JPMorgan Chase & Co, an underperformer so far this year, is one of several big banks whose shares could be poised for a revival now that U.S. financial regulatory reform is all but completed.

Diamond Hill Financial Long-Short Fund is bulking up on the No. 2 U.S. bank, led by hard-driving CEO Jamie Dimon, as the sweeping changes to rules for banks and brokerages appear close to passage in Washington, said Chris Bingaman, the fund's co-manager.

The market is overestimating the impact on some of these companies and assuming huge chunks of business will be wiped out with no offsets, Bingaman said. Valuations are still attractive and I like a lot of names.

Most stocks in the sector have suffered over the past three months, with the SPDR KBW Bank ETF down 8 percent even as the reform bill has moved forward, reducing uncertainty. JPMorgan, which is down 7 percent over the past three months, is no exception.

But the most recent changes to the plan -- such as the elimination of a tax to pay for failing institutions -- have only improved prospects for banks.

Bingaman also likes Wells Fargo, but he's not in love with all the big players and is avoiding Citicorp and Goldman Sachs.

Banks will need to tweak their business models and may see some revenues decline. Wells has already said it plans to impose a new monthly checking fee on some accounts, for example.

Still, stock market values are so low -- even below book value in some cases -- that share prices should rise. Our estimates of fair value for JPMorgan and Wells have come down but the spreads between the prices and the estimates have actually widened, Bingaman said.


Bingaman is hardly the only one getting more interested in banks as the reform process winds down.

Anton Schutz, manager of the Burnham Financial Industries Fund, sees big future returns in the shares of the very biggest banks: JPMorgan, Citi and Bank of America. I'm feeling more comfortable with the bigger banks, he said.

Companies are being given plenty of time to make adjustments to their business models, David Ellison, manager of the FBR Large Cap Financial Fund and the FBR Small Cap Financial Fund, said. And the de-risking, de-complicating and de-leveraging will be good for me as investor.

Ellison is particularly looking at small banks that will be able to grow quickly by buying deposits from the hundreds of failing institutions being shut down by regulators.

His favorites include Independent Bank Corp, based in Rockland, Massachusetts, and First Niagara Financial Group, in Lockport, New York.

They will also benefit from the legislation because less-well-managed competitors will be required to maintain more capital and tighter lending standards, thus reducing pressure to relax their own standards as the economy improves.

Despite the sector's recent underperformance, financial service sector funds like Ellison's have been among the top performers for the year so far. Funds in the category have gained an average of 1.85 percent through July 9, fourth-best of the 79 sectors tracked by Lipper. The real estate category, with an average gain of 8.59 percent, has been the top performer.

Many financial sector funds have yet to make up for huge losses suffered during the credit crisis. The category's average annual return of minus 18.28 percent over the past three years ranks 77th out of 79 categories, according to Lipper. Precious metals funds, with an average annual gain of 9.91 percent, have been the best over that span.


So-called trust banks like Bank of New York Mellon and State Street Corp, which mainly process transactions and administer assets rather than making loans, will be hurt less by the new rules, Diamond Hill's Bingaman said. Yet their stocks have been hit almost as hard.

They have less credit exposure and a much higher proportion of fee income than the rest of the industry, Bingaman said.

A last-minute concession allowing banks to invest up to 3 percent of their capital in hedge and private equity funds staved off one of the most painful possible outcomes for trust banks. They typically need to invest small amounts alongside customers in outside investment vehicles.

They've been so beaten down with the whole group, Bingaman said. That makes them pretty attractive now.

(Reporting by Aaron Pressman; Editing by Gary Hill)