Monday, March 22, 2010

Financial Regulatory Reform: No Consensus Yet [CREDIT SUISSE] $GS $MS $BAC

■ Financial reform legislation faces amendments: Chairman Dodd of the Senate Committee on Banking introduced his legislation on financial reform last week, and the Banking Committee will begin the markup tonight. Dodd pushed forward with a Committee markup of banking reform legislation, but we expect negotiations will continue even after a vote. While the bill may make it out of the committee on party lines, unless the bill can garner bipartisan support, it is less likely to pass in the Senate. As of Friday, there were about 360 amendments offered already.

■ Key areas of debate: The key areas of debate are likely to be the consumer provisions, the Volcker rule, the resolution fund and derivatives. In our view, it is these provisions that will largely dictate whether the bill can ultimately garner the bi-partisan support necessary to pass out of the full Senate. The “Volcker” provision is in the bill and empowers regulators to implement restrictions on prop trading and hedge fund sponsorship. Additionally, while the dollar amount is less than in the House bill, we think that the Republicans will oppose prefunding of the Resolution Authority.

■ Chances of passage hinge on negotiations: Overall, we put the chances of passage at under 50% if the Democratic leadership does not craft a bill that can get bipartisan support. Furthermore, as time passes it may be more
difficult to pass, as after the summer recess many legislators will be involved in reelection efforts. Therefore, it is likely that either the bill will be tempered or it will not pass.

■ Investment thesis: The risk of additional headlines remains high as discussions continue regarding industry regulation and reform. However, we think the risk/reward on BAC and JPM remains attractive despite the
proposed rules. We think that the current Volcker proposal will not pass in its current form. We continue to recommend USB as the company is wellpositioned and poised to return to normalized earnings before peers. We
rate C, PNC and WFC as neutral.

US Banks

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