What DOL Delay, Dodd-Frank Rollback Mean for Wall Street

Boosting the outlook for financial firms are expense cuts tied to deregulation, revenue growth resulting from this rollback and tax reform.

In January, KBW analyst Brian Kleinhanzl shared his views on the effect these three shifts could have on the profits of major banks and financial firms, like Bank of America and Wells Fargo.

He estimates between 24% to 38% upside to earnings in 2018 for the rollback, along with related growth in the economy and lower taxes. “We believe that [the large] banks can be big beneficiaries of less regulation, and we include a 5% expense reduction in our estimate and significant increases in trading and investment banking income.”

For instance, expense cuts alone from deregulation could boost earnings at Morgan Stanley and State Street by about 11-13% next year. Revenue growth could add another 7% or so to Morgan Stanley and Bank of America. And tax reform means 10-19% further earnings upside for most large banks.

The KBW analysts caution that the drop in regulation “may come at a cost,” however, as Republican proposals to amend Dodd-Frank “would require much higher capital levels at the biggest banks.”

These costs, they add, are not factored into the “Blue Skies” analysis.

As for DOL, many financial firms “have already taken steps and adjusted fees to restructure their businesses to comply with the rule,” according to equity analysts with Keefe, Bruyette & Woods in a report on Friday. The KBW team remains skeptical over how many of them “will reverse course simply because such a reversal may look like the firm is putting its interests ahead of its customers.”