Investors have to wait for Trump policies to take shape

THE RALLY in regional US bank stocks that followed last month’s election of Donald Trump may not be over, but investors may have to wait for policy to take shape for the massive move to extend further.

The S&P 600 index of smallcap banks has surged more than 20 percent since Trump’s surprise November 8 victory, while their large-cap peers on the S&P 500 index have jumped more than 17 percent.

Investors booked profits on Friday, with the small-cap index down 0.8 percent and the larger banks dropping 1.1 percent.

Smaller lenders could potentially add as much as 40 percent to their fourth-quarter 2017 earnings if Trump’s promises of tax cuts and regulatory changes materialise, according to Sandler O’Neill analyst Brad Milsaps.

But Milsaps has not changed his official estimates to reflect this possibility as he is waiting for confirmation that those policy changes will happen.

Trump is scheduled to take office on January 20. His treas- ury secretary nominee, Steven Mnuchin, on Wednesday criticised the Dodd-Frank banking regulation act, saying that it inhibited bank lending, potentially implying a willingness to try to change regulations to help boost that revenue source.

“It remains to be seen how much longer the rally can continue until we see some tangible evidence of changes coming from the administration that relates to regulations or tax rates,” said Milsaps.

Investors are betting that rising long-term interest rates, expected corporate tax cuts as well as lighter regulation will help banks under a Trump administration.

Domestic banks have more to gain from policy changes than their multinational counterparts as lighter regulation should make it easier for them to grow more quickly and could allow more mergers, according to investors and analysts. Insulated They could also benefit more from expected tax cuts and they would be insulated from currency fluctuations.

“There’s definitely more opportunity on the regional banking level,” said David Lebovitz, global market strategist at JPMorgan Asset Management.

“When you go down in market capitalisation you begin to insulate yourself from a lot of these external forces. Dollar strengthening is less of an issue.” Bank profits depend largely on the spread between long- and short-term rates.

The spread between benchmark US 10-year Treasury notes and 2-year Treasuries has widened nearly 30 basis points since the US presidential elec- tion, touching its highest in a year on Thursday.

Adding to upward pressure on yields, the Federal Reserve is expected to raise overnight US interest rates at its meeting on December 13 to 14 by 25 basis points, the first hike in nearly a year.

In relation to rising interest rates alone, Keefe, Bruyette & Woods boosted its operating earnings growth estimates for banks with assets of $50 billion (R689.18bn) or lower to 10 percent from 6 percent next year, and to 11 percent from 4 percent in 2018. – Reuters