If you've been reading news about the financial sector over the past week, chances are you've been reading about the approval of the Volcker Rule.
The Volcker Rule intends to rein in banks' risky trading practices by prohibiting speculative trading for their own accounts. In the cases where trading must occur, it must be reasonably related to client needs. Hedging should also be directly related to specific, identifiable risks. Ideally, this rule should prevent incidents such as JPMorgan Chase's (NYSE: JPM ) $6 billion loss in the "London Whale" trading debacle, which involved trading derivatives in a botched attempt to hedge interest rate risk.
Between now and when the Volcker Rule is implemented -- big banks need to comply by 2015, and smaller institutions by 2016 -- there are a lot of unique plays that investors can make to protect and grow their investments in the banking sector. One such play is increasing holdings in Bank of America (NYSE: BAC ) . I believe the Volcker Rule has opened up a set of new opportunities for the Charlotte, North Carolina-based bank.
Volcker Rule brightens retail banking's 2014 outlook
Big banks have between now and 2015 to adjust to the Volcker Rule. During this time period, the investment side of banking will be cast into a lot of incertitude. However, these companies are generally very good at dealing with regulatory and economic changes. Bank of America's mortgage business is a good case in point. In October, the bank cut 2,100 jobs and closed 16 offices in its mortgage business. This was in response to rising interest rates fueled by fears that the Fed would scale back on its economic stimulus program. I don't think adjusting to the Volcker Rule will be any different.
In the meantime, this scenario presents the perfect backdrop for a rise in retail banking in 2014. Although retail banking typically has lower margins relative to wholesale banking, it presents stability in times of incertitude.
Bank of America is in a unique position to capitalize on the prominence that retail banking will gain in 2014. This is primarily because of the pivotal role that the Volcker Rule will play in consolidating the gains Bank of America has made as far as consumer confidence goes.
Bank of America to gain most from Main Street's forgiving mood
Although big banks have been paying fines since the financial crisis, the Volcker Rule has introduced a strong regulatory element that signals banks' commitment to ethical practices. I think this will put Main Street, which constitutes the bulk of retail customers, in a forgiving mood. Indeed, we may already be seeing this. The recently released rankings of the nation's top banks by the American Customer Satisfaction Index indicate gains in customer confidence throughout the retail banking segment. JPMorgan emerged top with a CSI benchmark of 76, up 3% from the last rating. Citigroup (NYSE: C ) had a ranking of 74, up 6%, Wells Fargo (NYSE: WFC ) 72, up a modest 1%, and Bank of America 69, up 5%.
While Bank of America emerged last, the 5% gain it recorded was its largest improvement in a decade. In light of this great momentum, the comparatively lower CSI ranking, as well as the anticipated positive sentiment brought about by the Volcker Rule, Bank of America is likely to witness the most notable gains among its peers in customer confidence in 2014. This will place its retail banking business into overdrive, allowing it to capitalize on the increased appetite for credit.
Bank of America CEO Brian Moynihan expects borrowers to be "friskier," or demand more, if you will, in 2014. Wells Fargo CEO John Stumpf also expects credit quality to increase in 2014. Likewise, the imminent taper of the Fed's bond buying program (which indicates economic recovery) will put an upward pressure on interest rates, allowing Bank of America to squeeze out more profits from borrowers at a time when demand for credit is high and consumer confidence favors it.
The bottom line
I see the Volcker Rule as a positive for Bank of America. It strengthens customer confidence at a time when retail banking is on the verge of being thrust into prominence. Although I don't expect Bank of America to make mind-boggling returns in retail banking, increased exposure in the segment will allow it to maintain stability and protect investors' money amid notable changes in the sector landscape.
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