Bank Stocks Need More Than Tax Cuts to Sustain Their Rally in 2018

  • Market braces for MiFID II regulations starting January 3
  • Investors watching for loan growth, rate hikes, deregulation

Banks may be poised for more gains as analysts expect direct and secondary effects from Congress’s tax overhaul to keep boosting bottom lines. Even so, they’ll likely need more than taxes to stay attractive in 2018. Investors are watching for loan growth, rate hikes and deregulation. Eyes will also be on new European rules known as MiFID II, possible cyber-security events, and the twists and turns ahead for bitcoin, other crypto-currencies and blockchain.

Early in the year, look for for "kitchen sink" fourth-quarter earnings due to the effects of the new tax law, KBW Director of Research Frederick Cannon says in an email to Bloomberg. He will be watching next year for moves from bank-friendly regulators, Fed hikes and whether the yield curve steepens or flattens. Key risks include loan growth not picking up, widening credit spreads, rising deposit betas and cyber events. Cannon says the impact of MiFID on on banks is likely to be manageable, though there’s a risk that research spending will drop faster than expected. He’ll also be watching on January 3 to be sure there are no trading "hiccups."

Here’s a look at other Wall Street predictions:

Evercore ISI

  • Money may continue to flow into financials as value gains on growth
  • Earnings may grow double-digits (pre-tax overhaul), amid modest revenue growth, higher rates, tame expenses, steady credit, 3 percent to 6 percent share count shrinkage, possibly easier regulation; tax cuts good for stocks overall, though there may also be one-time DTA, repatriation hits
  • Sees a continued good backdrop for M&A likely, helped by tax shift; sees pickup in ECM, tough comps for DCM, mixed trading picture
  • MiFID II will likely hurt equities trading, shrink research fee pools
  • Sees credit costs staying tame, as underwriting has been deliberate, economy is solid, and as "lower taxes = a healthier consumer"

Wells Fargo

  • Updates estimates, increases price targets for 18 large-cap banks to reflect more upside from lower taxes, higher interest rates, and lower cost of capital due to greater resiliency
  • Results in the fourth quarter may "only be OK" given likely sluggish trading, loan growth, even with signs of commercial pick-up and likely higher NIMs, but 2018-2019 should be "at least modestly better"
  • "Stay the course" on big banks

RBC

  • "The best is yet to come" for U.S. banks, with higher profitability and earnings growth amid better economy, strong credit quality, more constructive regulatory environment, and further rate hikes, following a strong 2017 on expectations for tax overhaul, easier regulation
  • Also flags likely stronger capital markets revenue; sees loan growth speeding up in 2018 (may boost provisioning)
  • Cites stocks to buy: BAC, BBT, C, CMA, JPM, HBAN, KEY, MTB, MS, NTRS, PNC, SNV, STI, STL, WAL, ZION

Buckingham

  • Doesn’t see upside from tax reform, deregulation or materially higher economic growth and interest rates as priced in
  • Recommends investors "keep their chips on the table" as expectations remain conservative; investors should largely look past fourth-quarter results, shift focus toward impact of tax bill

Credit Suisse

  • Confidence in sustainable growth is critical, given the tight correlation between GDP growth and banking industry fundamentals like loan growth, capital markets revenues and credit costs
  • With Fed and Treasury aligned, there’s potential for significant progress in fine-tuning regulatory framework over next 12-24 months
  • Favors universal banking model; flags JPM, BAC, C, MS, with valuation discounts relative to return prospects

KBW

  • Big banks "keep flying into the wild blue yonder," as the narrative’s still positive and getting more positive into 2018
  • Along with boost from tax overhaul, says "the basic foundation" that led to 2017’s outperformance -- higher rates, U.S. economic growth, capital return -- is still in place for 2018
  • Also sees regulatory reform, better global growth adding to likely continued outperformance next year

Jefferies

  • In a November white paper, Jefferies listed MiFID concerns including higher administrative and reporting costs; exacerbated periods of acute market stress as algorithmic kill mechanisms are introduced; growing dark pools; cyber-security incidents; noisy glut of data
  • Cyber-security incidents were of particular concern to Jefferies equities senior vice president Shannon Murphy, who spoke with Bloomberg in November
  • Possible SEC follow-up rules were worrying Jefferies’s Michael Eastwood, director of Americas Research
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