Undeniably, U.S. banks will get a shot in the arm if the Trump administration’s proposed reforms to lower corporate taxes and ease banking regulations come into effect. An expected continuation of increasing interest rates has the potential to lift banks’ profitability to levels not achieved since the last recession, whether or not the reforms materialize.
Moreover, the industry has gained enough footing on its underlying structure to enhance business returns after handling its challenges related to the past several years.
A rising rate environment holds the key to banks’ success because higher rates would allow them to charge more interest on mortgages, credit cards, auto leases and all other forms of loans, helping to expand net interest margins. This would help counter any unknown threats to non-interest revenues and expenses.
Also, while a full-scale regulatory reform is unlikely without significant political opposition, smaller adjustments that the Trump administration could make through alternate routes would help banks lower their fixed costs.
Only time will tell whether banks will get any support from the reforms. In any case, there are underlying factors to help banks thrive in the future.
Banks’ Self-Sufficiency Raises Hope
Business reorganization post-financial crisis, effective expense management, enhanced focus on non-interest revenue sources, technical affluence, enhanced cross-selling opportunities with economic growth and many more positive factors could support banks in augmenting profits steadily.
In fact, these were the factors that helped banks progress on the earnings front over the last couple of years despite their vulnerability to a flattening yield curve, regulatory hindrances and global growth instability.
With increasing capability of consumers and businesses to borrow money, prospects of loan growth are rising. So, in case the industry doesn’t get significant support from the rate environment, high loan volume would back revenue growth.
Moreover, sound capital levels that banks generated by meeting strict regulatory requirements should help easily absorb likely credit costs related to their exposure to the troubled sectors. High credit risk in banks’ loan portfolios led to high loan-loss provisions in the past, but provisions are currently at very low levels. While the likely ease of capital restriction with Trump’s success in deregulating the industry could weaken banks’ credit profile, any possible disorder should be manageable for a decent period with capital power.
Though the earnings performance over the last few years has failed to more than offset the negatives arising from a challenging backdrop, the results depict banks’ efforts to pair aggressive actions (like creating new revenue sources) with defensive measures (like expense control) to stay afloat.
Moreover, banks have learned how to adapt to a changing landscape and deal with crises. They can now dodge pressure from the operating environment more easily.
Banks are trying to reorganize risk management practices to address potential solvency issues from rising interest rates. Asset-quality troubles are also being addressed by divesting segments containing nonperforming assets.
(Check out our latest U.S. Banks Stock Outlook for a more detailed discussion on the business trends.)
Loans and Deposits Should Keep Growing
Uncertainty related to politics and apprehension over regulatory and tax reforms have resulted in sluggish loan growth for most U.S. banks in the last few quarters, and this trend may continue for some time. But overall demand for loans has been rising with recovering domestic economic conditions and easier lending standards.
Consumer, business and real estate loans have increased significantly in recent years on the back of an improved housing market, lower unemployment, higher wage growth and enhanced consumer confidence.
Further, the speculation of a continuous rise in interest rates will drive borrowers to quickly apply for loans and avoid higher cost of borrowing later. This should lead to increased demand.
On the deposit side, less-levered consumers and businesses will continue to support strong deposit levels. Also, high levels of corporate cash holdings remain favorable for deposit growth. However, higher rates will increase the cost of maintaining deposits.
Technological Advancement to Raise Efficiency
Along with the adoption of advanced technologies to enhance cyber security, banks are resorting to increased use of analytics to drive efficiency. This could help them to better formulate strategies and enhance the top line of different business segments.
While analytics can elevate their expenses in the quarters ahead, concerted efforts to cut expenses should be enough to strike a balance.
FDIC’s List of Problem Banks Doesn’t Look Problematic
The fourth quarter of 2016 witnessed continued improvement in the FDIC's "Problem Bank List." The list contained 112 names as of Mar 31, 2017, down from 123 as of Dec 31, 2016. This is the smallest number since Mar 31, 2008 and represents a more than 87% decline from the post-crisis high of 888 on Mar 31, 2011.
While the number is still high considering the occurrence of the financial crisis nearly nine years back (there were only 76 banks on the Problem List at the end of 2007), the current level doesn’t spell any major concern.
Stocks Worth Buying Right Now
The factors that the industry are expected to benefit from might lead bank stocks to surge. While the concerns should not be overlooked, one can consider buying stocks that carry a favorable Zacks Rank.
Here are a few top-ranked bank stocks you may want to consider:
Comerica Inc. (CMA - Free Report) : This Zacks Rank #2 (Buy) stock rallied about 10% over the last six months versus the S&P 500’s gain of 8.5%. The stock’s earnings estimates for the current fiscal year have been revised roughly 1% upward over the last 60 days.
State Street Corp. (STT - Free Report) : This Zacks Rank #2 stock gained 15% over the last six months. Earnings estimates for the current fiscal year have been revised marginally upward over the last 60 days.
BancFirst Corp. (BANF - Free Report) : An upward revision in earnings estimates for the current fiscal year over the last 60 days lead to a Zacks Rank #1 (Strong Buy) for this stock. The stock gained nearly 5% over the last six months.
BOK Financial Corp. (BOKF - Free Report) : This Zacks Rank #2 stock gained nearly 4% over the last six months. Earnings estimates for the current year have been revised 1.3% upward over the last 60 days.
5 Trades Could Profit "Big-League" from Trump Policies
If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington's changing course.
Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure. See these buy recommendations now >>