Home Business Large Cap US Banks Face Legal Quagmires, Declining NIMs: Deutsche

Large Cap US Banks Face Legal Quagmires, Declining NIMs: Deutsche

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Deutsche Banks Markets Research analysts Matt O’Connor, Robert Placet, David Ho and Dan DelMoro frame a ‘Question Bank’ in their recent research note on US large cap banks.

One page of the report is dedicated to key industry questions that confront the sector as a whole, and here are some of their concerns.

Legal wrangles

Deutsche remains concerned about the on-going legal ‘uncertainties’ tied with the plethora of litigation surrounding US banks.

Mortgage investigations are being pursued by State Attorneys General as well as the US Department of Justice. Banks are also in the midst of negotiating settlements with the FHFA, the supervisory authority for mortgage GSEs Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA). Other issues arise from the LIBOR rate fixing investigations as well as lapses in money laundering compliance.

Buybacks at elevated prices

Considering that banks have already had a solid run up in prices during the past two years, would it be wise to implement share buybacks at these levels?

Bank of America Corp (NYSE:BAC), for instance, has received the Fed’s authorization to buy back up to $5B in common stock and 5.5B in preferred stock within Q1 2014.

Deutsche questions whether buybacks are a good use of capital in the present environment.

Declining NIMs

The continuing low-interest regime has severely crimped NIMs at US banks, as seen from the chart below.

Major banks such as Wells Fargo & Co (NYSE:WFC), U.S. Bancorp (NYSE:USB) and JPMorgan Chase & Co. (NYSE:JPM) reported “margin attrition” even during the fourth quarter.

“When will NIMs bottom, and what rate environment do we need?” asks Deutsche.

FICC revenues

The recent turmoil in global markets triggered by volatility in emerging market currencies does not augur well for FICC revenues in 2014, considering 2013 was itself a weak year. “Structural headwinds, inventory reductions and marketplace adjustments” along with rising interest rates are issues that could impact FICC in 2014, says the Deutsche report.

Fee income

Declining mortgage banking activity during Q4 had an unfavorable impact on their fee income according to ValueWalk here.

“What’s the outlook on fee income in 2014 given mortgage normalization, regulatory pressures, and competition?” ask the Deutsche analysts.

Investment banking

Could the recent market sell-off adversely impact the banks’ activities in M&A and equity capital markets?

Note that during Q4 investment banking fees came in better than expected up 29% quarter-on-quarter and up 9% year-on-year driven by equity underwriting and advisory, according to this ValueWalk article on big banks’ performance in Q4.

Deutsche notes, moreover, that the start to the new year in 2014 too has been “robust.” How will banks monetize this?

Rising interest rates and deposit outflow

A key concern is how banks’ will handle interest rate repricing in the event of a reduction in deposits due to a hardening interest rate structure.

Deutsche seeks clarity on banks’ interest rate sensitivity in the event of a decline in core funding such as deposits.

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