Playing Increased Bank Regulation in 2013

Ken Reid | Taxi | Getty Images

With increased regulation for financials due to the Dodd-Frank Act and Basel III rules on the horizon, one analyst listed bank stocks he expects to rise in 2013 and told CNBC that he sees the early stages of a recovery in banks' capital markets businesses.

"One reason that you've seen the run-up is a lot of the uncertainty seems to be working away," said Brad Hintz, an equity research analyst at Sanford C. Bernstein, about the rise in bank stocks this year. "The banks are making the changes to live in this post-Basel III, Dodd-Frank environment."

To prepare for these regulations, Wall Street banks have changed both inventory and compensation levels — moves that Hintz told CNBC's "Squawk on the Street" are necessary.

"If you remember, a year ago the market was convinced that the capital markets banks would never be able to beat their cost of capital again," he said.

To cut down on compensation expenses, several banks have announced layoffs this year. Some of these downsizing moves have been massive.

Earlier this month, Citigroup said it plans to axe 11,000 jobs as part of a broad restructuring effort that it hopes will save $1.1 billion in expenses. This follows an October announcement from UBS that it would cut up to 10,000 jobs, nearly a sixth of its positions, as part of a strategy to pare back a large part of its capital intensive fixed-income business.

"All of this says that management isn't just asleep at the switch going forward destroying shareholder value," he said.

Hintz stressed that banks will not give up their capital markets businesses entirely.

"Even though the capital markets businesses aren't beating their cost of capital right now, what we're seeing is we're seeing compensation levels coming down," he added. "That's increasing the margins in it."

In addition to increased regulation, banks have to contend with another concern, the "fiscal cliff," which Hintz said has made everything uncertain until at least March.

Hintz has "outperform" ratings on shares of Citigroup, Goldman Sachs and Morgan Stanley.

"Citi certainly has an advantage in the sense of its position internationally," he said. "As Asia picks up, Citi's going to pick up. They're well positioned for that."

Hintz has a $170 price target on Goldman Sachs and suggested that investors "go with it."

"Goldman Sachs, certainly the leading firm on the investment banking side," he said. "We would put them in a portfolio."

Additional News: From Worst to Best: Financials Surge 26% in 2012

Additional Views: This Sector Will Beat All Others in 2013: Pro

Disclsoure: No disclosure information was available for Brad Hintz.

Disclaimer