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Big Banks Becoming 'Public Utilities': Strategist

CNBC.com
Tuesday, 28 Jun 2011 | 1:40 AM ET

Investors should start changing how they view the banking sector on the back of tough rules imposed on the big lenders, says Don Luskin, Chief Investment Officer at Trend Macrolytics.

Because of increased regulation, the financials are becoming more like utility firms, according to Luskins, a transformation that could hurt the prospects of the sector.

"I think banks should not be seen as a growth industry, " he told CNBC Tuesday. "They should really be seen as a highly regulated public utility." Click here for full interview.

In a proposal outlined in the last week, global banking regulators are looking to increase the core capital big banks will be required to hold by between 1 and 3.5 percent starting in 2016. This would be on top of the 7 percent minimum core capital required of all international banks under new Basel III rules that will start from 2013.

The proposal still needs approval from G20 leaders in November.

The Bank for International Settlements (BIS) - an inter-organization of central bankers - warned that these new rules would mean smaller and predictable returns for financials, resulting in less value for investors.

"They're not going to be able to operate with nearly as much leverage as they were in the previous decade," said Morningstar equity strategist Paul Larson. "So if return on asset stays roughly the same, which is what we think will happen, that means that return on equity is going to go down."

While Luskin thinks investors should stay away from the "more systemically" important banks that are subjected to higher capital adequacy ratios, there could be opportunities in the lower tier banks.

"If you're not one of these so called 'too-big-to-fail' banks to have this gigantic capital cushion, if you're just in the tier below that or the tier below that, all of a sudden, the historical advantatge that the megabanks have had…is suddenly taken away," he said. "So there could be real opportunity in third tier and second tier banks here."

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