The Zacks Analyst Blog Highlights: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and American Capital Agency

The Zacks Analyst Blog Highlights: Bank of America, Citigroup, Goldman Sachs,
                  JPMorgan Chase and American Capital Agency

PR Newswire

CHICAGO, June 11, 2012

CHICAGO, June 11, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks
featured in the Analyst Blog. Every day the Zacks Equity Research analysts
discuss the latest news and events impacting stocks and the financial markets.
Stocks recently featured in the blog include Bank of America Corp. (NYSE:BAC),
Citigroup Inc. (NYSE:C), Goldman Sachs Group Inc. (NYSE:GS), JPMorgan Chase &
Co. (NYSE:JPM) and American Capital Agency Corp. (Nasdaq:AGNC).

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Here are highlights from Friday's Analyst Blog:

Fed Unveils New Capital Rules
A series of capital proposals were given by the Federal Reserve yesterday
aimed at guaranteeing that the U.S. banks maintain a solid capital position
and become resilient in stressful times.

These rules would put into practice the Basel III accords as well as changes
required by the Dodd Frank Wall Street Reform and Consumer Protection Act in
the United States.

Per the proposal, the rule would apply to all depository institutions, bank
holding companies with total consolidated assets of $500 million or more, and
banking organizations.

These proposals were voted 7-0 by the Fed governors and are subject to
discussion. Comments on them can be put forward until September 7. The rules
will be finalized after that. The proposal is likely to be approved by the
Federal Deposit Insurance Corp and the Comptroller of the Currency in the
coming week.

Banks are expected to adhere to these rules, which are scheduled to be
implemented in a phased in manner starting 2013 through 2019.

The Proposed Rules
The proposed rules suggest that U.S. banks would need to set aside more
capital as buffer in times of unexpected losses. Banks would need to maintain
a new minimum common equity tier 1 ratio of 4.5% of risk-weighted assets and a
common equity tier 1 capital conservation buffer of 2.5% of risk-weighted
assets. This comes to a total of 7%, which is well above the current
requirement of around 2%.

Moreover, per the proposals, banks would be compelled to not depend on credit
ratings for assessing their assets' riskiness. Instead, they need to base
their evaluation on the categorization of risk offered by the Organization for
Economic Cooperation and Development.

This is to comply with the requirements of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. Under this financial overhaul, all federal
agencies must remove from their regulation references to, and requirements of
reliance on, credit ratings.

The other proposed rule is related to banks with consolidated total assets of
at least $250 billion or consolidated total on-balance sheet foreign exposures
of at least $10 billion. It would also apply to banks with aggregate trading
assets and trading liabilities equal to at least 10% of quarter-end total
assets or $1 billion.

This includes Wall Street's major players, such as Bank of America Corp.
(NYSE:BAC), Citigroup Inc. (NYSE:C), Goldman Sachs Group Inc. (NYSE:GS) and
JPMorgan Chase & Co. (NYSE:JPM).

These banks would be required to hold more capital as a buffer against their
trading books. Such capital cushion would help address the risks associated
with complex financial products. The final rule in this context would be
effective January 1, 2013.

In Conclusion
These rules might limit the flexibility of the banks with respect to their
investments and lending volumes. Moreover, such strict capital norms may
somewhat reduce the pace of a worldwide economic recovery in the short term.

Moreover, elevated capital requirements are a significant cause of concern for
the smaller banks, which are already finding it difficult to navigate through
the current environment of tepid economic growth and increased regulatory
actions. While larger banks can counter such situations with their scale,
smaller banks whose business model has already been questioned might be
challenged while adhering to such capital norms.

However, the rules are still in the proposal phase and comments are welcome.
These might lead to the development of regulations that address concerns of
all. In fact, we believe that eventually, such norms will serve as building
blocks for the economy. It would check bank failures and involve less of
taxpayers' money for bailing out troubled financial institutions.

AGNC Upgraded to Outperform
We have recently upgraded the long-term recommendation for American Capital
Agency Corp. (Nasdaq:AGNC), a real estate investment trust (REIT), from
Neutral to Outperform primarily driven by its healthy first quarter 2012
results and strong growth perspectives.

American Capital Agency focuses on investments in mortgage pass-through
securities and collateralized mortgage obligations (CMOs). The company
purchases single-family residential pass-through securities which are
interests in pooled loans of principal and interest including pre-paid
principal that are made to the holders of the notes.

Collateralized mortgage obligations consist of multiple classes with payments
of principal and interest being made to note holders based on the maturity
date of the class of security.

The mortgages underlying these agency securities are fixed rate, adjustable
rate or hybrid (fixed and adjustable) securities. Agency securities differ
from traditional fixed-income investments as principal and interest are paid
on a regular schedule and there is a possibility that principal will be
pre-paid by mortgage holders if interest rates fall.

American Capital Agency invests only in fixed-rate agency securities where
payments are guaranteed by the U.S. government or government-owned entities,
such as Fannie Mae (FNMA), Freddie Mac (FHLMC) and Ginnie Mae (GNMA).
Specifically, American Capital Agency invests in FHLMC Gold certificates, FNMA
certificates, and GNMA certificates.

We like the company's focused investment approach, which is not distracted by
originations, servicing, or credit risk from investments in mortgages that do
not have the backing of the U.S. government.

With the government takeover of FNMA and FHLMC, American Capital Agency's
securities now have an explicit government guarantee, which makes it a much
more attractive prospect for investors. Additionally, the company's portfolio
of government-backed assets is relatively liquid and credit risk is limited.

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