5 Stocks To Buy As Trump Raises Hopes For Banking Sector

Bank stocks, in recent years, have been held back by heavy regulation and low interest rates. But, optimism surrounding the sector’s outlook is growing, thanks to Donald Trump’s victory.

Trump’s intention to roll back regulations and lower administrative burden will stand in good stead for the banking industry. Tax reforms and uptick in infrastructure outlays, then again, will spur a rate hike. There are other positives as well. Trading revenues will get a boost from heightened uncertainty surrounding Trump’s victory. Taking such positives into consideration, it will be prudent to invest in fundamentally sound banking companies.

Roll Back Regulations

Investors continue to turn toward banks as regulatory burden is likely to ease under Trump’s administration and Republican controlled congress. One such change will be the raising of the minimum asset threshold for banking behemoths to $250 billion from $50 billion, which will lend more flexibility, boost valuations, strengthen consolidation and increase lending. Regulations related to bank capital may be relaxed, with capital ratios for regional banks not expected to exceed 12%, while the ratio may be slightly higher for bigger lenders.

Trump, in the meantime, views the Dodd-Frank regulatory overhaul as a harsh measure, especially, on smaller banks. Trump has called for repealing parts of the Dodd-Frank Act, which has for a considerable period of time limited operational flexibility. Trump’s team is also focusing on scaling back the Financial Stability Oversight Council, which serves as a watchdog on big players in the economy. They also want to fix a section of Dodd-Frank Title II that has given financial regulators the right to take over a failing financial firm and liquidate it. At the same time, the Trump administration is expected to embrace encouraging aspects of the law such as regulating derivative products and transparency of credit rating agencies.

Tax Cuts, Rise in Spending

Trump’s pledge to slash taxes and increase government spending will fuel inflation. Prices of bonds tanked as inflation mostly erodes the value of securities with a fixed-rate income stream. This in turn reached the 10-year treasury yield to its highest level since January. Higher longer-term interest rates can boost bank profits, as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Trump called for sweeping reductions in personal income tax along with trimming the business tax rate from 35% to 15%. Corporates will also get a chance to repatriate foreign profits at a rate of 10%.

Trump is in favor of beefing up public spending by hundreds of billions of dollars on infrastructure. He said that he will support more spending on transportation and telecommunications infrastructure, clean water and electricity transmission in order to accelerate economic growth. This in turn will create plenty of jobs in construction and manufacturing.In fact, he is expected to offer Zacks Investment Research

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Written By: Zacks Investment Research