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Investors Should Hope Bank Fees Stick

Bank of AmericaWhat’s good for investors isn’t always good for consumers. Just look at the backlash over the nation’s big banks trying to raise fees on a host of products and services. After reversing itself last fall over adding a $5 monthly debit-card fee, Bank of America (NYSE:BAC) was at it again this week with a test program tacking on anywhere from $6 to $25 a month on checking accounts.

The uproar over bank fees has been rough on the industry, and it’s not just a public relations problem. Roughly 1 in 10 Americans has closed an account in protest over sneaky new fees. Market research firm J.D. Power and Associates said the rate of “customer defection” from a primary bank like BofA to another institution like a local credit union was 9.6% — up from 8.7% last year and 7.7% the year before that.

But investors in bank stocks should welcome the moves, if only because they need financial firms to find new revenue sources. Low interest rates (and tighter rate spreads), new financial regulations limiting everything from fees to proprietary trading, and a slow economic recovery have taken a huge toll on banks’ top lines.

“The passage of Dodd-Frank has changed the business models and profitability for many U.S. financial firms, especially large ones, as it has changed the services, fee structure, and limited the services financial firms can offer,” writes Frederick Cannon, analyst at Keefe, Bruyette & Woods, in a recent note to clients.

BofA, for example, booked $93.45 billion in revenue for its most recent fiscal year, down from $119.64 billion at the end of 2009. JPMorgan Chase (NYSE:JPM) saw revenue fall to $97.23 billion from $100.43 billion during the same period. Citigroup‘s (NYSE:C) revenue declined by $2 billion over the past two years, while Wells Fargo (NYSE:WFC) saw revenue fall by almost 10% to $80.93 billion.

That helps explain, in part, why bank stocks are soaring even as customers and lawmakers excoriate the firms for trying to hike fees. It’s the same reason a company’s share price goes up when it announces layoffs or higher prices: What’s good for business often is bad for customers or employees.

For all the heat BofA took over its plan to add a $5 fee for the privilege of using a debit card, the market couldn’t care less. BofA was the Dow’s best performing stock in February, rising almost 12%. Shares are up 46% year-to-date — and actually popped nearly 2% on the news the bank was looking to add fees.

New revenue streams are great news for investors — if banks can withstand the public uproar and make them stick. It costs JPMorgan Chase an average of $300 a year to maintain a bank account, CEO Jamie Dimon told investors at a conference this week. Anytime any business can boost revenue and defray costs, that’s good for the bottom line and, ultimately, a company’s share price.

And so far the backlash against fees hasn’t had much effect on bank stocks as a whole. Indeed, financials are up 15% in 2012, making them the second-best performing sector of the market this year after technology stocks. Loan growth, healthier balance sheets and the risk-on trade matter more to the market than public anger over fees.

In fact, the stocks that have performed the best, including Bank of America and Regions Financial (NYSE:RF), are benefiting from value investors and bargain hunters — investors who bet on fundamentals, not headline risk, Cannon says.

“These stocks, and others like them, trade at low price-to-book multiples and investors have been drawn to their valuations,” he says.

If anything, Cannon is worried that seemingly cheap bank stocks will turn into value traps. Handwringing over a fee backlash is small beer when compared to the other challenges big banks face. And as unpalatable as they might be, investors should hope banks can push through such fees. After all, they need all the revenue they can get.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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