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), 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.

10. First Horizon National Corp.

Shares of First Horizon National ( FHN) of Memphis, Tenn., closed at $11.37 Monday, declining 16% from a year earlier.

Based on First Horizon's $20 million in debit card interchange fee revenue in 2010, Matt O'Connor of Deutsche Bank estimated that the company's 2011 interchange fee income (not including the effect of Durbin) would make up only 1% of estimated total revenue, but would contribute 8% of First Horizon's 2011 pre-tax, pre-provision earnings.

In its annual 10-K filing with the Securities and Exchange Commission, First Horizon said that implementation of the Federal Reserve's December proposal for capping debit card interchange fees "could cost the Bank $30 million in revenues," and likely cause the bank to "revamp debit card practices and fee structures." First Horizon also said it "may not be able to recover all of the revenues lost in the revamping process."

With improving credit quality still being the main story, Deutsche Bank estimates that leaving out the new interchange fee rules that could be delayed a couple of years if, First Horizon will earn 44 cents a share in 2011, followed by 70 cents a share in 2012.

9. Huntington Bancshares

Huntington Bancshares ( HBAN) of Columbus, Ohio, saw its stock return 26% for the year ending Monday, when the stock closed at $6.74.

Huntington said in its 2010 annual report that "currently, interchange fees are approximately $90 million per year," and summed up its concerns nicely, saying "the Dodd-Frank Act gives the Federal Reserve, and no longer the banks or system owners, the ability to set the interchange rate charged to merchants for the use of debit cards."

The company said that a "maximum interchange rate of $0.12 would reduce our annual interchange fees by approximately 75%."

Based on the $90 million figure for 2010, Deutsche Bank estimates that Huntington's 2011 interchange fee revenue will make up 3% of total revenue, and provide 8% of pre-tax, pre-provision earnings in 2011.

Again leaving out the potential effect of the new interchange fee caps that could be delayed for a prolonged period, Deutsche Bank estimates Huntington will earn 49 cents a share in 2011 and 57 cents a share in 2012.

8. Fifth Third Bancorp

Shares of Fifth Third Bancorp ( FITB) of Cincinnati closed at $13.97 Monday, returning 3% over the previous year.

Based on $204 million in debit card interchange fee revenue in 2010, Deutsche Bank estimates that excluding the possible effect of the Federal Reserve's new fee limits, Fifth Third's interchange fee revenue will make up 3% of the company's total revenue and provide 9% of pre-tax, pre-provision earnings.

In his annual letter to shareholders, CEO Kevin Kabat said that unless the Federal Reserve's proposed limit on interchange fees were "mitigated," the new rules would prevent Fifth Third "and other banks from fully recapturing the costs of operating our debit card businesses." He added that the company was confident that it could "offset a substantial portion of the impact through mitigation strategies."

Deutsche Bank estimates Fifth Third will earn $1.22 a share in 2011, followed by $1.41 in 2012.

7. KeyCorp

Shares of KeyCorp ( KEY) of Cleveland closed at $8.92 Monday, returning 15% over the previous year.

Based on $100 million in debit card interchange fee revenue in 2010, Deutsche Bank estimates that the company's interchange fees will 2% of total revenue and 9% of pre-tax, pre-provision earnings in 2011.

In its 10-K filing, KeyCorp estimated that "approximately $100 million in debit interchange revenue could be impacted" by the Fed's proposed interchange fee limits, adding that until the regulations are finalized, "it is premature to assess the impact on this combined revenue stream."

Deutsche Bank estimates that KeyCorp will earn 56 cents a share in 2011 and 71 cents in 2012.

6. Zions Bancorporation

Shares of Zions Bancorporation ( ZION) of Salt Lake City closed at $23.95 Monday, returning 10% over the previous year.

The company owes $1.4 billion in bailout funds received in November 2008 through the Troubled Assets Relief Program, or TARP.

Based on $50 million in debit card interchange fee revenue in 2010, Deutsche Bank estimates that the company's interchange fee fees will contribute 3% of total revenue, but 9% of earnings before taxes and provisions for credit losses, in 2011.

During the company's fourth-quarter earnings conference call, CEO Harris Simmons said the "approximate gross impact" of the Federal Reserve's proposal for interchange fee caps "would be about $50 million annually," and that Zions was "very focused on various strategies to help us recapture a substantial portion of that through repricing of accounts, et cetera," according to a transcript provided by SeekingAlpha.

Matt O'Connor estimates that Zions will post a net loss of 13 cents per common share for 2011 and earn $1.40 a share in 2012.

5. Bank of America

Shares of Bank of America closed at $13.44 Monday, down 25% from a year earlier.

