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Could New BofA Fees Hurt Financials?

“It does not matter how slowly you go as long as you do not stop.”
— Confucius

Reports are resurfacing that Bank of America (NYSE:BAC) is considering instituting fees on certain checking accounts in an effort to generate some extra revenue from existing customer accounts.

The move is fairly controversial, as consumers previously have balked at the idea. The last time the idea was floated around was some time in the fall, when public outrage caused BAC management to rethink its strategy.

The question for stock investors, of course, is whether new fees might negatively impact investor perception on the broader financials sector. After all, if BAC does this, it’s entirely possible other major financial institutions — for instance, JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC), which were testing their own debit-card fees last year — will do the same as well.

I’m not sure anything short of another full-blown 2008 repeat can now turn the bullish sentiment in bank stocks around. I’ve been continually addressing the idea that 2012 might be a year of reflation similar to 2003 and 2009, whereby risk assets perform materially better than most may think. I addressed this in a recent segment I did on Bloomberg Rewind. In reflationary periods, anything that is leveraged — like junk debt and financials — tend to outperform.

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Take a look at the price ratio of the Financials Select Sector SPDR (NYSE:XLF) relative to the iShares S&P 500 Index (NYSE:IVV). As a reminder, a rising price ratio means the numerator (XLF) is outperforming (up more/down less) the denominator (IVV).

I’m putting this up because, independent of the concern over fees and uproar it might cause should others join Bank of America in charging for checking accounts, the outperformance in financial stocks still looks to be very early on in its move. The sector bottomed relative to the S&P 500 in late November and has since rallied quite strongly. The ratio likely has much more potential to continue higher given how substantially banks weakened last year.

The broader point here is that sentiment looks to have definitively turned for now, and even new fees might not be enough to sour investors on the group.

Of course, you could simply avoid buying financials if you believe the market is wrong, but as I like to say, price is truth.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.

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