When candidates in the presidential election began to fling mud and make voters squirm, constituencies lined up on both sides of the political football, vocally expressing strident opinions that pushed toward one goal or the other.
Less visible, and certainly far less outspoken, the leaders of the nation’s banks stood on the sidelines, waiting for the votes to be counted. And as it turned out, investors in the nation’s financial institutions scored. Big.
“The past few weeks have been quite good for the banking sector, with some stocks offering double-digit returns,” says Angelo DeCandia, professor of business and accounting at Touro College in New York. “The problem with the current mania for bank stocks, though, is that all banks are not equal.”
[See: The 7 Best Bank Stocks to Buy for 2017.]
And so 2017 begins on a note of cautious optimism for banks and their shareholders. On the one hand, a Republican majority in Congress and a GOP president occupying the White House for the first time in nearly a decade should mean a loosening of laws and a robust, pro-growth agenda.
But hold on a minute, bank fans — a few weeks of postelection exuberance doesn’t necessarily mean a bull run is at hand. “All four U.S. majors are trading well above their respective five-year averages of price-to-book ratios by 25 to 50 percent,” says Clement Thibault, senior analyst at the global financial platform Investing.com. “This is usually a bright red flag for investors.”
The four banks Thibault refers to are Citigroup (ticker: C), JPMorgan Chase & Co. ( JPM), Bank of America Corp. ( BAC) and Wells Fargo & Co. ( WFC). Wells Fargo has hit some definite sour notes that could have the others singing the blues.
The specter of the cross-selling controversy remains a huge issue for banks in 2017. When the Wells Fargo scandal broke in the fall, it shone a bright light on a dark side of the practice, where the San Francisco-based bank saddled customers with credit accounts and bank products they never asked for — all with the goal of hitting corporate sales targets. It forced the departure of embattled CEO John Stumpf.
Initially, the WFC stock price took a hit, dropping more than 12 percent from September to early November. But since then, Wells Fargo has recovered all that lost ground and then some: It trades now at about $55 per share, up almost 8 percent from early September.
But what happens to Wells Fargo — and other banks — once the post-election rally ends? The market last week experienced its first three-day drop since October, its first mini-bearish trend since Election Day. If that trend continues, banks will be pressured to find other ways to increase sales and revenues.
Wells Fargo profits have slumped for four consecutive quarters and the bank has agreed to pay out a $185 million settlement in the scandal. Meanwhile, it remains to be seen how other banks may find profits slashed should they decide to cut back on cross-selling. It’s a universal practice, though WFC apparently took it to aggressive ends far beyond any of its competitors.
“Very few credit card companies turned a profit in the teeth of the Great Recession, so if a bank you’re targeting for an investment managed to do so, you can certainly feel more comfortable entrusting your money to it,” says John Kiernan, senior editor at WalletHub. “You should also investigate how the company’s stock is priced relative to its peers and its fundamentals — as well as the expectations for its next earnings announcement.”
[See: 7 of the Best Stocks to Buy for 2017.]
Other factors may make investors happy. “The big story of 2017 for the stock market is likely to be rising interest rates,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “Interest rates are likely to be a bigger story than a Trump administration.”
As Johnson explains it, what’s potentially bad for the market overall could be good for banks. “I believe the absolute level of interest rates being at historical lows for an extended period of time has hurt bank stocks, as these rates have lowered the profitability of banks,” he says.
What’s more, the recent interest rate hike by the Federal Reserve points to the fact that the U.S. economy is once again solid. “A stronger economy means that there will be greater demand for funds and that’s good for banks,” Johnson says. “That is, the demand for loans should rise as the economy improves.”
Also at issue is whether a Republican administration with solid majorities in the House and Senate will water down forces that they believe have hurt banks. The actions could range from a gutting of the Consumer Finance Protection Bureau to the death of the Dodd-Frank Act, signed by President Barack Obama in 2010.
That law, adopted largely as a consequence of the Great Recession, imposed strict regulations on banks and the financial services industry. And as banking regulations became stricter, banks incurred massive, recurring costs to maintain compliance.
“Whether you like (Donald) Trump or not, almost everyone agrees that the regulatory environment under a President Trump will be lighter than under President Obama,” DeCandia says. “All financial institutions, including banks, will benefit. And while it’s premature to say that Trump will set his sights on Dodd-Frank as soon as he dismantles the Affordable Care Act, most banking industry participants expect a much easier time of it compared to the past eight years.”
[Read: Wall Street Predictions for 2017.]
And an easier time should mean easy money for banks and the shareholders who back them. Or to once again borrow from the argot of gridiron: touchdown.
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Bank Stocks Beyond the Post-Election Bounce originally appeared on usnews.com
