Bank stocks had a strong run following Trump’s election, but things have been much more grim in recent months. Major lenders have suffered in the face of falling expectations for Trump-led growth, deregulation, tax cuts, and inflation. All of this has conspired to bring down the once high-flying stocks. After a big move upward, banks are now approaching bear market territory, with Goldman Sachs down 16.5% from its March peak. Wells Fargo is down 14% and JP Morgan 12%.
FINSUM: The losses are logical given how slow progress in Washington has been. Goldman’s fall was steeper because of the big earnings miss, however.
Let’s be clear, there have been no tax cuts, no overturn of Dodd-Frank, and no major infrastructure package. Yet, banks stocks have remained strong and Credit Suisse is arguing they will keep on rising. The reason why is the benefit of the universal banking model, with “its multiple levers for growth and greater potential for realization of scale economies”, according to the bank. Credit Suisse sees 10-15% upside for big US universal banks like BAC, JPM, C, and GS.
FINSUM: This is a vague and uncompelling argument from our perspective. Bank shares are at the mercy of the US economy and politics, in our opinion, and do not have a fundamental driver that will push them higher without wind in their sails from those two.
The retail industry has been in a major meltdown this year with companies going bankrupt left and right. However, the news from banks has been especially quiet given the tumult. This article says that banks have not been wounded by the crisis in retail because of the unique structure of their involvement with the industry. Banks have made loans to 15 of the 21 retailers that have recently declared bankruptcy, yet because they issue “asset-based” loans which are backed by accounts receivable or inventory, they have been, or are expected to be, fully repaid. The situation is a far cry from the oil industry, where banks took a big hair cut when prices fell.
FINSUM: It looks like the US’ big banks, like Bank of America and Wells Fargo, took a very smart approach with these loans. We are slightly skeptical there will not be any problems, however.
The Consumer Financial Protection Bureau, a name hated by Republicans, loved by Democrats, and tolerated by banks, may be set to die a prolonged death. The agency, which was created by the Obama administration, has held almost limitless power to create and enforce new financial regulation, all created by hardline anti-financier Elizabeth Warren. Now, a courtroom battle over one of the punishments it set out may lead to its ultimate demise. The agency already lost some power when a court ruled that the CFPB did have too much freedom, but it decided against dismantling it altogether.
FINSUM: The big battle here is over Trump’s ability to fire the head of the CFPB, which he currently does not have the ability to do unless it is “for cause”. Once that power comes to Trump, the whole situation changes.
We have been covering this story for a few months and today developments took a dramatic turn in terms of what a Trump version of Glass-Steagall might look like. Generally, it appears that investors should not worry all that much as the administration will not seek to actually split investment banks from retail banks. Treasury secretary Steve Mnuchin does not support doing so, as he told Congress yesterday, saying “We do not support a separation of banks from investment banks”. Doing say would create problems for “financial markets, on the economy, and liquidity”.
FINSUM: While rhetoric and reality can sometimes be far apart, this seems to be a clear statement that the administration won’t tear banks apart. Investors can breathe a small sigh of relief.
Source: Wall Street Journal