November 8, 2011

Big U.S. Banks Are ‘Uninvestable,’ Say Industry Insiders at SIFMA Meeting

In earthquake terms, Dodd-Frank is an 8 on the Richter scale, says BofA-Merrill’s Moszkowski

Bank stocks like BofA's will take a beating. (Photo: AP) Bank stocks like BofA's will take a beating. (Photo: AP)

Industry insiders criticized big U.S. banks as being “uninvestable” on Tuesday at the Securities Industry and Financial Markets Association’s (SIFMA) annual meeting in New York.

High-ranking officials from Bank of America-Merrill Lynch, McKinsey & Co. and Moore Capital Management agreed in a panel discussion on the financial sector’s outlook that investors are turning away from the big banks because the future of their business models are far from certain.

“Uncertainty is so profound in financial institutions that I’m sure Guy would say it’s uninvestable right now,” said Moore Senior Portfolio Manager Matthew Carpenter to Guy Moszkowski, managing director of BofA-Merrill’s U.S. Equity Research team, seated with him on the SIFMA stage at the Marriott Marquis in Times Square.

Moszkowski agreed, noting that a return on equity (ROE) of 7% to 8%, with no dividend, is typical in the current economic climate as banks deal with interest rates in the low single digits. “It hasn’t been easy,” he said. “There’s a tremendous amount of uncertainty.

LPL Financial President of National Sales Bill Dwyer introduced the panel by saying that the financial sector is at an “inflection point” where regulatory reform, market volatility and industry changes all create challenges.

SIFMA President and CEO Tim Ryan, who served as moderator, then asked the panel how big a deal Dodd-Frank reform is, particularly in terms of the Volcker rule and Basel III capital rules.

“In earthquake terms, I’d put it at about an 8 on the Richter scale,” Moszkowski said. Banks still can’t quantify the impact on trading revenues, but the impact will be significant, he said.

Last month, AdvisorOne reported that Susquehanna Financial Group analyst David Hilder said Goldman Sachs and Morgan Stanley may consider dropping their status as bank holding companies to avoid increased costs related to the Volcker rule in fallout from the proprietary trading proposal released earlier in October.

The big U.S. banks have growth and profitability problems due to Dodd-Frank, Basel III and consumer deleveraging, said panelist Toos Daruvala, McKinsey’s director of banking and securities. U.S. consumers are halfway through an

eight- to 10-year deleveraging cycle, after which he predicts 8% growth for the big banks.

Proprietary trading came in for a drubbing from Carpenter, who was recruited away from Citibank by Moore Capital Management, which has gained a reputation for aggressively recruiting proprietary-trading teams from big investment banks. Last year, Hedge Fund Alert reported that Moore, a $14 billion hedge fund manager, hired four people from Citigroup's prop desk, including Carpenter.

“Prop trading is all about the money. There’s nothing noble about it,” said Carpenter. “Those businesses have been shut down, and they should be.”

Carpenter said he believes that mid-cap banks are now a better bet for investors than big ones.

Still, the panelists said they believe that current downsizing in the banking industry doesn’t suggest a return to the days of the Glass-Steagall Act of 1933, which prohibited commercial banks from owning full-service brokerage firms.

Even if Goldman Sachs and Morgan Stanley give up their banking model, there’s no way they’re going to reduce their size back to what they used to be, Moszkowski said. “You can’t put the genie back in the bottle,” he said. “The world has changed.”

Daruvala agreed, arguing that the Volcker rule does not suggest a return to Glass-Steagall because it has a much narrower focus.

Read David Tittsworth’s thoughts on Measuring Dodd-Frank’s Effectiveness and Impact on Advisors at AdvisorOne.com. Tittsworth is executive director of the Investment Adviser Association.

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