It only took a decade but it's officially OK to fall for U.S. banks again.
Consumers feel good. Business leaders feel good. And interest rates are finally not zero -- in fact, they may get an extra lift from President-elect Donald Trump, should his policies boost economic growth as everyone seems to be expecting. The impact was tangible in fourth-quarter results released Friday by JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., validating the industry's post-presidential election rally that some thought might have gotten ahead of itself. Shares of all three banks climbed further, with JPMorgan hitting a new intraday high.
The Trump bump is real but only part of the story. Banks have been slowly working their way to this moment. Profitability -- as measured by net interest margins -- ticked back up at Wells Fargo, the biggest U.S. home lender, thanks to higher borrowing rates, even as the company reels from a scandal involving unauthorized new accounts that has eroded customers' trust in the brand. Bank of America's net interest margin was unchanged from the third quarter, when it rose to 2.23 percent from 2.03 percent.
All three companies also set aside less money for their bad-loan reserves than analysts were expecting, another positive sign. And of course, fixed-income and stock trading continue to bounce back as expected, after two big political upsets -- Trump's win and the U.K.'s vote to leave the European Union -- brought more life back to markets.
It's not yet clear whether the ever-unpredictable Trump will stoke or stifle dealmaking. That said, one would assume his slant toward loosening financial regulation and plans for a tax-system overhaul would foster an environment more friendly to M&A than under the Obama administration. This could bolster the outlook for banks' advisory businesses, which have already benefited from three years of strong merger activity despite regulatory pushback -- and in some cases, blockades -- for the biggest transactions. And there's no better gauge of takeover appetite than CEO confidence, which surged in December to a more than decade high:
Keeping with the confidence theme, the credit-card businesses at all three banks soared during the holiday shopping season. Many brick-and-mortar retailers may still be hurting, but you can't say Americans aren't spending somewhere (read: online). Wells Fargo CFO John Shrewsberry told analysts Friday that customers are using credit cards more and charging more.
Higher borrowing rates will be a double-edged sword for mortgage lending, as fellow Gadfly Gillian Tan pointed out this week. Still, the prospect of fatter returns gives banks the incentive to try to claw back share lost to non-bank lenders such as Quicken Loans Inc. They enjoyed growth from the last wave of refinancing; now comes the chance for profit expansion, even if fewer customers take out new mortgages.
How much higher can these bank stocks go? Well, Mike Mayo, an analyst for CLSA, sees 50 percent upside over the next three years. Wanting to proceed with caution is understandable. But the underlying bank businesses -- even Wells Fargo as it tries to regain customer trust -- look sturdy, Trump or not.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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