Bank of America's (BAC) conference call is a must read. Warning: it is not for the faint of heart. Its implications for banking, now that Congress has passed credit card and financial reform, are not pretty.
1. The Card Act is expected to cost $1 billion after tax.
2. Regulation E/Overdraft policy changes have already cost $1 billion after tax. The fourth quarter of 2010 will see a further reduction of $2 billion pre tax.
3. The Dodd-Frank Bill impact at this point is uncertain because hundreds of rules need to be written still. It is expected to be very costly.
4. The Durbin Amendment in the Financial Reform Bill is expected to decrease debit card revenue each year by as much as $1.8 to 2.3 billion starting in Q3 2011. BAC expects to take a $7 to $10 billion charge in goodwill in Q3 2010 due to the impairment of the debit card goodwill.
5. Net interest margin is dropping. BAC's dropped 16 bp to 2.77%. Per the call, the low interest environment is flattening the returns banks can get for their borrowed money. Loan demand is weak. As a result, net interest income was down over $800 million from Q1 2010. These 5 banking nightmares will likely visit other financial institutions. BAC is the first to quantify some of them. BAC reiterates throughout the call that it has no idea how to "mitigate" these. While the legislative action may be intended to help level the playing field for consumers and to prevent banking excesses, for now, it appears to be leveling the financial institutions. It is surprising that Congress would inflict these new burdens on the banking industry in a fledgling recovery. The idea was to prevent new bubbles from forming. It would be sadly ironic if the reforms were to cause the recovery to fizzle. After all, how many recoveries have occurred without the banks?
