As described in an earlier post, most U.S. banks now have — or are close to having — the capital they need to meet the federal government’s new capital requirements, we believe. One exception involves institutions that continue to have extensive investment banking operations and still are likely to need to increase capital.
Generally speaking, from this point forward, we anticipate little in the way of new equity issuance. Those banks that need additional capital are likely to attain it by generating and retaining earnings, either as cash or in the form of “safe” securities.
And while the ultimate impact of new financial sector regulations will be unknown for some time, our view is that the risk and volatility of bank earnings, and, by extension, bank stocks, should be lower in the future.
We believe banks have been responding and will continue to respond to the new environment and seek ways to attract investors. As new regulations are implemented, the banks will also explore new ways to protect and increase their profit margins. They are likely to adjust their mix of businesses and develop new ways to work within regulations in order to achieve higher ROEs.
Given that higher capital requirements are likely to lower the profit margins for investment banking, the leaders of each institution will need to decide whether it makes sense to continue operating these units. We anticipate that many institutions will decide to scale back investment banking operations.
Read more in our white paper on the outlook for the financials sector: Putnam White Paper: The outlook for U.S. and European banks
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.