Now that Donald Trump and the long-ish list of Goldman bankers in his inner circle are set to roll back Dodd-Frank in a concerted and ongoing effort to “make Wall Street dangerous great again,” America’s banks can finally get back to business as usual.
That is, back to business as they knew if before the financial crisis woke America up to the fact that “business as usual” on Wall Street generally means embedding untold systemic risk in the scaffolding that underpins the financial system. Here’s an amusing bit from a New York Times piece out Friday:
If only we had been clever enough to take Donald Trump neither literally nor seriously, we would have known that after vilifying Wall Street throughout his campaign, he would embrace it once he got to the Oval Office.
And, just like that, Wall Street is swarming the Trump administration and steering financial policy. On Feb. 3, Mr. Trump invited the members of his Strategy and Policy Forum to the White House. Stephen Schwarzman, the group’s chairman and the billionaire co-founder of the Blackstone Group, was seated at Mr. Trump’s right. Jamie Dimon, the chairman and chief executive of JPMorgan Chase, sat across from him. Mr. Trump said he expected to cut “a lot out of” the 2010 Dodd-Frank law that re-regulated Wall Street after the financial crisis.
“There’s nobody better to tell me about Dodd-Frank than Jamie,” Mr. Trump said, presumably meaning that there was nobody better to help him dismantle Dodd-Frank than Jamie.
Hilarious, right?
Anyway, between a friendlier regulatory environment, higher expected growth, and higher rates, many investors do indeed expect that the new administration will go a long way towards restoring the glory days for America’s financial institutions.
For those interested in the space, below find what Deutsche Bank calls “the single most important question for each bank.”
Via Deutsche Bank
- BAC is well levered to rising interest rates, has done a good job controlling costs, has boosted capital levels and has de-risked both the credit and trading books. However, some worry that revenue trends (ex rates) will remain sluggish given weak loan growth and mixed fee trends. Discuss why organic revenues have been sluggish and what may improve outside of a macro lift.
- BBT: Momentum has stalled a bit, but the NIM outlook has improved and mgmt signaled a much larger CCAR ask. What other levers are there?
- C’s valuation is the lowest vs. peers on both earnings and book. This reflects less leverage to a stronger US economy/rates, less leverage to a cut in taxes (and risk of DTA impairment), the perception that Citi is more complicated than some peers and that they have more strategic holes. That said, mgmt has done a good job post crisis of de-risking the balance sheet, growing capital, controlling costs and simplifying the co. What more can be done?
- FITB: Mgmt noted $800m in pre tax benefit from Project North Star by 2019. However, it’s expected to be a drag to earnings in 2017. What’s the path/timing to this $800m uplift and how does it go from a net negative to such a large positive in just two-plus years? Does the $800m factor in any normalization of credit (it doesn’t appear to)? If not, why?
- GS seems well positioned for a stronger economy, higher rates and a softening in regulation. We see the most upside within fixed income trading (after years of secular and cyclical pressure). Is this fair and if so how meaningful can a recovery be? How will I&L be impacted if Volcker is repealed?
- JPM: There’s the perception that peers have more leverage to higher rates and a stronger economy. However, JPM has invested heavily in recent years (including in card, branches, ibanking) which should provide good leverage to stronger macro conditions in our view. Discuss the uplift from a stronger macro and how these investments better position you vs. some peers.
- MS: ROE was 8% in 2016 and MS has a target of 9-11% by year end 2017. Why aren’t current (and targeted) ROEs higher considering MS has a leading position in equity trading, ranks #2 in M&A and #3 in ECM and derives 40-45% of earnings from wealth and asset mgmt (both higher return businesses)?
- PNC: 1) if the US corporate tax rate is reduced, will PNC sell its 20% stake in BlackRock and if so what will it do with the proceeds? 2) PNC still has ~$25b (or 8% of earning assets) of liquidity. What pace will this be deployed? 3) PNC is focused on boosting consumer loan growth. How will this be done?
- RF: Rev growth has been sluggish, in large part reflecting modest loan growth; How much will RF’s recent investments to bolster revenues contribute to growth this year/beyond? What can mgmt do to enhance overall loan growth? STI: Mgmt is confident the efficiency ratio will grind down for the 6th year in a row. How much will this come from revenue growth vs. cost cuts?
- WFC: WFC appears to be making progress in remedying their retail banking sales practices issues. How big of a financial impact will it ultimately have on the company and how long will it remain an overhang for the stock?
“The good old boys are back in town” and licking their chops.