If the Trump bump is over, what's going to keep bank stocks aloft? Plenty, it turns out.
Every major bank from JPMorgan Chase & Co. to Bank of America Corp. tumbled on Wednesday, leading to a more than 4 percent drop in the KBW Bank Index. Some stocks had their biggest intraday declines since last year's Brexit vote. The fear is that President Donald Trump's bank-friendly legislative agenda may be stymied by the political turmoil roiling the White House.
It's understandable that investors are questioning Washington's ability to deliver on promises around tax reform, financial deregulation and even infrastructure spending. But hang on: Even if there are months of disruption and distraction, Republicans' current hold on Congress means those topics will remain atop the agenda for at least the next couple of years. Plus, Treasury Secretary Steven Mnuchin has already signaled ways to loosen financial regulation without having to rewrite the law. Banking regulators can issue guidance instead, or simply not enforce existing rules. And changes in law aren't required for regulators to ease requirements in the annual stress-testing of large banks, known as the Comprehensive Capital Analysis and Review, or CCAR.
Stepping past the noise in Washington, banks remain on a path to improving profitability. That's tied to an assumption that their interest income will rise as interest rates climb, however slowly. For example, Bank of America, the most sensitive of the largest banks to rate hikes, forecasts an additional $3.3 billion of net interest income for every 100 basis-point shift in the yield curve, which measures overall economic health.
And though the yield curve flattened on Wednesday (pressuring bank stocks), traders are still pricing in an 82.5 percent chance of a 25 basis-point hike at next month's Federal Reserve meeting, according to data compiled by Bloomberg. Another move is still expected later in 2017.
Beyond that, regional banks should continue to forge ahead with industry consolidation as a means to bolster their earnings and justify higher valuations. Achieving cost savings through synergies may become an even more compelling proposition if tax cuts and loosened regulation are delayed or otherwise muted.
Back to Washington: Investors could hear reassuring news as soon as Thursday, when Mnuchin testifies before the Senate Banking Committee. Any additional details about how the administration intends to wind back parts of the Dodd-Frank Act or make it easier for small banks to compete will obviously be welcomed by shareholders.
But even absent new information, bank stocks don't deserve a battering. In fact, Wednesday's declines -- and any that may follow -- present believers with a buying opportunity.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Gillian Tan in New York at firstname.lastname@example.org
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