Bank stocks, in recent years, have been held back by heavy regulation and low interest rates. But, optimism surrounding the sector’s outlook is growing, thanks to Donald Trump’s victory.
Trump’s intention to roll back regulations and lower administrative burden will stand in good stead for the banking industry. Tax reforms and uptick in infrastructure outlays, then again, will spur a rate hike. There are other positives as well. Trading revenues will get a boost from heightened uncertainty surrounding Trump’s victory. Taking such positives into consideration, it will be prudent to invest in fundamentally sound banking companies.
Roll Back Regulations
Investors continue to turn toward banks as regulatory burden is likely to ease under Trump’s administration and Republican controlled congress. One such change will be the raising of the minimum asset threshold for banking behemoths to $250 billion from $50 billion, which will lend more flexibility, boost valuations, strengthen consolidation and increase lending. Regulations related to bank capital may be relaxed, with capital ratios for regional banks not expected to exceed 12%, while the ratio may be slightly higher for bigger lenders.
Trump, in the meantime, views the Dodd-Frank regulatory overhaul as a harsh measure, especially, on smaller banks. Trump has called for repealing parts of the Dodd-Frank Act, which has for a considerable period of time limited operational flexibility. Trump’s team is also focusing on scaling back the Financial Stability Oversight Council, which serves as a watchdog on big players in the economy. They also want to fix a section of Dodd-Frank Title II that has given financial regulators the right to take over a failing financial firm and liquidate it. At the same time, the Trump administration is expected to embrace encouraging aspects of the law such as regulating derivative products and transparency of credit rating agencies.
Tax Cuts, Rise in Spending
Trump’s pledge to slash taxes and increase government spending will fuel inflation. Prices of bonds tanked as inflation mostly erodes the value of securities with a fixed-rate income stream. This in turn reached the 10-year treasury yield to its highest level since January. Higher longer-term interest rates can boost bank profits, as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Trump called for sweeping reductions in personal income tax along with trimming the business tax rate from 35% to 15%. Corporates will also get a chance to repatriate foreign profits at a rate of 10%.
Trump is in favor of beefing up public spending by hundreds of billions of dollars on infrastructure. He said that he will support more spending on transportation and telecommunications infrastructure, clean water and electricity transmission in order to accelerate economic growth. This in turn will create plenty of jobs in construction and manufacturing.In fact, he is expected to offer $137 billion in tax credits to private construction companies undertaking infrastructure projects.
In his victory speech, Trump said, “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.”
Heightened Volatility Boosts Trading
There’s a lot of uncertainty about what a Trump presidency means for the U.S. economy over the medium and long term. Such uncertainty is expected to benefit banks by boosting its trading revenues from fixed income, currency and commodities segments.
Gold prices are moving north, U.S. Treasury yields are leading a global bond rally while the Mexican peso registered a massive slump on Trump concerns. Trump’s win has hit Mexican assets hard after some of his pledges were viewed as a threat to the Mexican economy.
Top 5 Bank Stocks to Buy Now
Banks are poised to reap huge benefits from lighter regulations and rising interest rates under Trump’s presidency. The KBW Nasdaq Bank Index has gained 10% since the Election Day, while the value of stock and options held by six big bank CEOs have increased by a collective $159 million, according to Forbes. Jamie Dimon, the CEO of JPMorgan Chase & Co. (JPM - Free Report) , has raked in the highest as his holdings rose by $69.8 million since Trump’s win.
We have, thus, selected five banks that have tremendous financial strength and are also positioned to grow in the near term. Such stocks boast a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. Such stocks also flaunt a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Bank of America Corporation (BAC - Free Report) provides banking and financial products and services for individual consumers, institutional investors, large corporations and governments. The companyhas a Zacks Rank #2 and a VGM score of ‘B’.
Bank of America has a price-to-earnings ratio (P/E) of 13.02, compared with 14.90 for the industry. The company’s estimated growth rate for this year is 11.5%. The Zacks Consensus Estimate for its current year earnings surged almost 15% over the last 60 days.
Eagle Bancorp Montana, Inc. (EBMT - Free Report) provides various retail banking products and services. The company has a Zacks Rank #1 and a VGM score of ‘A’.
Eagle Bancorp Montana has a price-to-earnings ratio (P/E) of 13.42, compared with 17 for the industry. The company’s estimated growth rate for this year is 91.8%. The Zacks Consensus Estimate for its current year earnings soared 12.3% over the last 60 days.
Bryn Mawr Bank Corp. (BMTC - Free Report) provides commercial and retail banking services to individuals and businesses. The company has a Zacks Rank #2 and a VGM score of ‘B’.
Bryn Mawr Bank has a price-to-earnings ratio (P/E) of 16.25, compared with 18.70 for the industry. The company’s estimated growth rate for this year is 123.9%. The Zacks Consensus Estimate for its current year earnings increased 2.9% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Investar Holding Corporation (ISTR - Free Report) provides various commercial banking products and services for individuals and small to medium-sized businesses. The company has a Zacks Rank #1 and a VGM score of ‘B’.
Investar Holding has a price-to-earnings ratio (P/E) of 14.51, compared with 17.20 for the industry. The company’s estimated growth rate for this year is 14.3%. The Zacks Consensus Estimate for its current year earnings advanced 3.7% over the last 60 days.
American River Bankshares (AMRB - Free Report) delivers commercial banking services to small to mid-sized businesses. The company has a Zacks Rank #2 and a VGM score of ‘B’.
American River Bankshares has a price-to-earnings ratio (P/E) of 14.45, compared with 17.80 for the industry. The company’s estimated growth rate for this year is 23.6%. The Zacks Consensus Estimate for its current year earnings went up 10.1% over the last 60 days.
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