An unstable top line is primarily responsible for the earnings weakness that the banking industry has been witnessing for the last few quarters. And investors’ concerns in this regard could tarnish the optimism over the benefits due for banks from the reforms and the monetary policy changes.
In fact, the continued weak backdrop, which has been putting pressure on the financials of banks, could shift investors’ focus from the industry in the near term. So, until the benefits from the expected change in regulations or the Fed’s actions are tangible, banks stocks might perform erratically.
Also, investors’ enthusiasm may wane if the actual benefits don’t meet investors’ expectations or take too long to come. As a result, there could be downward pressure on bank stocks that were flying high just based on the expected benefits.
While there is no indication of disruption in the interest rates moving higher, the Trump administration is yet to make any tangible progress on the reforms front. As political oppositions reduce chances of a full-scale regulatory reform, only smaller adjustments appear feasible for now. While any adjustments to existing regulations would be favorable for banking business, they may fail to meet investors’ expectations.
Moreover, softer regulations might benefit banks earning mostly from domestic operations. However, larger banks with significant international exposure might lose out on competitiveness due to ever-increasing international regulatory standards. Further, meeting international standards will restrict them from generating domestic revenues.
Though it is too early to make any negative assessment of the likely financial policy changes, easier lending standards and lesser regulatory restrictions could increase credit costs for banks, similar to what the industry witnessed just before the recession.
Moreover, while the expected rate hikes and Trump’s pro-growth and business-friendly approach will instill some fresh energy into the banking business, there are a number of fundamental challenges to hold banks back from growing steadily.
Expense reduction was the key measure that helped banks stay afloat in the past few quarters. But it may not be a major support going forward, as banks have already cut the majority of unnecessary expenses.
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