Why Deregulation Could Significantly Enhance Banks’ Profit
Deregulation could boost banks’ profit
According to Bloomberg, deregulation of US banking (XLF) could enhance gross profits for the six largest US banks by $27 billion, which would increase their annual pretax income by around 20%. JPMorgan Chase (JPM) and Morgan Stanley (MS) would be the largest beneficiaries with pre-tax profits soaring 22%. Goldman Sachs (GS) would benefit the least with about a 16% rise in pretax profit while Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) could fall somewhere in between.
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The proposed deregulation would allow the largest banks to accept more deposits, invest more excess cash into higher-yielding Treasuries and municipal bonds, and reduce high-cost debt. Allowing banks to buy US government bonds entirely with borrowed money could substantially influence banks’ profit.
US banks’ profit up by a record high
According to the Federal Deposit Insurance Corporation, profits of US banks jumped 10.7% year-over-year to $48.3 billion in 2Q17, a record high. The sharp rise in profit was mainly attributed to banks’ higher interest income and lower costs. The data suggest that banks continued to benefit from recent interest rate hikes from the Federal Reserve. The average interest margin for the industry was 3.22% compared to 3.08% a year ago.
Berkshire Hathaway stock hits an all-time high
Berkshire Hathaway stock (BRK.A)(BRK.B) rose to a new high last week after S&P Global Ratings upgraded the company to a “stable” rating outlook from the earlier “watch negative.” Berkshire A shares hit $270,960, and B shares rose to $180.61—both all-time highs. Berkshire’s “AA” credit rating from S&P remained unchanged.