It shouldn't be much of a surprise that stocks have risen during President Trump's time in office. Trump campaigned on business-friendly economic policies and also has a Republican House and Senate to make accomplishing his goals possible, such as the recently passed tax reform bill.
One of the biggest beneficiaries of President Trump's first year was the banking sector, which increased by nearly 30% thanks to a combination of factors that should translate to higher profits. Here's a rundown of why the Trump presidency has been good to banks so far, and why we could see bank profits continue to increase.
Image source: Official White House photo by Shealah Craighead.
Bank stock performance during Trump's first year in office
To clarify what we mean when we say bank stocks soared, here's a look at how some of the largest U.S. banks performed in the one-year period following President Trump's inauguration on Jan. 20, 2017.
Bank or Index Fund
1-Year Total Return
Bank of America (NYSE: BAC)
Citigroup (NYSE: C)
JPMorgan Chase (NYSE: JPM)
Morgan Stanley (NYSE: MS)
Wells Fargo (NYSE: WFC)
Financial Select Sector SPDR ETF (NYSEMKT: XLF)
Data source: YCharts. Total returns are from Jan. 20, 2017, through Jan. 19, 2018.
To be fair, the stock market had a great year overall, with the S&P 500 generating a 26.2% total return during Trump's first full year in office. However, the overall banking sector surpassed this performance, and most of the largest banks did even better. Even scandal-plagued Wells Fargo returned nearly 20% for the year, an excellent return considering the dismal year the bank had.
Pro-growth policies = rising interest rates
First of all, the performance isn't just a result of Trump's election. The major catalysts for the banking sector have been possible because of the combination of Trump's presidency and Republican control of both the House of Representatives and the Senate.
Having said that, one big catalyst for banking is rising interest rates, or, more specifically, the expectation of rising interest rates over the next few years, brought on by the pro-growth policies of the new administration.
The Federal Reserve is widely expected to raise rates at least three more times in 2018 and several more times in 2019 and 2020. And there's been speculation that thanks to programs such as Trump's infrastructure plan and the Federal Reserve's unwinding of its balance sheet, interest rates could rise even faster than these expectations.
Here's why it matters to banks. When interest rates rise, the rates banks charge on loans tend to rise faster than the rates they pay for deposits. As a result, profit margins tend to expand during rising-rate periods.
Tax reform should boost profits for most banks
The recently passed Tax Cuts and Jobs Act is not only another form of economic stimulus that could ultimately result in fast-rising interest rates, but it should also translate into billions of dollars in profits for banks.
The new 21% corporate tax rate should be a major boost to banking profits. Most big banks operate at effective tax rates in the 30% ballpark, so this is a major reduction.
In addition, lower income taxes on individuals could be a positive factor for banking all around. More money in consumers' pockets could mean more deposits and greater demand for loans and other banking products.
Many banks are benefiting, or could benefit over the next few years, from the Trump administration's anti-regulation mindset. Just to name one example, there's a strong possibility that the threshold to be considered a systematically important financial institution could soon be raised from $50 billion to $250 billion in assets, which could save midsize banks a significant amount of money on compliance expenses.
Banks continue to improve on their own
Ever since the financial crisis, there has been a general trend toward higher asset quality and greater efficiency in banking, and this trend continued in 2017. Banks are reducing their physical footprints and embracing new technologies, a trend that has resulted in improving efficiency and profitability.
For example, since the end of 2014, Bank of America's branch count has fallen by 385, while the percentage of deposits that take place through cost-effective mobile technology instead of in a branch has risen from 12% to 23% in the same time period.
A generally business-friendly environment
The takeaway is that in addition to the improvements banks continue to make on their own, we now have a much more business-friendly environment than we previously had, and banks should be among the biggest beneficiaries. Economic stimulus, higher interest rates, lower taxes, and looser regulations could translate to billions in additional banking profits, which is why the sector has been one of the best performers since Trump's election.
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