Wall St experts say finreg a drag on bank profit

* New financial regulation seen a drag on profits

* Fee income will come under pressure

By Joseph A. Giannone

NEW YORK, July 15 (BestGrowthStock) – Sweeping financial regulatory
reform will reduce bank profits and could squeeze systemic risk
from Wall Street into new corners of the market, a securities
industry conference heard on Thursday.

The massive Dodd-Frank Bill, which could be signed into law
as soon as Thursday, responds to the 2007-2009 financial crisis
by setting tougher capital requirements, establishing a
consumer protection watchdog and imposing new trading rules.

The nitty-gritty of the new law will not be known for many
months, as rule-making duties shift to agencies like the
Securities and Exchange Commission. But banks are bracing for
the end of more than two decades of deregulation.

“In our view, it is back to the future. Moving forward
profitability goes down, fees go down, leverage goes down and
expenses go up,” said Fred Cannon, chief investment strategist
at KBW (KBW.N: ), a boutique investment bank specializing in
banks and thrifts.

Policy analyst Jaret Seiberg of Concept Capital warned an
overflowing audience of securities industry executives that fee
income, such as checking account charges, will come under
pressure by the new consumer protection agency.

“You can’t assume the revenue streams of the past will
exist,” Seiberg told the Securities Industry and Financial
Markets Association regulatory conference.

Growing customer fees and looser capital rules allowed
banks to boost profitability even as net interest income from
their balance sheets fell.

Analyst Kian Abouhossein, who leads JPMorgan bank stock
coverage in London, sees investment bank profitability falling
by 3 percentage points to about 16 percent. Changes to the
Basel II bank capital rules could chop off 4 points from
returns, he said.

“Investors generally demand 15 percent returns for
investment banks, which tend to be volatile businesses. We
think that is achievable,” he said.

All three analysts concurred that other changes will offset
these declines, including cuts in employee compensation,
business reductions or passing on costs to customers.

What is harder to predict, the panel said, is the impact of
efforts to prevent another systemic credit crisis.

“The goal of the bill is to push the risk out of the banks
and to smaller entities who would not have systemic impact,”
Cannon said.

Abouhossein said hedge funds will be big winners, since
Dodd-Frank will let them compete in new areas and most will not
be subject to the new too-big-to-fail rules. He argued
regulators should cast as wide a net as possible.

Customer-related securities trading, or “flow” trading,
could be another area to suffer some unintended consequences,
Abouhossein said, since a wide number of firms will be
competing for the same business. The new bill attacks the
practice of proprietary trading, or making bets with the bank’s
own money.

“We look at the revenue wallet, compare with the
announcement of new staff and hiring targets and the numbers
don’t stack up,” he said.
(Reporting by Joseph A. Giannone; Editing by Tim Dobbyn)

Wall St experts say finreg a drag on bank profit