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December 27, 2016 at 11:01 AM
Analysts following the stocks of large U.S. banks, which own major broker-dealers, are generally bullish on the sector for 2017.
Though technology challenges and economic unknowns naturally present risks for the sector, the positive factors that have propelled the group up about 50% since June’s Brexit vote will likely be more influential in the year ahead, they say. Plus, other circumstances—such as the election of Donald Trump—bode well for it in the year ahead.
The reasons behind this positive outlook include broad and specific drivers in the financial system, according to Richard Bove, vice president of equity research for Rafferty Capital, and they encompass the bank’s broker-dealer operations.
Analysts at Keefe, Bruyette & Woods agree: The group “still has room to run as rates move higher, the trading environment improves, modest deregulation decreases company-specific risks, and the U.S. sees better nominal growth aided by a strong U.S. consumer,” according to a recent report by analysts Brian Kleinhanzl and Michael Brown, CFA.
Looking at President-Elect Donald Trump’s policies, Bove points that there could be tax cuts in 2017 to incentivize greater corporate spending. “There also could be $2 trillion repatriated through a government program to bring back profits held overseas,” Bove explained in an interview.
Ultimately, he says, a decent amount of these repatriated funds should end up as bank deposits. He also sees at least a small amount of fiscal stimulus on the horizon.
The team at KBW says it sees large-scale deregulation or tax reform on the horizon, and the large banks “would be a major beneficiary if either were to occur.”
Three Key Assumptions
Looking at these general trends in more depth, Bove argues that three conditions will further support the sector in the year ahead.
“First, there’s going to be a huge need for money,” he explained, “if the government is going to stimulate the economy to build bridges and tunnels.” The public sector will do some of borrowing to finance these programs, he says, and will “move to involve the private sector to do so as well.”
“There should also be tax cuts to incentivize growth in the economy,” Bove stated, “and, again, that entails lots of bank lending.”
If tariffs are put into place to stimulate manufacturing, that policy move also will be associated with increased bank lending, the veteran banking analyst says.
“For bank earnings, the main source is loans. And all indications are that they are going to go up,” he added.
The KBW analysts forecast median loan growth of 4.9% in 2017 and 5.1% in 2018—in-line with their nominal gross domestic product (GDP) growth expectations.
The Fed, Rates
The Federal Reserve, equity analysts say, is poised to raise rates in 2017.
