Today regulators published final Basel III rules for U.S. banks. Citi’s best assessment is that the final rules were relatively in line with investor expectations for the “advanced” banks (The Bank of New York Mellon Corporation (NYSE:BK), Bank of America Corp (NYSE:BAC), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), Northern Trust Corporation (NASDAQ:NTRS), PNC Financial Services (NYSE:PNC), State Street Corporation (NYSE:STT), U.S. Bancorp (NYSE:USB) and Wells Fargo & Co (NYSE:WFC)). They did find the rules modestly exceeded investor expectations for the non-advanced banks (BB&T Corporation (NYSE:BBT), Fifth Third Bancorp (NASDAQ:FITB), M&T Bank Corporation (NYSE:MTB), Comerica Incorporated (NYSE:CMA), First Horizon National Corporation (NYSE:FHN), First Niagara Financial Group Inc. (NASDAQ:FNFG), Huntington Bancshares Incorporated (NASDAQ:HBAN), KeyCorp (NYSE:KEY), New York Community Bancorp, Inc. (NYSE:NYCB), Regions Financial Corporation (NYSE:RF), SVB Financial Group (NASDAQ:SIVB), SunTrust Banks, Inc. (NYSE:STI) and Zions Bancorporation (NASDAQ:ZION)).
Most banks have been hoping for higher interest rates and disclose lots of earnings to leverage this scenario. While the recent rise in LT rates may moderate NIM pressure some going forward, banks aren’t as well positioned for rising long term rates as it may have seemed, as noted by Deutsche Bank AG (NYSE:DB) (ETR:DBK). Higher rates will also pressure mortgage production revenues, given a likely sharp decline in refinance activity and likely lower gain-on-sale spreads. This will partially be offset by higher servicing revenues.
Basel III – NII trends likely mixed q/q (flattish overall) given lower NIM and weak loan growth
Deutsche Bank AG (NYSE:DB) (ETR:DBK) is forecasting net interest income (NII) to be flat/up q/q vs. down 2% on average in 1Q. Many banks assumed a modest rebound in loan growth off seasonally weak 1Q levels . However, unless growth picks up in the second half of June, their estimates are likely optimistic.
Investment banking (IB) fees could be better vs. a year ago
Deutsche Bank AG (NYSE:DB) (ETR:DBK) expects 2Q investment banking fees to be a positive this quarter. (See figure below.) 2Q trends will likely be driven by stronger equity underwriting volumes (ECM) and debt underwritin (DCM) was generally positive y/y. Lastly, completed M&A activity revenues will likely improve y/y, but remain somewhat subdued on an absolute basis. Industry ECM volume is tracking up 40-50% yoy, DCM up 20-30% and M&A down 10-15%.
Continued improvement in credit trends expected
Deutsche Bank AG (NYSE:DB) (ETR:DBK) expects additional modest improvement in net charge-offs. They expect charge-offs to decline at half of the 30 banks they cover. They also expect non-performing assets (NPAs) to continue to decline, reflecting a continued slowdown in the pace of non-accrual inflows. Loan loss reserve draw downs are likely to continue at most banks this quarter. Given ongoing improvement in housing, unemployment, and lower mortgage delinquency rates, they expect mortgage reserves to continue to decline. See the figure below for bank-by-bank trends for provisions, NCOs and loan loss reserves for the large cap banks, and next figure for these trends amongst the mid-cap banks.