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Investors Reassess Banking Stocks amid Trump Trade Volatility

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Part 3
Investors Reassess Banking Stocks amid Trump Trade Volatility PART 3 OF 5

How Core Banking Business Could Be Affected by Trump’s Policies

Commercial banking

Commercial banks (XLF) have seen strong growths in their core banking businesses backed by rising interest rates and steady growth in the broader economy (SPX-INDEX) (SPY), which has driven credit growth.

Banks have also benefited from a reversal of credit losses due to a revival in oil prices (USO) from their 4Q15 and 1Q16 lows. President Donald Trump’s election helped the markets continue their upward trend on hopes of corporate reforms, lower taxes, and increased domestic manufacturing, which could lead to higher credit lending, improving net interest income, and improving margins.

How Core Banking Business Could Be Affected by Trump&#8217;s Policies

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In 1Q17, JPMorgan Chase’s (JPM) commercial banking business posted $2.0 billion in revenue and $799 million in net profits, rises of 12% and 61%, respectively, YoY (year-over-year). This growth was mainly due to rising rates, investment banking fees, and higher spreads on improved macroeconomic fundamentals.

Mixed provisions, higher NIMs

Bank of America’s (BAC) consumer banking business has grown on the back of higher spreads and loan book expansion, partially offset by higher provisions. In 1Q17, the bank’s consumer banking division posted net income of $1.9 billion, which represented a 7% rise YoY, aided by interest income of ~$5.8 billion and lower non-interest expenses of ~$4.4 billion. On the other hand, Wells Fargo (WFC) posted net interest income of $12.3 billion during the same period, compared to $11.7 billion in 1Q16.

Wells Fargo has seen a relatively weak performance in 2016 due to sanctions and investigations, partially offset by higher investment securities and rising interest rates. The bank has continued to command high net interest margins of 2.7%–2.9% in recent quarters.

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