Banks you may now wish to avoid (improved and updated)

JP Morgan analyst Kian Abouhossein has produced some interesting research on the banks that will be most heavily impacted by the 'Volcker Rule.'

This is the same Abouhossein who produced something back in September on the likely impact of proposed regulatory changes on various banks. We published the findings of his original research at the time, and have published them again below.

As you'll note, in September Abouhossein was predicting biggish comp/headcount changes at banks in order to maintain ROE at around 15%.

It's therefore not great news that following Obama's announcement yesterday, Abouhossein is now expecting banks' earnings to take an even bigger hit. The implication? Goldman, Deutsche, Morgan Stanley and Credit Suisse will have most need to trim pay/headcount to maintain EPS in future.

Source: JP Morgan

Below, we've also added a brief summary of other analysts' research and opinions from around the web on the likely impact of Volcker on a bank by bank basis.

Barclays Capital

Barclays claims to have no prop trading at all, so should not be unduly impacted by the new rule. However, in a worse case scenario, The Times suggests Barclays could lose 1.5bn of trading revenues. It could also be obliged to sell Barclays Private Equity, which generates up to 350m in revenues. The bank is not thought to have inherited any hedge funds from Lehman.

BofA, JP Morgan and Citi

All are likely to be less impacted (than Goldman), although the likelihood of investment banking spin outs can't be discounted. According to the Telegraph, JP Morgan estimates that prop trading accounts for only 1% of its total revenues., Hendler points out that at Citi revenues from principal transactions were just 5% of the total in 2009, at BofA they were just 1%.

Credit Suisse, UBS and Deutsche

Analysts at KBW think these three banks will most impacted in Europe. They're assuming that 5% of sales and trading revenues at CS, UBS and DB are generated from prop activities: "For our value destroyed calculation, we assume that the

multiple placed on the prop trading is lower than the other IB revenue streams (around

4x) and that HF and PE activities could be spun off at ~8x with a significant 50%

haircut. This leads to value destruction of between 6-8% for the Euro IBs and 2-5%

for the other large wholesale names."

Analysts at Credit Suisse think that if the Volcker rule were enacted globally it woud reduce profits by 14% at Deutsche and by 10% at UBS. As noted above, Kian Abouhossein thinks the EPS impact on European banks will be greatest at Deutsche, Credit Suisse and UBS (in descending order).

The French banks

Credit Suisse analysts aren't predicting too much change for French organisations, pointing out that, "French banks' business model is largely based on lending and client driven revenues."

Out of all French banks, Credit Suisse says SG is the most exposed, with prop trading equal to about 15-20% of CIB revenues (more than Goldman's ~10%). At BNP Paribas, they estimate prop trading is 5-10% of revenues:

"A back of the envelope calculation suggests that if all proprietary trading disappeared worldwide (with a 40% cost offset and 30% tax rate) the EPS 2011E impacts could be of about 15% at SG, 7% at BNPP, and 3% at CA and Natixis. If we assume that only the US portion goes to zero the impacts could be reduced by 80% in our view to about 3% at SG, 1% at BNPP and <1% at CA and Natixis.

Goldman Sachs

Goldman will be particularly impacted by the Volcker rule, says Dave Hendler at CreditSights. He claims it's overly dependent on capital markets activities (75%) of which have a sizeable prop trading element.

KBW analysts estimate that the combined impact of the Volcker rule on Goldman's prop trading, principal investing and asset management businesses could be about

$8.4bn (19% of KBW's 2010 estimate) of revenues at risk, $3.7bn (21.6%) of pre-tax

earnings, and about $4.27/share (23.1% of "core" estimate) of earnings.

At worst, Goldman could be forced to divest entire divisions, including its distressed debt arm, internal hedge funds, and its private equity portfolio (which has $18bn of investments outstanding according to Hendler).

However, Goldman may yet find a means of avoiding this eventuality.

The Financial Times points out that during Thursday's conference call, CFO David Viniar suggested the bank could move its prop trading operations into the asset management business where clients would be able to invest in them, thereby exempting any resulting trading activities from the rule.

Equally, The Times points out that some of Goldman's private equity and hedge fund activities are already open to investment by clients, that half of Goldman Sachs Principal Strategies is already open to client investments, and that all the bank's hedge funds are already open to clients.

Goldman could also shed its deposit taking business and give up becoming a bank holding company. But, as Zero Hedge points out, giving up bank holding status would greatly increase the cost of refinancing the $20.7bn of debt written by Goldman under the temporary liquidity guarantee program.

On the other hand, Goldman may yet have reason to celebrate the new rule. US banking analyst Dick Bove says Goldman could benefit, on the grounds that....

...banks with large deposit bases have distinct advantages in certain sectors of the market. They can produce financial products at lower cost. If the banks are told they cannot use deposits in this fashion in the future, it "levels the playing field" for companies like Goldman Sachs. It should allow the company to gain market share and increase prices. This would increase profits and presumably offset the loss from proprietary investments.

And analysts at Sanford Bernstein point out that in a worse case scenario where universal banks are obliged to spin off their securities businesses (which would then be forced to operate without the funding advantages of large diversified firm), Goldman would emerge as the clear winner.

Morgan Stanley

Morgan Stanley's likely to be a lot less impacted than Goldman: it's far less reliant on prop trading and has a far smaller private equity business ($828m according to Hendler, vs. Goldman's $18bn). According to the Financial Times, prop trading, private equity, and other bank investments account for less than 5% of revenues at Morgan Stanley.

Morgan Stanley is also shielded by its push further into retail brokerage through the consolidation of the Dean Witter network with the Smith Barney retail business; analysts at Bernstein estimate that nearly half of Morgan Stanley's normalized revenues will be generated by wealth management in future.

The bank could nevertheless by obliged to sell off some of its stakes in hedge funds including Lansdowne Partners, Abax Global Capital and Traxis Partners.

RBS

It seems unlikely that RBS is heavily involved in prop trading (according to The Telegraph, it's in the process of closing its remaining prop desks down), but Raul Sinha at Nomura points out that it has a disproportionate level of market risk weighted assets, suggesting it's still taking a lot of trading risk - although if this is on behalf of clients it should be unaffected by the new rule.

Questions have also been raised about RBS' sale of Sempra (at which prop trading is understood to account for 50% of profits according to the FT). However, The Scotsman reported on Sunday that the sale is going ahead.

At worst, City AM's editor Alistair Heath suggests that RBS could sell its investment bank to an overseas player, and possibly move trading and hedge fund operations elsewhere.