3 Bank Stocks Running Out of Steam From UBS

NEW YORK (TheStreet) -- UBS analyst Brennan Hawken on Thursday downgraded three of the largest U.S. banks and brokers on Thursday, while keeping the faith for two others.

"We are shifting to a more cautious stance on the sector, after the group has run up 31% since late July."

The analyst said that "in a more constructive environment for capital markets, the average returns on tangible equity for the group could move up to around 10% for next year... however, given a 12% cost of equity, this would mean the group is fairly valued at 0.82x tangible book value."

In addition to "the regulatory/political uncertainty and impact of structural shifts in capital markets businesses," other concerns for the biggest industry players, according to Hawken, include "slower than expected reductions in legacy mortgage costs, weak consumer lending, the impact of European recession on universal bank commercial and industrial loan growth, and potentially higher funding costs from the recently unveiled details of the FDIC resolution plans."

While it would have to be considered a long-term concern for the industry -- unless of course the coming election leads to the Democratic Party again controlling both houses of Congress, as well as the presidency -- FDIC Director Thomas Hoenig's proposal that banks enjoying the "public safety-net" of deposit insurance protection and access to the Federal Reserve discount window be banned from the brokerage business, perfectly illustrates the political uncertainty cited by Hawken.

The prolonged roll-out of new rules derived from the Dodd-Frank Wall street Reform and Consumer Protection Act -- signed into law by President Obama in July 2010 -- represents the regulatory risk, with the overly complex Volcker Rule and proposed Basel III capital requirements at the forefront.

Regarding the recent market strength in the wake of additional stimulus actions by the Federal Reserve and other central banks, Hawken said that although the "actions may help drive earnings higher, particularly through capital markets operations, we felt that the stocks currently more than reflect the upside of this potentially improving earnings outlook," and that "even if the capital markets environment picks up dramatically, driving earnings forecasts roughly 20% higher than current levels, the stocks actually already reflect this higher level."