How Obama's reforms could affect banksUS President Barack Obama is looking at limiting risk-taking at banks. But his proposals on Thursday were tantalizingly vague. He said he wanted to limit the amount of borrowing that banks can do relative to their peers and limit their trading activities to buying and selling securities to customers.
But it is not clear whether relative borrowing limits will be low enough to force banks to reduce their debt. And the line between buying and selling securities on behalf of customers, and doing so on behalf of the bank, can be blurry.
The White House has also said it wishes to prevent banks from investing in and sponsoring hedge funds and private equity firms, but it is not clear if banks will also be prevented from financing these clients, which can itself be risky.
Wall Street firms are likely to fight any efforts at reform, and President Obama has lost some political capital after a bruising effort to pass health care reform, and losing a Senate seat in a special election in Massachusetts.
Any legislation will take months if not years to wind its way through Washington, and predicting how it will the law will end up working is difficult. But here are some possible outcomes of Obama's efforts:
Killing it softly
On a conference call with journalists, Goldman Sachs Chief Financial Officer David Viniar said he had not seen details of Obama's plan, but that he generally appreciates government policies that stabilize the financial system.
Experts said that banks were unlikely to publicly disagree with Obama, but are sure to furiously lobby behind the scenes to water down any proposal that the president and legislators put forward.
Banks took similar steps when rulemakers and lawmakers sought to move more derivatives trading onto exchanges and into clearinghouses. Although trade groups initially said they supported efforts at reform, proposals now look likely to be watered down. Obama's efforts to reduce risk taking could meet a similar fate.
Whether that is a good thing is debatable. Major banks including Lehman Brothers took large proprietary bets that resulted in big losses, and in Lehman's case, forced it into bankruptcy. But many bank executives are quick to argue that if they can't do this kind of trading, foreign banks and unregulated domestic entities will, which may not reduce systemic risk.
Gray hair triumphs
A number of elder statesmen of the financial world, most notably former Federal Reserve chairman Paul Volcker, believe that Obama is right, and that large banks should be severely constrained from making bets with their own funds.
Obama seems keen to personally shepherd these changes through Congress, and given the populist outcry against Wall Street, he may have the political capital to do so.
If he is successful, the biggest banks will likely shrink further. Obama's fee on bank's liabilities, announced last week, may collect less money than originally planned.
Talented risk-taking traders will move to hedge funds and private equity firms, where their failures could have less of an impact on the broader market.
Trading volume on major exchanges and in many financial markets may drop, because smaller players will have less capital available to consistently trade. Shares of exchanges dropped on Thursday — NYSE Euronext dropped 3.9%, while CME Group Inc fell 5.8%.
The biggest banks will likely become even less profitable, and more like staid, slow-growing utilities that pay high dividends to shareholders.
One question that remains is how far Obama will go in limiting banks from risk activities. Will a bank holding company be allowed to own a hedge fund, even if the regulated bank subsidiary cannot? Will commercial banks be barred from all investment banking activities? Will foreign banks that operate in the United States be constrained?
Also unclear is whether some institutions, such as Goldman Sachs, will be able to shed their bank charters to avoid restrictions on trading. Goldman Sachs CFO Viniar said on a conference call that the bank has no plans to get rid of its charter. Many investors believe it ought to, but regulators may balk at a move that would give them less oversight over a company whose health is critical to the financial system.
Rules change, but banks backslide
Even if Obama successfully implements his risk limitations, banks may find ways around them. Banks, for example, could buy securities and claim they were doing so in anticipation of client demand, when in fact they intended to make bets on the securities and hold onto them themselves. Or bank holding companies could engage in risky activity that leaves their subsidiary banks worse off.
But if regulators are sufficiently vigilant, and limit risk-taking across many businesses in the financial sector, the brainpower that Wall Street devotes to finding loopholes may migrate to other sectors of the economy. From Obama's standpoint, this may be the most positive scenario.
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LKP Shares, stock trading broker has recommended to buy stocks on Bajaj Auto with target price of Rs 2,100 against current market price (CMP) Rs 1,800.
The stock investment research team of broker said that the company has posted significant growth in Q3FY10. The management is very positive on the company`s growth banking upon the recent launch of Pulsar last month and looking forward to the new launch by April.
Market Cap 25,938.14
* EPS (TTM) 89.97
* P/E 19.93
* P/C 18.12
* Book Value 129.23
* Price/Book 13.87
Div(%) 220.00
Div Yield(%) 1.23
Market Lot 1.00
Face Value 10.00
Industry P/E 29.33
Bajaj Auto's results outperformed the street expectations. The company's strong thrust on the entry-level segment has fetched it market share gains. After recording a peak margin of 22% in the last quarter, the company surprised us by maintaining them at the same level.
Going forward, we expect increased input costs to pull down the full year margins to 20.2%. However, the robust volume growth, and cost saving at employee expenses level and marketing costs may somewhat offset this increase. Success of Discover 100cc along with the Pulsar models and the upcoming new launches in the Discover family will provide a strong boost to the topline. Growth in the exports along with new launches in the three wheeler segment will also provide a strong boost to the topline.
At CMP of Rs 1800, the stock is trading at FY11 P/E of 13.2, on an FY11E EPS of Rs 136.5. We believe the stock is looking attractive and hence recommend a BUY rating on the stock with a targetprice of Rs 2,116, which translates into an upside of ~22%.
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Anand Rathi, stock trading broker and stock investment research firm has recommended to buy stocks of Polaris Software with target price of Rs 250 on Jan. 21, 2010.
Polaris Software looks to be a good mid cap stock. It has reported a good set of 3Q figures, with USD revenue rising 3.9% qoq. They raise FY10-12 earnings estimates slightly. It has won 30 new deals, the highest in a single quarter over the last two years. They reiterate itsBuy stocks rating and target price of Rs 250.
Key points from the 3Q results. Polaris Software`s 3QFY10 revenue grew 0.2% qoq (rupee) and 3.9% (USD). Margin was flat qoq. Consolidated net profit rose 13.9% qoq.
The company won 30 new deals, the highest in any quarter in the last two years.
Geographically, Europe was down 1.3% while ROW grew 1.2%.
Market Cap 1,725.04
* EPS (TTM) 13.05
* P/E 13.37
* P/C 10.05
* Book Value 70.21
* Price/Book 2.49
Div(%) 55.00
Div Yield(%) 1.58
Market Lot 1.00
Face Value 5.00
Industry P/E 24.02
Polaris has maintained its EPS guidance for FY10 of Rs. 15/-
The stock investment research house pointed out at target price of Rs 250, the stock would trade at 12 times FY-11e earnings. At this stock valuation, Polaris would trade at a 33% discount to IT large caps.
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Here are 3 stock market trading tips provided by Mr. Himanshu Tiwari. He has provided these stock trading tips as his recommended hidden gems.
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Src: Moneycontrol, DP Blog, ET and Etc.. etc
