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3 Reasons Why President Trump Sounds Good to Banks

JPM C BAC MS GS

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Donald Trump’s surprising presidential victory received a grand welcome from both large and small bank stocks, reflecting investors’ positive sentiments on the election of the 45th U.S. president.

The KBW Nasdaq Bank Index gained 4.9%. Among the U.S. mega bank stocks, Morgan Stanley (MS - Free Report) , Bank of America Corp. (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and The Goldman Sachs Group, Inc. (GS - Free Report) climbed 7.10, 5.71%, 4.60% and 5.89%, respectively, on Wednesday.

Citigroup Inc. (C - Free Report) saw a slightly less gain of 3.37% as investors remained wary of the bank’s sizable Mexican exposure. Notably, Trump’s trade and immigration rhetoric primarily targeted Mexico all through his campaign.

Banks - Major Regional Industry Price Index

While speculation and uncertainties over financial policies under Trump’s presidency have clouded the markets, the likelihood of certain developments is a silver lining for banks.

Less Regulation

Banks have been facing revenue pressure in a stricter regulatory landscape following the 2008 financial crisis. However, under Trump’s regime, a repeal or considerable change in the Dodd-Frank Act – which has been limiting operational flexibility and includes several provisions – might drive the bottom line of banks to some extent.

In an interview with Reuters in May 2016, Trump stated, “Dodd-Frank has made it impossible for bankers to function.” He added, “It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop."

A Keffe, Bruyette & Woods analyst wrote in a note on Wednesday, “Despite Republicans keeping both houses of Congress, we think chances for wholesale changes to Dodd-Frank are still low. We think the main result of Donald Trump's election will be that Trump will be able to appoint regulators who are more industry-friendly than regulators appointed by President Obama. The regulatory implications are more important than what might come out of Congress but are broadly positive for financials in our view.”

While currently there are regulatory uncertainties shrouding the Federal Reserve, the Consumer Financial Protection Bureau or the Dodd-Frank Act, several market experts forecast changes in regulations to benefit small and midsize banks more than the large players.

Possibility of Faster Rate Hike

On Wednesday, the 10-year Treasury yield jumped more than 2%, touching the highest level since January. The movement largely reflects investors’ higher inflation expectations driven by easing regulations, tax cuts and increased government spending under Trump’s administration.

Trump noted in his victory speech, “We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, and we will put millions of our people to work as we rebuild it.”

Further Trump, having Republican control of the U.S. Senate, may nominate two members to fill in two vacancies on the Federal Reserve Board of Governors. Notably, Trump, who at times did not favor low rates, may choose nominees with a hawkish outlook and expedite the pace of rate hike.

According to CME Group data, the odds of a December rate hike, now stands at 71.5%.

Trading Revenues to Get a Boost from Volatility

Investors witnessed how Brexit-driven volatility pushed up trading revenues for banks like Goldman, JPMorgan Chase and Morgan Stanley in third-quarter 2016. The picture is not different now.  Investors’ concern over uncertainties following Trump’s victory should drive increased trading activity leading to heightened volatility. This in turn is expected to benefit banks that are largely dependent on trading revenue.

In Conclusion

Apparently, post election, while things look favorable for the banking sector to some extent, it is too early to predict future developments. What is scare is that Trump had earlier proposed bringing back the Glass-Steagall Act from the Depression era that separates commercial activities from investment banking.

Confusion prevails as how regulatory changes will crop up with the potential repeal or reform of the Dodd-Frank Act and the restoration of the Glass-Steagall Act. Further Trump may not be greeted by central banks globally, thereby affecting cross-border ties. As such, banks with substantial international exposure might be affected.

Notably, of the above-mentioned stocks, Bank of America and JPMorgan currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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