Investing in bank stocks should be a straightforward decision. If you know the cost of money and you know how a given bank operates, the result is “automatic” profits (in theory).
The first data point is fixed, after all. The benchmark interest rate set by the Federal Reserve helps determine the cost of money for banks nationwide. So, their ability to profit — the lower bound, anyway — is set in stone.
Now all that matters is the quality of the bank’s existing or potential customer base, and of course the effectiveness of a bank’s management itself.
Much of that data is knowable, too, thanks to our own Weiss Ratings Stock Screener. Using key variables such as return on equity, profit margins, and pricing data can help the savvy bank investor zero in on just the right selections. Combining that with our proprietary Weiss Bank Safety Ratings delivers performance with stable, predictable outcomes — investing nirvana.
But what could change the course of financial sector investing over the next year? Plenty of intangibles, many of which can’t be measured or forecast precisely by anyone. Nevertheless, these are the trends worth watching, in rough order of importance:
Trend #1: Tax Reform
As we explained last week, tax policy is the 800-pound gorilla in the room for all investors, including bank stock buyers. The Trump tax cut is now law, and that means the effective tax burden on the banks is going to fall by half or more.
For many banks, this means hundreds of millions of dollars in fresh capital to invest and/or return to investors. In the short run, look for some spending on purely competitive avenues that increase profits — branch openings and new product lines.
Some of that new capital will also be spent on shoring up staff, especially at the entry level in higher-cost urban areas. That will help banks retain staff and reduce turnover, a key management metric.
Mostly, though, look for stronger and higher dividend payouts in the coming year and stock buybacks that help bank investor-owners.
Trend #2: Deregulation
President Trump already took one shot at bank deregulation, signing an executive order to review the Dodd-Frank package of restrictions on banking passed in the wake of the 2008-2009 financial crisis.
That’s not the same as rolling back the law. But senators already are adding amendments to a bill that would seek to relax the rules on banks across the board. We expect there to be some kind of bipartisan deal here, with potential strengthening of consumer protections amid general relaxation of rules for the banks themselves.
The ultimate effect may not be seen in the industry right away. But that won’t stop investors from placing bets early, and pushing up share prices in anticipation.
Trend #3: The Economy
It’s always tough to make a call on the direction of the entire U.S. economy. We are, after all, starting the ninth year of this expansion.
But the expansion to date has been relatively slow and lackluster after an absolutely mind-bendingly deep recession before it. That’s really different from the typical V-shaped, crash-and-rebound recessions of the past.
Because it has been slow, we may ironically have more room to run in order to reach our full potential. Trump may benefit from that well into his second year in office. So many tremendous trigger events for market sell offs in the past — nuclear brinkmanship, daily political scandals, investigations — seem to bounce off this president and our economy, too, and that could easily continue.
Trend #4: Generational Shifts
The race is absolutely on for the dollars and attention of the Millennial generation, the largest group after the Baby Boomers and the future of the American consumer. Much has been made about how young people are putting off buying cars and homes, but that’s not a sustainable trend.
Over time, the Millennials will settle down, marry and own property, much like their parents and grandparents before them. That wave of home buying and borrowing for purchases of consumer durable goods (think things like furniture and appliances) will feed into the banking industry’s bottom line.
Trend #5: Wild Cards
The first four items on this list are the big levers that will move the needle for banks for sure. But there are many smaller undercurrents worth watching.
For one, the fintech revolution — banking in the age of smartphone apps — will continue and will disrupt a lot of slower, older bank cultures. The craze for cryptocurrencies is facing a do-or-die moment in early 2018, one we expect will end with more “do” than “die.” Banks will have to be ready for that, too.
The Federal Reserve is arguably also worth watching closely as new management takes charge. If the Fed accelerates the pace of rate hikes given the improvement in the economy, that could impact the banking industry.
Only time will tell if these kinds of wild cards will come into play. In the meantime, stay safe and prudent with your financial stock investing – using the impartial, time-tested Weiss Ratings as your guide.