Financials Have A Tough Road To Hoe To Get Stock Prices Higher
by Trefis Team, Forbes Blog,
JPMorgan, Goldman Sachs, Morgan Stanley and Citigroup were some of the banks that saw a cut in their target prices and earnings estimates late last month from Wall Street analysts. [1] [2] Analysts at Morgan Stanley expect JPMorgan, Citigroup and Bank of America to face a 2.5% capital surcharge that would force them to hold higher reserves than the industry norms to be followed under Basel III.
Banking stocks are also facing pressure because of weak housing data and uncertainty over the pace of the economic recovery. [3]
For JPMorgan and others, higher capital requirements could lead to lower growth of credit card loans, consumer loans and commercial loans. We have a $45.60 price estimate for JPMorgan, which is around 15% ahead of the market price.
Capital Surcharge Fee Cushion
The Financial Stability Board, under the directions of G20 nations, is set to finalize a capital surcharge fee for large banks to reduce instances of tax payer bailouts in future events of crisis. [4] Up to 30 “globally systemically important financial institutions” (G-SIFIs) may be forced to hold an additional 2-3% capital reserves over the 7% minimum requirement under Basel III.
Although the plans are still being finalized, the size of the additional reserves a bank will need to hold may depend on its size and scope of its operations. For a given level of capital, a higher reserve requirement would mean banks would have to reduce lending – thereby decreasing the return on capital. The surcharge is, however, not expected to be so large to force banks to raise additional capital.
Economic worries weighing down stocks
Continued weakness in the housing market, the low demand for credit and other macroeconomic concerns such as the reduced estimates for U.S. growth are some of the factors responsible for the decline in banking stocks over the past few months. Credit demand, capital market activity and sales & trading revenues are heavily influenced by economic conditions, and a deteriorating macro picture could adversely affect banking revenues.
The IMF has cut its estimate for U.S. GDP growth twice over the last two months, and now expects the world’s largest economy to grow at 2.5% this year. [5] Further deterioration in the growth outlook could negatively impact our revenue projections for these stocks.
Notes:
- Big U.S. Bank Estimates Slashed, The Street [↩]
- BofA, Citigroup: New Targets, Estimates, The Street [↩]
- Analysts: Banking sector growth outlook subdued, AFP MSNBC [↩]
- UPDATE 4-Biggest banks may face stiffer capital surcharge, Reuters [↩]
- IMF Cuts Forecast for U.S. Growth Again Amid Risk of Contagion From Europe, Bloomberg [↩]
Categories: Stocks, Trends, Patterns, Indicators