A couple of days after Donald Trump was elected President of the United States, his transition team announced that it plans to "dismantle the Dodd-Frank Act". If accomplished, this will be a big win for the Big Banks.
Impact on the Banks
Dodd-Frank was signed in to law in 2010 as a reaction to the 2008 financial crisis. Referred to the most significant change in financial regulation since the Great Depression, this legislation called for a significant increase in regulation over the financial services industry.
Companies that most impacted were those deemed "too big to fail". The regulation did not call these companies too big to fail. Instead they were labeled systemically important financial institutions, and given what is referred to by the Fed as a "SIFI designation".
What did a SIFI designation earn these companies? A lot more regulation. Without going into all the details, these companies were forced to hold more capital (meaning less money to invest), take less risk (leading to lower returns), and spend a substantial amount money on internal functions needed to address the boatload of additional reporting required by the Federal Reserve.
This how they remain today... But a Trump presidency may change that.
It may not be that simple.
The Dodd-Frank Act was a bipartisan bill that was supported by both major parties, but the several members of the GOP had been calling for its repeal since 2015. Now that Trump is president-elect and republicans control both the house and the senate, the odds of a Frank-Dodd repeal look pretty good, and Wall Street has noticed.
Bank of America (NYSE:BAC) stock traded up about 20% to over $20 the week after Trump was elected. It's continued to gain since and now sit just under $23.
Bank of America wasn't alone. Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM) and other Big Banks all saw large gains after the election.
The interest rate effect
Banks make money as lenders. As rates rise, they can charge more interest for loaning money. This is not insignificant. In fact Bank of America has projected that a 1% increase in rates would generate an additional $5.3 billion in income.
Lower taxes
President-elect Trump plans to lower the corporate income tax rate from its current level of 35% to 15%. This should benefit all US corporations including the Big Banks. As an example, Bank of America's current corporate tax rate is about 30% after deductions. This would fall to 15% at the most.
The rally isn't over
Reduced regulation, higher interest rates and lower taxes will lead to higher earning over the next several years. These stocks have been shunned since 2008. Now that they are free from most (if not all) of their subprime assets, their valuations will continue to increase over the next several years.
There are still more gains to come.