Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Wall Street's titans may not all have voted for Donald Trump, but investors in bank stocks are giving him a ringing endorsement. Is the rally premature?

As markets absorbed Trump's upset presidential win, Bank of America Corp. and JPMorgan Chase & Co. each surged almost 6 percent, while the KBW Bank Index rose as much as 5.5 percent, its highest level since August 2015. 

Buyers piled in because banks' regulatory burden will likely be eased under a Trump administration and Republican-controlled Congress, which could lead to reduced compliance costs. The GOP platform states that no financial institution is "too big to fail," and calls for repealing parts of the Dodd-Frank Act. Trump has said he wants to dismantle it.

Bank stocks also gained on the expectation that many of Trump's economic policies -- tax reform and infrastructure spending, for instance -- will be reflationary, and spur faster rate hikes. Banks earn bigger profits when rates rise they can take a wider margin on their loans to customers and earn more on their mammoth cash reserves. For context, Bank of America is one of a handful of banks that has shared its sensitivity to any rate increases: as of Sept. 30, it estimated that a 1 percent bump would increase net interest income by $5.3 billion over the following 12 months.

Pick Up the Pace?
Trump's policies could result in faster increases to the benchmark fed funds rate
Source: Bloomberg

There are other positives, too. Fixed income, currency and commodity trading revenues -- which were a bright spot in many of the banks' third-quarter earnings -- should get a lift from the uncertainty caused by Trump's victory. Already, gold is approaching its busiest trading day ever, U.S. Treasuries are leading a global bond rally and by now, you know what's happening to the Mexican peso. 

Folks are also less perturbed about an overall decline in dealmaking as a result of Trump's win than they were about June's surprise Brexit vote, even though cross-border mergers and acquisitions activity could slump as a result of new policies that damage free trade. Shares of independent investment banks such as Greenhill & Co. Inc. and Evercore Partners Inc. actually edged higher on Wednesday, in stark contrast to declines in excess of 20 percent after the U.K. voted to leave the European Union.

But investors may want to curb their enthusiasm. It's unclear where Trump's priorities lie. Is he committed to undoing Dodd-Frank? And what about his support for reimplementing the Glass-Steagall Act? Such a move would involve separating commercial and investment banking activities but confusingly, Trump himself has said he disagrees with the notion of breaking up banks. Who knows what his approach to that, among other possible changes, will be once he moves into the White House? 

The KBW Bank Index has rallied some 40 percent since February, leading Wall Street analysts to believe the majority of the largest U.S. banks are fairly valued. Even before Wednesday, they priced in at least one one rate hike and a generally prolonged low growth environment.

Room to Run?
According to Wall Street analysts, most of the biggest U.S. banks are fairly priced
Source: Bloomberg

A Trump presidency may be good for the banking industry, but his policies need to be clarified first. Let's not get carried away.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net