Thought of the day
03.07 - Stress relief for banks
Banks have had an undeniably good run. The S&P financial index has gained more than 30% over the past 12 months, climbing to levels last seen in late 2007, driven by hopes of higher rates and potentially reduced regulation under President Trump.
But although a repeat of those kind of gains is probably too much to expect, the outlook for banks remains bright. The latest boost has come from the Fed's annual stress tests, which earned US banks the go-ahead to pay out almost all of their annual earnings to shareholders. Indeed, 29 June was the biggest day in history for share buyback authorizations, with US lenders hitting an average payout ratio of 97%, or an estimated USD 132 billion according to Barclays. And while a repeal of the post-2008 Dodd-Frank act rules on financial firms looks unlikely, we do expect Trump administration regulatory changes to successfully scale back the burden on banks. A reduction in compliance costs could also feed through to the bottom line. Added to this, the US economic backdrop is positive, with the Atlanta Fed GDPNow tracking second quarter growth at 2.7%, while rising interest rates could help lift net interest margins and loan growth for US lenders.
So, while US banks already have plenty of good news priced in, we believe there could be more upside as progress on regulator-driven reforms takes hold. We have a preference for universal US banks with regulatory exposure, and expect consumer oriented financials to benefit from the healthy US consumer.