Is the Financial Sector Set to Outperform?
In addition to the promising signs of the financial sector passing the rigor of this stress test, talk of deregulation makes the financial sector even more attractive. Amidst all the talk of the Trump administration, one thing that the financial sector was hoping for was to reap the benefits of increased interest rates and deregulation. Trump, who was quoted calling the 2010 Dodd-Frank Act a “disaster” has made a point of trying to make deregulation a priority for his administration.
Scott Martin CIO of Kingsview Asset Management noted “Currently, we are seeing similar underlying fundamental improvement in financial services employment that resembles the surge we saw in the late summer of last year in the banks which incidentally preceded one of the biggest moves in financials percentage-wise upwards in the last several years. With this, one could argue that there will be a similar move coming up soon in the financial sector.”
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The graph above shows the return on equity (or ROE) on all US banks (KRE)(KBE). It suggests the profitability of American banks has declined since the financial crisis and not hit pre-crisis levels since.
The Dodd-Frank regulations came about in 2010 to prevent crashes like what we saw in 2008. However, capital requirements, along with lower interest rates, have squeezed banks’ profitability (IYF).
The financial sector had a mixed start to earnings season. Wells Fargo (WFC) reported its fiscal 2Q17 numbers on Friday, July 17. The third-largest bank by assets, it beat analysts earnings estimates of $1.01 per share with earnings of $1.07 per share. However, its revenues of $22.17 billion disappointed compared to Wall Street estimates of $22.47.
J.P. Morgan (JPM) also beat earnings estimates of $1.58 per share. Earnings for fiscal 2Q17 came in at $1.71. However, shares fell as the bank reduced net interest income estimate for the year.