Overdraft Legislation Hangs Over TCF Financial

| About: TCF Financial (TCB)

With Congress back in session today, be on the lookout or the House Financial Services Committee to schedule a mark-up of Rep. Maloney's Consumer Overdraft Protection Fair Practices Act (H.R. 1456). The bill is nearly identical to the version of the bill Rep. Maloney introduced in 2007, but with much better chances for passage as the bank industry's political fortunes have waned.

The bill primarily mandates better disclosure of overdraft fees, but the element that poses the greatest risk to bank revenues regards debit transactions. Essentially, banks would be required to give customers a notice - similar to the one that pops up when you make a foreign ATM withdrawal - that a pending transaction would trigger an overdraft fee, and give customers the opportunity to cancel the transaction. Cancellations would likely be quite high at debit/POS terminals, since the average transaction size is less than the average overdraft fee.

However, most debit/POS terminals are not equipped to give customers such a notice, and that poses an even bigger threat - the bill bars the imposition of overdraft fees on transactions where it is not technologically feasible to give opt-out notices. According to the FDIC's Study of Bank Overdraft Programs released last December, NSF/Overdraft fees represented 74% of total deposit service charges, and based on the growth in debit transactions as a source of those fees, it seems reasonable to assume that up to 70% of those fees could be at risk as a result of the pending legislation.

The most vulnerable bank appears to be Minnesota-based TCF Financial (NYSE:TCB); over the past five years, total deposit fees have equaled 77% of TCF's pre-tax income. As a result, between one-quarter and one-third of TCF's normalized earnings power is threatened by Rep. Maloney's bill. This would also have a significant impact on their growth rate, which is driven by a strategy of de novo expansion and growth in free checking account deposits, the profitability of which relies upon overdraft fees.

TCF actually has very astute management, and they would undoubtedly react. The most likely step might be the imposition of monthly maintenance fees on low-balance accounts; in the current environment, though, I think it is an open question whether any bank could do that without triggering significant deposit outflows; there are too many competing banks starved for liquidity, and thus happy to forgo fee income just to enjoy the low-cost funding.

Disclosure: No positions.