(Bloomberg) - For Mike Mayo, the veteran analyst known for pointed opinions on the largest US banks, the election of Donald Trump is nothing short of a sea change for the industry.
As he sees it, a new era of deregulation could fuel a surge in Wall Street profitability.
“This has been one long harsh regulatory cycle for banks,” the Wells Fargo & Co. analyst said in an interview. “Now the expectation is for a paradigm shift that prioritizes economics over politics.”
Mayo is hardly the only analyst riding a renewed wave of optimism. Many expect Trump’s policy promises, including a flurry of tax cuts, to turbo-charge economic growth, driving new business for lenders. And while others are more circumspect, noting the president-elect’s unpredictability when it comes to carrying out his pledges, the consensus is clear: the outlook for bank stocks hasn’t been this bright in years.
“This might be a watershed moment in terms of how banks manage their capital,” Mayo said.
Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo all surged by more than 10% Wednesday before paring those gains modestly Thursday. Firms in the KBW Bank index added a collective $237 billion in market value in the first trading session after Trump’s win.
Other analysts are quick to point out that the outlook for share prices was constructive even before the vote, and that the sector has been one of the best performers all year.
Barclays Plc’s Jason Goldberg said that the current backdrop of historically low unemployment, sound credit quality trends and the potential for improved loan growth is “pretty good” for banks.
“For a while now the rules have been getting more stringent, and now you have the opportunity for stability and improvement,” he added.
Deregulation isn’t the only thing buoying sentiment. Analysts and investors expect Trump’s pro-growth policies to boost dealmaking and IPO volumes and generally accelerate capital markets activity.
“The earnings are going to look very, very solid for banks and they are already paying very hefty dividends,” said Dec Mullarkey, a managing director at SLC Management, which oversees $273 billion.
To be sure, some analysts are bucking the consensus, with research shop Baird on Thursday urging investors to take profits on JPMorgan shares it says now command a “peak multiple on peak earnings.” The stock is up 39% year-to-date.
For Mayo, betting on banks to extend their gains isn’t without risk. Trump’s policies could overheat the economy and fuel a resurgence of inflation, particularly when coupled with potential tariffs on importers.
“Unusually high tax cuts and tariffs or other moves that cause interest rates to skyrocket could kill the Trump rally very quickly over the next year,” Mayo warns.
Still, he sees a lot to like.
“The biggest concern for investors has been unpredictable regulation,” he noted. “That will be significantly less of a concern.”
By Eleanor Harmsworth
