After disappointing following last week’s Federal Reserve meeting, the Financial Select Sector SPDR (NYSEArca: XLF) and other financial services exchange traded funds were decked earlier this week as traders worried about how President Donald Trump will deliver on his campaign promises that recently fueled the market rally and a dip in Treasury yields.
However, some analysts still view Fed tightening as an important, potentially rewarding catalyst for big-name bank stocks.
The Trump administration’s expansionary policies would be especially beneficial for banks since the segment is sensitive to the overall economy. Moreover, the expansionary policies have fueled bets of increased Federal Reserve interest rate hikes to rein in a potentially overheating economy and rising inflation, which further supports lending revenue and their bottom line among bankers and insurers.
“All in, our base case translates to 11% year to year EPS growth and 12% return on total common equity (ROTCE), on average in 2017,” said Credit Suisse in a recent note seen on Barron’s. “Our blue-sky estimates are about 20% above base case, with near equal incremental upside in the stocks. Looking at a weighted average of our blue-sky, base-case and gray-sky scenarios translates to 7%-10% total return remaining in our recommended names — Bank of America (ticker BAC), Citigroup (C), JPMorgan Chase (JPM) and Goldman Sachs Group (GS). We favor the universal banking model, with its multiple levers for growth and greater potential for realization of scale economies.”