Trump: Game-Changer for Banks

01/03/2017 8:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

The election of Donald Trump with a GOP majority in Congress is a game changer for the banks. In fact, rarely in financial history has the outlook for an industry changed so dramatically in such a short period, asserts Elliott Gue, editor of Capitalist Times.

Granted, the post-election run-up in stock prices appears stretched in the short term. Corrections on the order of 5 to 10 percent are to be expected following such a dramatic advance.

However, the market is just beginning to price in the magnitude of this shift. Bank stocks remain cheap relative to the broader market averages and are poised to lead the market higher in 2017.

Inexpensive valuations, coupled with rising earnings estimates, set the stage for the group to deliver a strong relative performance.

Market expectations for US economic growth, interest rates and inflation have shifted higher since early November.

Banks are sensitive to economic growth. Stronger economic growth tends to drive loan demand and improve credit performance.

Rising interest rates are an even more powerful driver for the banks. In addition, under President Trump, regulatory changes that will positively impact bank profitability are likely.

Deregulation, stronger economic growth and higher interest rates represent a powerful tonic for the US financial sector and could eventually push the group’s valuations to historical levels.

Citibank (C) is particularly well-positioned to benefit from these changes. The company has invested in growing its US credit-card business in recent quarters.

Since interest rates on credit cards are particularly sensitive to short-term rates, this business should fare well in a rising-rate environment.

With the bank’s capital position improving and the prospect for significant changes to CCAR tests in coming years, Citigroup will be permitted to return more capital to shareholders via dividends and buybacks, a major upside catalyst for the stock.

Meanwhile, Citigroup trades at a discount to tangible book value, compared with the S&P 500 Index’s multiple of 1.8 times tangible book.

A final kicker: Citigroup derives a larger portion of its revenues from emerging markets than any major US bank. Growth in emerging markets is likely to exceed developed markets over time, making this business a valuable franchise.

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