|Sen. Blanche Lincoln, Democrat from Arkansas.|
What It Means For Bank StocksGraseck pegged middle-of-the-road estimates for the Lincoln amendment's impact on 2012 earnings for Bank of America ( BAC), JPMorgan Chase ( JPM) and Citigroup ( C) at 3.5%, 4.5% and 6.2%, respectively. That's $12 billion less in revenue, $2.7 billion less in earnings collectively, or 11 cents less per share for Bank of America, 3 cents less per share for Citi and 27 cents less per share for JPMorgan Chase. (Lower spreads related to other reform measures were already "baked into" her estimates.) Kian Abouhossein, an analyst with JPMorgan-Cazenove, says return on equity for global investment banks would drop to 12% from 19% if the Lincoln amendment -- also known as "section 716" -- were adopted in its current form. He estimates that the eight investment banks he covers may require $85 billion in capital. (A trade association has pegged the overall industry estimate at $200 billion.) UBS ( UBS) is the only one with excess capital, according to Abouhossein, while others would need anywhere from $500 million to $26 billion, with Deutsche Bank ( DB) being most at-risk for requiring fresh financing. But Abouhossein doesn't quite know what it means for the stocks he covers. Goldman, Morgan Stanley, UBS, Deutsche Bank, Credit Suisse ( CS), Societe Generale ( SG), BNP Paribas ( BNP) and Barclays ( BCS) may now be trading at anywhere from a 7% discount to a 36% premium, depending on whether their derivatives businesses are left largely in tact, or completely dismantled. "Until we have clarity about section 716, we are unable to make a very strong case for Global IBs in terms of investments," says Abouhossein. Indeed, investors had been pushing bank stocks higher from the lows of March 2009 until recently, when regulatory crackdowns came to the fore. Most of those crackdowns pertain to derivatives, and the selloff pertains to doubt about where it will all end up. The Securities and Exchange Commission kicked off the wave of bank-stock selling on April 16, by alleging that Goldman Sachs had engaged in derivatives fraud. Since then, Goldman has shed 26% of its market value. The top five U.S. swaps dealers, including Goldman, Morgan Stanley, JPMorgan, BofA and Citi, have lost an average of 22%.
|Stock Plays 5 Financials That Benefit From Reform|