A few months back, coming off the results of the Presidential election, we opined on the seemingly rocket-fueled rally in bank stocks. At the time, we posited the following as probable/potential catalysts underpinning the significant positive move in the sector:
Meaningful tax reform – might rates drop from approximately 35% to 25% or lower?
Pro-growth sentiment in D.C. – will it help fuel stronger economic growth as measured by GDP?
Favorable interest rate environment – will expectations of steadily rising rates help shape a steeper yield curve, and result in long-sought margin expansion?
Regulatory relief – could a roll-back or significant revisions to Dodd-Frank help ease the time and costs associated with this post-crisis regulatory burden, particularly for our nation’s community banks?
Each of the four technically remain in play, but the timing and magnitude of any single driver has become less clear.
Tax reform has moved to the top of the Administration’s agenda, but the ripple effect of the failed health care reform efforts is still playing out, and to what extent, if any, it will have on tax reform is unknown. If nothing else, it has served to remind us all that the legislation wheels often grind slowly, and neither party holds sole proprietorship of the political dysfunction in Washington.
While it would seem that economic growth would truly be a bipartisan objective embraced by both sides of the aisle, that sentiment currently faces growing headwinds in the form of geopolitical uncertainty (Syria, Russia, North Korea, etc.) that could blunt or derail the best intentions.
Last month witnessed a rate increase by the Fed, with expectations of possibly two to three more increases during the course of 2017 still very much intact. Again, how quickly and to what degree these rate hikes are implemented remains to be seen. And the tangential impact with regard to speed and magnitude cannot be ignored, particularly as it may influence liquidity and funding considerations for the financial sector.
And, in assessing potential regulatory relief, plans to roll back or revise Dodd-Frank have been tabled until this Summer at the earliest. While most bankers remain optimistic, this has always been an area that is at best very difficult to quantify, but seemingly also carrying potentially significant “emotional” benefit to the group. While the recent health care debacle gives pause to any reform efforts, ongoing discussions with financial industry leaders and meetings with community bankers are reinforcing apparent genuine efforts to address the costs and resource allocation requirements of this legislation.
Succinctly, as depicted in the following chart, the run-up in bank equities has softened over the past few weeks. While still out-pacing the broad market averages when measuring post-election returns, the recent pull-back has trimmed what had been nothing shy of a rapid and profound rally in bank stocks:
As the attached monthly summary also highlights, while broader market averages remain positive thus far in 2017, bank stocks across all relative measurements have turned negative year-to-date. The aforementioned commentary would clearly support this dynamic, while all eyes will continue to be focused on the new Administration’s efforts to find its footing while navigating the at times convoluted morass of D.C. I remain cautiously optimistic that common sense and constructive discourse will prevail, but it is clearly becoming more difficult to take a lot of comfort based upon recent observations of the political climate in our nation’s capitol.
In closing, attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organizations forward, please do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of any assistance in helping you assess the competitive landscape. Best wishes for continued success in 2017!