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Regulatory Risk For Banks Is Off The Charts: Mike Mayo


As the old saying goes, you can't please all of the people all of the time, and that appears to be the case with Wednesday's landmark testimony from JPMorgan Chase (JPM) CEO Jamie Dimon. Investors who initially loved the humbled-but-occasionally-feisty banker's answers during his Senate hearing, seemed less convinced by the end of the day that bravado alone was going to solve their problems or be able to lessen the many headwinds facing the highly cyclical Banking (BKX) and Financial Sectors (XLF).

Specifically, what looked set to be a great day for JPM around lunch time, saw gains pared in the afternoon as hopes dwindled and reality set in. At least one big name bank watcher, however, was unmoved by the D.C. dog and pony show, before, during and after the first of two hearings scheduled to take place over the next week.

Banking analyst Mike Mayo of CLSA sees the day as more of a starting point or a "step in the right direction" along what is set to be a challenging and unpredictable path going forward, particularly when it comes to the unknowable risk of regulatory retaliation or some other type of legislative blow-back.

"Don't under-estimate what could happen here," Mayo warns in the attached video, citing recent moves by Fannie Mae and Freddie Mac to go after banks again for more money for bad mortgages as an example. "So don't under-estimate what the government might do when going after the banks."

Whether it's through the Volker rule, or via Dodd-Frank, or from GSE's going after mortgages, Mayo's underweight rating on the banks did not change as a result of anything Jamie Dimon said on Capitol Hill.

''This is not over. There still is a lot to be written and the root issue is that many in the banking industry have still not been held accountable," the author of Exile on Wall Street cautions.

To be fair, despite his negative rating, Mayo does consider JPMorgan and Jamie Dimon to be among the better banks and bankers but says he is unwilling to invest until he sees an "ultimate resolution." Until then, his prediction for the banks is tough sledding for the foreseeable future.

"This is going to be the worst revenue-growth decade since the Great Depression, and I'm very confident about that conclusion."

As much as Mayo sees regulatory risk, he does not expect it to lead to the dismantling of the so-called super-market financials or conglomerate banks, but points out the breakdown in risk control at JPMorgan does point to "cracks in that centralized business model."

On the positive side, Mayo cites Wells Fargo (WFC) as a bank that he likes right now.