The S&P 500 Financial Index is once again trying to push above the 200 level. The group has been a popular area of debate as headline risk and concern of a weak Q2 earnings season are weighed against valuation. The 200 area has set up a key level in the tug of war between bulls and bears with market participants keeping a keen eye on whether or not banks can hold current levels through the Q2 earnings season. The majority of financial institutions will be reporting during the weeks of July 18-22 and July 25-29. Analysts continue to lower estimates ahead of the announcements so the bar continues to be lowered which could provide for upside surprises. In addition, headline risk from the Basel III capital requirement rules are slowly passing. But the European sovereign debt risk remains a key headwind.

News of Note:

1) Basel III Rules- The Basel committee provided the framework for its 'too big too fail' capital buffer rules. The extra capital the world's largest institutions are generally in line with expectations. A tiered approach will be used with capital above the current 7% already required ranging between 1.0-2.5%. The Basel committee did not address which banks fell into this zone nor did they provide which banks would fall into which tier of additional capital. The committee will allow institutions until 2019 to get their fiscal house in order and meet the standards but most institutions are expected to reach these levels by 2012-12. Many U.S. banks are already believed to be at the necessary levels which will ease concern that institutions will need to do massive capital raises to meet objectives. European financial institutions are a little more of a concern especially with the uncertainty around CoCos which is a type of instrument that can be turned into equity in order to meet capital requirements.

2)) European Banks Close in on Maturity Rollover Plan- European institutions are close to formulating a plan that would allow them to rollover Greek debt maturing in 2012-13. This private sector participation would be a major win for the EU as it works to avoid a Greek default. Voluntary involvement of the private sector has been a key element of the EU plan and the fact that an agreement appears to be close is a major positive for the euro. Under the rules, Greek creditors (which European banks make up the majority of) would roll over 50% of their bonds into 30-year bonds. The remaining 20% would go into a special purpose vehicle used to guarantee the 30-year debt. The market is patiently awaiting more details but the news that a deal is close has helped prop up confidence in the EU.

3) Goldman Sachs (GS) and Morgan Stanley (MS) tgts cut before the open at BofA/Merrill; RBC is lowering its 2Q11, FY11, and FY12 estimates on Citigroup (C) to $0.97, $4.20, and $5.25 from $1.22, $4.89, and $6.05 ($4.18/$5.27 consensus), respectively, due to lower expected trading revenues and seasonal adjustments for the second quarter. RBC believes the co's trading operations, similar to its competitors', are feeling the negative effects of the lower equity and fixed income trading volumes in 2Q11. These lower volumes may persist throughout the year.

4) Stifel recognizes that many investors are already focused on C&I trends as it is the loan segment showing the best growth trends since 2H10. They have developed a C&I growth potential scorecard; COBZ, and ZION are the highest ranked in their scorecard from their West coverage. Also Buy-rated USB (followed by a different analyst) received the highest overall ranking. With the competition for C&I loans high, unused lines and growth in total commitments indicate a bank has won the battle for the customer should be a precursor for C&I loan balance growth. Unused lines as a percent of total loans are relatively high for COBZ and CYN (22% and 24% respectively). The banks with highest total commitment growth in their coverage YoY are UMPQ and BOH.