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Dodd-Frank Reducing Bank Revenues by $9 Billion Spawns New Fees

Bank of America Corp., JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) are among the 10 largest U.S. banks that may lose more than $9 billion in annual revenue from two parts of the Dodd-Frank regulatory overhaul.

The group of lenders estimated lost revenue of at least $4.6 billion a year from new caps on debit-card swipe fees as they reported results this month. The Volcker rule, which limits bets that banks can make with their own money, may result in the loss of stand-alone proprietary-trading units that produced average annual revenue of $4.5 billion over the past two years, the Government Accountability Office said in a July 13 report.

The Dodd-Frank Act, passed in July 2010, may cost 23 U.S. financial companies --including the top-10 banks -- at least $22 billion in additional expenses or lost revenue, according to a Bloomberg Government study released last week. Banks laid out plans this month to recoup some of that revenue with new fees and fewer customer perks such as debit-card rewards.

“The more onerous parts of Dodd-Frank are now being openly discussed and banks have been able to get their arms around certain numbers as the regulations become clear,” said Gerard Cassidy, an analyst at RBC Capital Markets. The debit caps “and prop-trading are the big areas of revenue challenges from Dodd- Frank.”

Bankers including JPMorgan Chief Executive Officer Jamie Dimon, 55, have questioned whether the regulations will hurt lenders’ ability to support the economy. The 10 biggest banks’ estimated impact of the two rules accounts for less than 2 percent of the $514.6 billion net revenue they posted last year.

Debit-Fee Caps

Bank of America said the cap on debit-card swipe fees charged to merchants would reduce revenue by about $475 million a quarter, while JPMorgan and San Francisco-based Wells Fargo each pegged the decrease at about $1 billion a year. U.S. Bancorp, PNC Financial Services Group Inc. (PNC) and SunTrust Banks Inc. (STI) reported anticipated annual revenue declines of about $300 million, $250 million and $180 million, respectively.

The Federal Reserve last month limited the fees to 21 cents per swipe, while letting banks tack on 5 basis points of each transaction, or almost 2 cents based on the average debit ticket of $38. The cap, set to start Oct. 1, replaces a formula that averages about 1.14 percent of the purchase price, or 44 cents. The Fed conditionally approved an additional 1 cent adjustment for banks that follow certain fraud-prevention standards.

Visa Inc. (V) and MasterCard Inc. (MA), the world’s biggest payment networks, set swipe fees and pass the money to card-issuing banks. Retailers say the payments can be their highest expense after labor. U.S. Senator Richard Durbin, an Illinois Democrat, pushed for the caps last year as an amendment to Dodd-Frank.

Eliminating Perks

To restore some of the lost revenue, banks are moving to eliminate perks associated with debit cards, including rewards programs and free checking. Lenders including Wells Fargo and Atlanta-based SunTrust have said they expect they can mitigate about 50 percent of the impact from Durbin.

“The re-pricing of our products was in response to Dodd- Frank, there’s no question,” James Rohr, chairman and CEO of Pittsburgh-based PNC, said last week during a conference call with analysts and investors. Banks will introduce fees and encourage customers to use credit cards rather than debit cards “in order to recover this terrible hit that the Durbin amendment put through the industry,” said Rohr, 62.

Smaller banks also are adjusting to make up for lost revenue. BB&T Corp., based in Winston-Salem, North Carolina, said July 21 that the regulations will cost the firm about $395 million in annual revenue. Chairman and CEO Kelly King said he expects lenders to charge an annual fee for debit cards.

‘Make No Mistake’

“Make no mistake about it, over a period of time, we will recover these revenues because it’s too significant for us to just absorb,” King, 62, said after the bank reported that second-quarter profit climbed 46 percent.

Stand-alone proprietary trading accounted for as much as 3.1 percent of total revenue in a quarter, according to the GAO report, which collected information from the six biggest U.S. lenders. The business of betting money for banks’ own accounts produced net revenue in 13 of the 18 quarters examined, totaling $15.6 billion, and generated losses of $15.8 billion in the other five, the GAO said.

Banks also may face costs tied to additional collateral they will have to post if ratings firms including Standard & Poor’s downgrade their credit because of a Dodd-Frank provision that prohibits future taxpayer bailouts of troubled lenders, according to the Bloomberg study. Higher Federal Deposit Insurance Corp. fee assessments and derivatives regulations will result in lower revenues and increased costs, the study shows.

‘We Can’t Forget’

It’s difficult to analyze the interactions between rules and assess the cumulative impact of all the new regulations in the banking industry, Fed Chairman Ben S. Bernanke told the Senate Banking Committee earlier this month.

“We are doing what we can to assess the costs and benefits,” Bernanke said. “We can’t forget where we were three years ago when the financial system almost collapsed and, of course, we’re still seeing the damage from that. So we’re trying to apply rules in a way that will minimize the risk of another crisis and still permit good loans to be made to creditworthy borrowers.”

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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