No Budget, No Certainty For Banks

Includes: BAC, C, JPM
by: Adam Alvarez

The United States government may still not possess a budget, but those in Congress found another way to make due without one. When the House of Representatives recently voted 285-144 to temporarily suspend the approaching debt limit in a measure which was also later passed by the Senate, those in power did one thing they have done all too often in recent years. They kicked the can down the road.

With markets basking in new found interest and the Dow nearing its all-time high set in October 2007, the still looming budget battle may appear frivolous. With banks in the middle of the buying some may even be left to foolishly believe the ongoing budget battles aren't even crucial.

Still, every time Congress fails to make progress, another ominous date is set. The government now faces a potential shutdown on March 27th. By summer, the nation will once again stand on the brink of default.

Now some may choose to overlook the coming cloud of uncertainty after such nervousness at the end of 2012 went unabated. However, there is reason to believe this eventual budget battle will be even more troubling. With Nancy Pelosi once again alienating Republicans by recently announcing further tax hikes were still possible, the divide between the parties remains dubious. Things may have gotten even more treacherous when Paul Ryan vehemently proclaimed that "spending cuts are coming."

Such political gridlock threatens to hamper economic growth and effect multiple sectors. Still, banks appear primed to be among the hardest hit.

In the most recent earnings announcement, Bank of America (NYSE:BAC) reported beating earnings by a penny, but missed slightly on revenue in large part due to unfriendly mortgage settlements the bank is still being left to overcome. For Citigroup (NYSE:C), however, things got even worse as the company missed projected earnings by $0.28 a share.

Even the stronger banks are continuing to allow sizable reserves set aside to cover potential mortgage losses to bolster their reports. In the most recent quarter, JP Morgan (NYSE:JPM) generated a $700 billion pre-tax benefit from releasing loan reserves in the fourth quarter.

Outside the continuing budget uncertainty, banks are growing even more unfavorable in the eyes of many consumers as a direct result of their continued attempts to counter the Dodd-Frank legislation. The recent elimination by many of free checking has only encouraged more consumers to flock to smaller, yet assumed safer, credit unions.

As for the lending which has become a very depressed spot for many banks in the past few years, things still appear a long way from fully recovering. With a recent poll of 25,000 voters showing 37% acknowledging rising prices as the biggest problem facing people like them, it's safe to say customers are still hesitant to willingly take on debt. The ongoing budget fiasco certainly doesn't help.

As the controversial Dodd-Frank bill becomes more a part of the growing troubles facing these institutions along with the threat of overdue spending cuts, banks are also left to no longer assume government aid will come flowing in.

As Wells Fargo CEO John Stumpf recently responded about whether Dodd-Frank eliminated the problem of "too big to fail," he responded, "Yes, it's in the language. It's in black and white. You cannot be bailed out."

Therefore, it should be acknowledged that the road ahead for the industry is nothing short of uncertain and prolonged bickering in Washington only casts a darker cloud over what has the potential to be an agonizingly frustrating environment.

With 2013 GDP expected to come in at a meager 3%, further tax increases still possible and another ugly government showdown on the horizon, banks appear to face a darker road than many might choose to admit.

With such uncertainty and many banks such as Wells Fargo still "hungry for loans," bank stocks appear to provide anything but a guarantee. As most continue to hover near 52-week highs as investors have chosen to focus more on the present than the future, the time for investors to take profits has arrived.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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