Here is a head-spinner: the US is the world’s new tax haven, at least according to Bloomberg. That is a huge shift for a country whose tax policy used to compel companies to reincorporate overseas in “tax inversion” deals. But it is actually a different policy that has made the US a tax haven—a lack of reciprocation in data sharing. Unlike many of its overseas counterparts, the US government cannot compel banks to disclose balances or beneficial owners of accounts, letting wealthy foreign citizens stash cash in US banks to evade foreign taxes.
FINSUM: This may be good business in the long run, but having a standard that others must abide by, but not doing so itself, is the kind of practice that undermines relations with other states.
While many Wall Street players argue that stocks overall are a solid buy, one of them in particular will be a good name to own. That name is Morgan Stanley, which rallied this week on an upgrade from Keefe, Bruyette, & Woods. There are two parts to the thesis. Overall, the idea is that MS will improve its profit margins and return on common equity, and will do so two ways. Firstly, the firm seems likely to benefit from regulatory ranges to the way the Fed reviews banks. Secondly, if the equity market keeps rising, MS stands to gain disproportionately, as its banking business is more tied to equities than other Wall Street rivals.
FINSUM: The point on regulatory changes makes sense, but the equity-related argument is risky, because if stocks end up doing poorly, MS would likely suffer more than other banks.
There is a big warning sign coming out of the US economy that investors need to know about. Following Trump’s election past year there were big hopes for financial industry performance this year. In particular, the bullish new outlook was supposed to stimulate more corporate borrowing in a move that would pickup the economy. However, new data shows that loan growth is slowing at America’s banks. The rate of 12-month loan growth hit its lowest level since 2013 in the third quarter.
FINSUM: This seems like a warning sign that the cycle might finally be running out of steam. Expectations are high, but if credit growth is slowing that is a worrying omen.
Financials, and bank stocks in particular, are hard to figure at the moment. They started the year fantastically, then had a long weak patch, and have moved higher recently. But where do they go from here? Barron’s argues that the direction is up on the back lower regulations and higher rates. The Fed seems likely to ease banking regulation, which would allow better business for big (and small banks). The top picks Barron’s suggests are Bank of America, Citigroup, JP Morgan, and E*Trade.
FINSUM: This is a slightly myopic, but still insightful argument. Leaving aside the prospect for tax reform and economic growth, this piece mostly focuses on the tangible earnings benefits of deregulation.
Bank of America released earnings yesterday and the numbers were positive. The bank reported the highest net income in six years, as cost-cutting efforts and better revenue from rising rates combined to deliver strong earnings. Net interest income rose, and costs, including legal bills, dropped, helping the bank buffer earnings. Fixed income trading, however, slumped, as did trading as a whole.
FINSUM: Trading revenue was down 15%, so not good news, but not catastrophic either. Trading will always be cyclical, but the underlying banking business looks strong.