Based on Bank of America's $2.9 billion in debit card interchange fee revenue in 2010, Deutsche Bank estimates the fees will make up 3% of total revenue in 2010, but provide 11% of pre-tax, pre-provision earnings.

Bank of America said in its 2010 10-K report that "based on 2010 volumes, our estimate of revenue loss due to the debit card interchange fee standards to be adopted under the Financial Reform Act was approximately $2.0 billion annually," driving the company's $10.4 billion goodwill impairment charge for its Global Card Services segment.

Deutsche Bank estimates the company will earn $1.07 a share in 2011, followed by $1.30 a share in 2012.

4. M&T Bank Corp.

Shares of M&T Bank Corp. ( MTB) of Buffalo, N.Y., closed at $89.32 Monday, returning 16% over the previous year. Based on a quarterly payout of 70 cents, the shares have a dividend yield of 3.13%.

The company owes $600 million in TARP money received in December 2008, plus another $151.5 million originally received by Provident Bancorp, which M&T acquired in May 2009.

Based on M&T's $160 million in debit card interchange fee revenue in 2010, Deutsche Bank estimates that interchange fees will contribute 5% of total revenue in 2011, and 11% of earnings before taxes and provisions for credit losses.

According to a SeekingAlpha transcript of the company's fourth-quarter conference call, CFO René Jones said M&T had "avoided talking about or speculating about what the impact" of the interchange fee caps would be and probably wouldn't comment until more guidance was received in April. With the Federal Reserve delaying its final rule until July, we might be waiting until then for M&T to comment.

Jones did say that the coming rules were probably a "worst case scenario for the banking industry," and that if the proposed rules were implemented, "the business model would have to take a dramatic change in some new direction."

Deutsche Bank estimates that M&T will earn $6.16 a share in 2011 and $7.03 in 2012.

3. SunTrust

Shares of SunTrust ( STI) of Atlanta closed at $29.35 Monday, returning 8% over the previous year.

SunTrust reported total interchange fee income of $332 million for 2010, and based on that number, Deutsche Bank estimates the company's debit card interchange fee revenue will be 4% of total 2011 revenue, providing 13% of pre-tax, pre-provision earnings.

In its 10-K report, SunTrust said that the interchange fee "provisions of the Dodd-Frank Act may cause future annual interchange income to decline by as much as 75% from 2010 levels, beginning in the second half of 2011."

Deutsche Bank estimates that SunTrust will earn $1.10 a share in 2011 and $2.51 a share in 2012.

2. Regions Financial

Shares of Regions Financial ( RF) of Birmingham, Ala. closed at $7.30 Monday, declining 6% from a year earlier.

The company owes $3.5 billion in TARP money.

In 2010, Regions collected $346 million in debit card interchange fees, and based on that figure, Deutsche Bank estimates debit card interchange fee revenue will be 5% of total revenue in 2011 and a very important 23% of earnings before taxes and provisions for credit losses.

Regions estimated in its 2010 10-K report that the Federal Reserve's initial proposal of a 12-cent cap on debit card interchange fees, the company's "revenues resulting from debit card income would likely be reduced to approximately one quarter of current levels, absent any mitigating actions.

Deutsche Bank estimates that Regions will earn 16 cents a share in 2011, and 59 cents a share in 2012.

1. TCF Financial

Shares of TCF Financial of Wayzata, Minn., closed at $15.82 Monday, down 1% over the previous year.

TCF's 2010 "card revenue, primarily interchange fees, totaled $111.1 million," according to the company's 10-K filing. Based on that number, Deutsche Bank estimates that interchange fees would contribute 9% of estimated revenue and a whopping 25% of pre-tax, pre-provision income for 2011.

The company reported that its average debit card interchange fee was 49 cents per transaction in 2010, and estimated that if the Federal Reserve's proposed 12-cent cap on debit card interchange fees were to go into effect, the "resulting reduction in TCF's average interchange rate after July 21, 2011 could approach 85%."

Although TCF was obviously disappointed that Judge Piersol denied its petition for a preliminary injunction to keep the Durbin rules from going into effect, the company is likely to appeal, and there is hope on the political front. The Senate has yet to take up Senator Tester's bill, and Congressman Barney Frank (D-Mass), who co-authored the Dodd-Frank act and is the ranking Democrat on the House Financial Services Committee, said in a statement Tuesday that he supports a delay in the interchange fee rules, as the Durbin Amendment "is the only part of the financial reform bill that needs to be amended."

-- Written by Maria Woehr in New York and Philip van Doorn in Jupiter, Fla.

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