Regulatory Costs Driving Bank Earnings Lower, QE Impact Too

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While the Volcker Rule did not hit banks as hard as many expected, that is not to say that the big banks are off the hook in 2014. There are still a number of items that are likely to have a negative impact on the bottom line.

Analysts at Sterne Agee have lowered their earnings per share (EPS) estimates for four big banks, noting the hits from all the new and changed regulations:

Principal drivers for the estimate reductions include higher provisions, lower margins following the beginning of the Fed Taper, modestly lower mortgage and higher baseline expenses as the banks recalibrate their expense base relative to the new regulatory and compliance requirements.

The Sterne Agee analysts have lowered their 2015 EPS estimate for Bank of America Corp. (NYSE: BAC) from $1.60 to $1.50, while leaving their 2014 EPS estimate of $1.25 unchanged. Sterne Agee has a Neutral rating on the stock.

Bank of America stock traded around $15.77 Friday morning, in a 52-week range of $10.98 to $15.98. The consensus estimate on the shares from Thomson Reuters is around $15.50, yielding an implied gain of 3%. The forward multiple is nearly 12, based on the consensus estimate for 2014 EPS of $1.32. And based on the Sterne Agee estimate of $1.25, the forward price-to-earnings (P/E) ratio is 12.4.

The 2014 EPS estimate for Buy-rated J.P. Morgan Chase & Co. (NYSE: JPM) falls from $6.10 to $5.90, and the estimate for 2015 falls from $6.50 to $6.30. The consensus EPS estimate for 2014 is $4.42, and the price target on the stock is $63.20. Based on that, the forward P/E ratio is 9.55. Using the Sterne Agee 2014 EPS estimate, the forward P/E works out to 10.7. The stock was trading around $57.74 in the mid-morning on Friday, in a 52-week range of $42.90 to $58.14, implying a potential gain of 9.5%.

Buy-rated Citigroup Inc. (NYSE: C) also gets a double dose of estimate cuts. The 2014 EPS estimate has been lowered from $5.50 to $5.30, and the 2015 estimate has been cut from $6.10 to $5.80.

Citigroup stock was trading around $52.07 Friday morning, in a 52-week range of $38.50 to $53.68. The consensus estimate on the shares from Thomson Reuters is around $59.90, yielding an implied gain of 15%. The forward multiple is 9.73, based on the consensus estimate for 2014 EPS of $5.37. Based on the Sterne Agee estimate of $5.30, the forward P/E ratio is 11.3.

The fourth bank included in the EPS cuts is M&T Bank Corp. (NYSE: MTB). The 2014 EPS estimate on the Buy-rated bank has been sliced from $8.20 to $7.90, and the 2015 estimate has been cut from $9.50 to $9.00.

The consensus estimate on M&T shares from Thomson Reuters is around $121.50, yielding an implied gain of 6.8%, based on Friday morning’s price of $113.73. The forward multiple is 13.74, based on the consensus estimate for 2014 EPS of $8.26. Based on the Sterne Agee estimate of $7.90, the forward P/E ratio is around 15.4. M&T’s 52-week range is $95.68 to $119.54.

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