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Matt O’Connor, Barclays’ US Large Cap Banks analyst, is out with a new note that aims to present a big picture for medium and long-term investors in the industry.He outlines the positives and risks for each bank he covers. But here are the positives and risks that he has identified for the industry as a whole:
1) Capital deployment (dividends + buybacks) in 2012 could be 40% plus of bank earnings and even more meaningful in 2013;
2) Credit costs likely to grind lower, but may be close to bottoming at some banks;
3) [Net interest margins] may hold up better than expected (at least in 2012), even if interest rates stay low;
4) Capital markets poised to rise and a (positive) surprise quarter will happen eventually (maybe 2Q12); and
5) Eventual reversal of mortgage and litigation reserves (after large builds in recent years). This may happen later in 2012.
1) If interest rates remain low for another 2-3 years, net interest margins and net interest income dollars will be pressured;
2) Reserve release should slow in 1H12 and be done at many banks by the end of 2012. Overall credit costs are poised to inflect for half of the banks we cover by mid-year 2012;
3) Visa/Mastercard merchant litigation;
4) Regulatory risk and overhang over mortgage litigation.