Monday, March 15, 2010

Fee Regulation Impact: BAC, STI, MTB, RF, UBSI

New regulation regarding overdraft fees will begin July 1st for new accounts and August 15 for all others. Some banks such as Bank of America are getting a head start on the regulation and implementing changes before the deadline. With many consumer complaints the federal reserve stepped in to regulate overdraft fees but what will be the impact on banks bottom line.

The new regulation only affects ATM withdraws or debit/credit transactions with your debit card. Consumers will have the option to opt-in and overdraft their account. For more information follow this link. The intention of this post is to explore the impacts on financial institutions.

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Bank of America (BAC)
Current stock price:16.77
Market Cap:169 Billion

In 2008 Bank of America charged more services fees on deposit accounts than the total amount of their net income. If B of A had no service charges in 2008 they would have had negative earnings. Service charges on deposit accounts include overdraft fees, NSF and account maintenance. Banks will still be able to charge NSF for bounced checks and account maintenance but a significant portion of banks service charges will be from debit/ATM transactions.

SunTrust Bank (STI)
Current price:26.90
Market cap:13.4 Billion

Historically SunTrust has had more earnings than service charges and as the economy slowly recovers the bank should be able to sustain the new regulations.

M & T Bank (MTB)
Current price: 80.00
Market cap: 9.5 Billion

Although MTB was in better shape in 2009 than Bank of America in 2008 if service charges on deposits were eliminated the company would have also reported negative earnings. MTB should fair better than B of A with the new regulation because of the smaller proportion but the regulation will eat into shareholders returns.

Regions Financial (RF)
Current price: 7.26
Market cap: 8.75 Billion

Regions financial is having a tough time with the current recession. Losing the portion of revenue from overdraft fees will only make recovery for Regions more difficult. As you can see from the graph the company is already in the negative. Limiting service charges will only dig them deeper into the hole.

UnitedBank Shares (UBSI)
Current price: 27.05
Market cap: 1.18 Billion

United Bankshares is my winner for this post. The company is not dependent on service charges to keep them afloat; if they would have lost the portion of revenue from service charges on deposits it would not have turned their earnings negative. The new regulation will still impact their bottom line but they are positioned to sustain the new regulation better than its competitors.

Out of the five banks I used for my sample only one of the banks had more net income than service charges on deposit accounts in its last reported full year of earnings and that bank was United Bankshares. Although service charges will not disappear entirely with the new regulation banks may have a difficult time finding ways to replace the revenue gained from charging customers overdraft fees on debit card transactions.

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