U.S. banks' post-election rally may be just an appetizer
13 Nov 2016 13:44
The U.S. banking sector's dramatic rally post Election Day is likely just a taste of bigger gains to come, as investors expect banks to reap huge benefits from rising interest rates and lighter regulation under a Donald Trump presidency.
In recent years, bank stocks have been held back by heavy regulation and historically low interest rates which have sapped the earnings potential of their massive cash holdings.
But optimism about the sector's outlook is growing. Interest rates are rising and investors are betting that Trump will follow through on his campaign promise to review the increased number of regulations put on the banking system after it nearly keeled over in the ۲۰۰۸ financial crisis.
The S&P ۵۰۰ bank subsector rose ۱۰.۲ percent in the three days following Trump's victory in the U.S. presidential election. This was the index's best three-day performance since August ۲۰۰۹.
In those three days, Wells Fargo Co shares rose ۱۳.۶ percent, JPMorgan Chase & Co climbed ۹.۵ percent and Bank of America gained ۱۱.۹ percent.
Some investors and analysts watching banks say the stocks are likely not near the end of their run.
"They are not close to being expensive yet," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.
The S&P ۵۰۰ banks are currently trading at about ۱۱.۲ times forward earnings estimates as a group, up from about nine times in February, when the index hit its lowest since May ۲۰۱۳.
Valuation is still well off peak levels of over ۳۳ times earnings estimates in May of ۲۰۰۹, though it trades near levels seen between ۲۰۰۲ and ۲۰۰۸, before many current regulations were put in place.
If rates continue to rise and the Trump administration gives some clarity on how regulations will change, then bank valuations "certainly can move higher," Piper Jaffray analyst Kevin Baker said.
Baker stopped short of giving a specific P/E estimate but he pointed to the higher valuations of banks that are not designated as systemically important financial institutions, commonly referred to as "too big to fail".
Today, the minimum asset threshold for too-big-to-fail designated banks is $۵۰ billion. If this threshold is lifted to $۲۵۰ billion in a regulatory overhaul it would give a lot more flexibility that could likely boost valuations of banks operating in that range, Baker said.
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