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

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.

 Basel III

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%.

 Basel III

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.

 Basel III

  Basel III