Major banks' stocks have been on a tear lately — up 40 percent in the past six months versus the S&P 500's 9 percent rise — but one analyst is wary of big challenges in the new year, challenges that favor the industry's strongest players.
"There's a lot of optimism that's starting to get baked into these (financials') names, but I still see a lot of headwinds potentially clouding that optimism," said Brennan Hawken, a banks analyst at UBS.
He says regulatory and political pressure threaten to limit growth opportunities, while that planned central clearing of the derivatives market is of particular concern.
The global regulatory standard known as Basel III, along with the Volcker rule, will also put heavy pressure on certain types of trading, in particular FICC — fixed income, currency and commodities — which he described as "principle trading."
Hawken also said that the Fed the is going to remain reluctant to give some banks permission to return capital to shareholders.
"The trouble is (banks) have got to kiss the ring of the Fed in order to get permission to return capital to shareholders," and this favors the banks the regulators believe in and whose internal controls they trust, namely Goldman Sachs and JPMorgan, Hawken said.
However, of his "neutral" ratings, Hawken is most positively disposed to Citigroup, citing the new leadership after Vikram Pandit's sudden departure in October.
"Instead of empire builders, lawyers and hedge fund mangers, now we've finally got a bank operator" running Citigroup, he said, referring to CEO Michael Corbat and Chairman Michael O'Neill.
The trouble with Citigroup stock, however, Hawken said is that after it's run up, it's no longer trading at as much of a discount as it used to.
The U.S. equity strategist, a member of his team, or one of his household members has a long common stock position in Goldman Sachs, JPMorgan and Morgan Stanley.
These companies are or have been investment banking clients of UBS within the past 12 months: Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley.
With the past 12 months, UBS has received compensation from these companies: Bank of America, Citigroup, Goldman Sachs, JPMorgan, and Morgan Stanley.
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