As was widely reported late last week, bank stocks and financial sector exchange traded funds soared on news that President Donald Trump is actively moving to loosen the regulatory burden facing the S&P 500’s second-largest sector weight.
That includes a plan to rollback the 2010 Dodd-Frank financial-overhaul law, which was implemented in the wake of the global financial crisis.
Such an effort is believed to have potential benefits for regional bank stocks and ETFs, including the SPDR S&P Regional Banking ETF (NYSEArca: KRE), PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) and the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA).
Regional bank ETFs had already been a high-flying asset class following Trump’s stunning upset in the November presidential election.
Much of the bull case for regional banks depends on the Federal Reserve and interest rates. With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Additionally, the Fed is hoping to raise interest rates as many as three times this year, an effort that could further support KRE and friends.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“…the Trump admin is prioritizing the easing of the regulatory grip on the U.S. financial system. As for direct benefits, details of the order are still limited, but could help drive an incremental leg up in capital deployment, both organically and via M&A,” according to an Evercore note posted by Crystal Kim of Barron’s.
Some critics assert that broad reach of Dodd-Frank and the slowness with which the law has been implemented are factors that could hamper Trump’s efforts to scale back the law.
The Trump administration has been seen as friendly toward Wall Street banks, especially as President Trump fills out his administration with members of Congress and Wall Street executives, including Cohn who retired as president of Goldman Sachs Group (NYSE: GS) to join Trump’s team.
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