U.S. banks are still on a profit trajectory despite Wells Fargo’s Q3 profits declining; Bank of America, J.P. Morgan Chase, Citigroup have all revealed improving profits.
Four factors supporting financial/bank sector outlook:
o Interest rates
- Federal Reserve expressed intention to raise rates, tighten monetary policy
- Expect a hike in December, followed by at least two more in 2018
- Banks’ most basic profit-making business model is to take on deposits and issue loans
- Higher interest rates means higher rates on loans, which translates to improved profit margins
o loan growth
- To fuel an improving economy, business and americans will borrow, and many may continue to take advantage of the current low-rate environment to borrow
- For example, J.P. Morgan Chase already showed improving loan growth
o potential for Trump administration to push through deregulation and tax cuts
- Beyond obvious effects of lower taxes on businesses, deregulation or scaling back of draconian post-financial-crisis Dodd Frank would help banks do more with capital or turn around a quicker profit
o buybacks after latest stress test revealed banks are fully capitalized
- CCAR – share buybacks, overall shares shrinking, adding value to company stocks
- top four banks approved for 59 billion in share buyback
XLF includes all of the largest Wall Street players with attractive valuations relative to broader equities market.
Its top holdings include Berkshire Hathaway 11.2%, JP Morgan Chase 10.6%, Bank of America 8.0%, Wells Fargo 7.7%, Citigroup 6.4%, Goldman Sachs 2.8%, U.S. Bancorp 2.7%, Morgan Stanley 2.2%, Chubb Limited 2.1%, and American Express 2.1%.