Northeast, Mid-Atlantic and Southeast banks, along with banking in general, are expected to see change in the economy as a result of the recent U.S. presidential election. Some analysts say Dodd-Frank is unlikely to be repealed because there are many rules put into place already through regulatory agencies like the Federal Reserve, the SEC and the CFTC, that it would take years to figure out which rules belong to the bill and then repeal them. Moreover, they say populist political climate would prevent lessening regulations, but more importantly, the regulations could remain in place independently from the bill through the agencies’ regulations.
The new administration, however, may be able to change the Federal Reserve through appointments, and the president-elect is expected to have a chance to appoint four out of the total of seven members of the board through his tenure. A new majority in the board could change priorities for the Federal Reserve. The current performance of the Federal Reserve is debated among analysts, some saying it has done a good job in the last few years, whereas others say it’s acting in erratic ways, saying that increasing the money supply via quantitative easing is in direct conflict with making banks purchase government bonds.
The general outlook has changed since the U.S. elections. U.S. bank stocks have rallied quite strongly, analysts say. They underperformed in 2016, but they are expected to continue to outperform on the back of rising rates, which analysts say is beneficial to net interest margins. They also expect a pickup in lending volumes if the new administration delivers on promises of reflationary measures, and they say there is a stronger growth profile in the U.S.
Analysts say banks are some of the most attractive investments today. In 2015, they had the highest earnings in the history of U.S. banks. In 2017, earnings could be very high too if they economy grows at a 2% rate and interest rates are raised by 25 to 50 basis points. In terms of valuation, they’re not above average right now. Analysts also say industry fundamentals are actually very strong at the moment.
Some analysts say U.S. banks should be able to leverage more. Foreign banks are larger and more leveraged, and this will have implications for the U.S. They say the Financial Stability Board erroneously said U.S. banks were the riskiest and should be penalized by having higher capital requirements. The Chinese banks were deemed the safest, and European banks are now having fewer problems according to this board. Analysts say this defies conventional wisdom given the problems in European and Chinese banks that have been reported, as well as the reports saying that U.S. banks are doing better.
Analysts say the market expected the new administration to provide market stimulants to boost growth. A better domestic environment may provide a spur to M&A activity in banking which slowed in the first half of 2016, but may pick up again. Lower tax rates may fuel M&A too. However, higher rates could affect loan volumes as people take less loans.
U.S. banks in the last few years were focused on lowering costs. They have shifted personnel to lower-cost locations, and digitalized/automated processes like equities and fixed income trading.
Full report available here.
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