditors, and executives -- not taxpayers -- will be responsible if a large financial institution fails," Treasury Secretary Jack Lew said in a speech last week.
According to Cannon, Volcker and other new rules will combine to severely curb the big banks' trading activities and "squeeze the ability of large banks to compensate employees engaged in these activities."
So there's quite a bit on the table for the large banks. Investors will be watching to see which of the "big five" named above will be first to spin-off some or all of their investment banking operations.
According to KBW's data second-quarter trading revenue for all U.S. bank holding companies totaled $21.9 billion, with JPMorgan in the lead with 24%, followed by Citigroup (20%), Goldman (18%), Bank of America (16%) and Morgan Stanley (13%). All other U.S. bank holding companies combined for the remaining 9% of second-quarter trading revenue.
With other rules soon to be implemented covering foreign non-bank trading firms, KBW expects total trading revenue for all firms to decline, and that "revenues currently at the large bank holding companies will be pushed out to non-bank broker-dealers and other security trading firms."
Here are quick valuation snapshots for the five firms KBW mentioned as well-positioned to benefit from Volcker and other coming regulations that could push the largest U.S. banks to radically change their businesses:
- Shares of Piper Jaffray closed at $38.00 Friday, returning 18% this year. The shares trade for 15.4 times the consensus 2014 earnings estimate of $2.47 a share, among analysts polled by Thomson Reuters, and for 15.0 times the consensus 2015 EPS estimate of $2.53.
- BlackRock closed at $301.83 Friday, returning 50% this year. The shares trade for 16.9 times the consensus 2014 EPS estimate of $17.86, and for 14.7 times the consensus 2015 EPS estimate of $20.60.
- KKR & Co. closed at $23.23 Friday, returning 66% this year. The shares trade for 9.4 times the consensus 2014 EPS estimate of $2.47, and for 8.5 times the consensus 2015 EPS estimate of $2.74.
- The Carlyle Group closed at $32.99 Friday, returning 32% this year. The shares trade for 10.3 times the consensus 2014 EPS estimate of $3.19, and for 9.0 times the consensus 2015 EPS estimate of $3.67.
- Springleaf Financial began trading on Oct. 16 at an opening price of $19.10 a share. The shares closed at $21.77 Friday, trading for 11.7 times the consensus 2014 EPS estimate of $1.86, and for 8.3 times the consensus 2015 EPS estimate of $2.30.
-- Written by Philip van Doorn in Jupiter, Fla.
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