How Banking Sector Stocks Will Fare Under Trump

Despite Pro-Bank Stance, Forces Outside White House Control Wield More Power

As banks witnessed the Election Day upset that put Donald Trump into the White House, a sudden bout of exuberance gripped the sector with all the force of a twister flinging thousand dollar bills onto the Wall Street trading floor.

Double-digit gains in share prices weren’t just uncommon: they proved more the rule than the exception. Even the scandal-plagued Wells Fargo & Co. (ticker: WFC) basked in the glow.

And boy, was it sorely needed. The San Francisco bank hasn’t had a shred of good news since the fall, when the bogus account debacle pushed John Stumpf from his CEO perch. The lift coincides with Wells .

Yet a quick look overall at banks stocks today—Wells Fargo included—makes clear that whatever shareholder enthusiasm Trump’s victory inspired, it’s clearly worn off at the end of the first quarter of 2017. And as for the rest of the year, the future is less certain—make that far less certain. While deregulation of banking laws appears to be in the cards, no one can predict with any certainty how Trump’s future actions, especially as a political novice, will produce any sort of long-term security for the financial services sector.

The first chess piece in the banking stock game involves an unpopular piece of legislation that predates his short tenure as commander in chief.

 

With the immediate future of banking stocks, no single act of deregulation holds more weight than the repeal of the . Signed into law by President Obama in July 2010, Dodd-Frank is a consumer protection measure that came in the wake of the financial crisis of 2007 and 2008. Dodd-Frank imposed more sweeping financial regulation and reform than anything the banking industry had seen since the Great Depression.

Fast forward to the Great Recession, which inspired Dodd-Frank as a way of keeping banks from engaging in high-risk behavior. Still, banks have contended that the law has created thorny layers of regulation that make it tough to do business.

And to be sure, the Trump administration has set the law in its crosshairs. “We’re going to be doing a big number on Dodd-Frank,” the president stated in January during a brief session with reporters. “The American dream is back.”

At the very least, it would be a bank investor’s dream. Combine rolled-back regulation with the higher-interest rate environment the Federal Reserve is creating, and you have two key ingredients for a strong showing by bank stocks.

But that said, bank lobbyists are tempering expectations for Dodd-Frank overhaul, as they face the reality that deregulation legislation will have to wait in line behind other priorities such as healthcare reform and tax relief, according to .

What’s more, the gains of deregulation may prove short term—and the pain potentially sharper over the long haul. “While we sympathize and tend to agree with [bankers’] perspectives, we must also consider that the intent is to make the financial system stronger,” writes David Karp of the advisory firm in a paper posted on LinkedIn,

Karp references a previous stab at deregulation that went awry: the repeal of the Act, a Depression-era measure that restricted the way banks could venture into financial markets. It was repealed in 1999 in favor of the . “While the benefits of removing Glass-Stegall limitations accrued to the banks and the economy immediately, it also increased the severity and cost of the 2008 financial crisis,” Karp notes.

In the meantime, major bank stocks have leveled off since January after a sharp post-election bounce. Shares in four major banking and financial services companies have closely mirrored each other as of late March 2017, with the November wall turning into nothing doing so far this year:

Wells Fargo & Co. (WFC)

Trading price: $55

Since Election Day: up 21 percent

Since New Year’s Day: down 1 percent

(C)

Trading price: $58

Since Election Day: up 15 percent

Since New Year’s Day: down 6 percent

(JPM)

Trading price: $87

Since Election Day: up 24 percent

Since New Year’s Day: unchanged

(BAC)

Trading price: $23

Since Election Day: up 34 percent

Since New Year’s Day: up 1 percent

“Investors should be quite clear as to which of these industry [sub-sectors] they’re putting their money into,” says , professor of business and accounting at Touro College in New York City. “The first group includes firms like JP Morgan Chase and Goldman Sachs, while the latter involves smaller, local, savings and thrifts servicing retail customers throughout the United States.”

To hear DeCandia tell it, the large multi-national institutions have more diversified products and services, whereas regionals offer “the more traditional banking services” focused on the retail level. In the case of the latter, much rests on interest rate hikes, which affect retail profits on many levels. And that could be a very good thing indeed.

Most recently, the Federal Reserve increased its federal funds target rate on March 15 by 25 basis points, from 0.75 percent to 1 percent. ( is a common unit of measure for interest rates and other percentages in finance: 25 basis points equal .25 percent.)

While Fed action doesn’t control interest rates directly, it has an almost immediate ripple effect on product lines from credit cards to mortgage services. But the big banks, with their overseas operations and investments, could stand vulnerable in light of the impending Brexit, European Union stability and other matters such as the ever-present threat of a recession in China.

Says DeCandia: “The potential for big returns causes investors to salivate, but are they willing to sign up for a potential meltdown as seen in 2007-2008? If it’s regionals you’re looking at, the focus should be more on loan quality and regulatory capital ratios. Those are the factors more likely to drive stock performance.”

Meanwhile, no one—not even the staunchest conservatives—think that entirely bank-driven agenda is the way to go. Standing outside the fray, at least one expert wonders whether financial markets, some 10 years after the 2007 crisis, have the ability to restrain themselves.

“Capitalism remains the best way to improve the human condition, but it is also a force of relentless disruption that does not benefit all,” . “Softening its edges, even at some cost to economic efficiency, remains the best way forward.”

Will Donald Trump turn out to be either the banking world’s best friend, or a destabilizing force that needs to be watched like a child run amok in a candy store? If the recent stock performance of the big banks offers any clue, a cautious stance prevails while the financial services world awaits the outcome of Dodd-Frank efforts on Capitol Hill.

Just a few months ago, views among international experts were clear. The rated a Trump presidency the number 4 among the worst things that can happen to the world economy outside of a prolonged recession in China. And Trump’s stated intention to rip up multilateral trade agreements, for starters, could prove disastrous for banks that will be left to scramble in the aftermath.

Yet if one thing’s also clear, the Trump administration has much more affinity for the banking world, and its bottom line, than President Obama—who after all, signed Dodd-Frank into law.

So for now, the scale tips toward a steady climb of banking stocks under the former reality TV show host with the larger-than-life reputation.

DeCandia puts it like this: “As George Friedrich Handel wrote in ‘The Messiah,’ ‘His yoke is easy, His burden is light.’ In such an environment, the banking sector will finally have found religion.”