Is now the time to buy banks? Clinton is seen as being cosy with Wall Street, while Trump is in no one’s pocket.

But it’s the Democrat who wants to extend the reach of regulators, while the Republican nominee says Dodd-Frank should be torn up. So where do banks stand in relation to the election?

Dodd-Frank

 

Dodd-Frank is the key piece of post-crisis regulation that imposes far stricter regulation of banking activity and tougher capital requirements. In short, it’s made it costlier for banks to do business, although it’s probably made them safer and more resilient, too.

Trump has made it very clear where he stands on this landmark piece of banking regulation.

 “Dodd-Frank has to be either eliminated or changed greatly,” he said in a CNBC interview. “The regulatory climate is so bad that the banks just aren't loaning to businesses… And that's one of the reasons you have GDP there. It's one of the reasons we have no growth.”

Speaking to Reuters later, he said his plan would “be close to dismantling of Dodd-Frank… Dodd-Frank is a very negative force, which has developed a very bad name”.

Mrs Clinton, on the other hand, is very much in favour of tougher bank regulation.

“As president, I would not only veto any legislation that would weaken financial reform, but I would also fight for tough new rules, stronger enforcement and more accountability that go well beyond Dodd-Frank,” she said in the New York Times.

Specifically, she wants to extend the rule to the shadow banking industry – hedge funds, insurance firms etc. This could actually help give the big banks their competitive advantage back, although the tone of the rest of her policy is negative for the big institutions.

She wants to impose a ‘risk fee’ above standard capital requirements and would expand the Volcker rule, which curtails banks’ trading activities.

Glass-Steagall

 

Taking things a step further, there is the possibility that Democrats could sweep the boards at the elections and this could mean even wider-reaching reforms to banking. In particular, there has been talk about bringing back Glass-Steagall, the law that separated banks’ investment and commercial activities. Signed into law in 1933 as a counter to the Great Depression, this was repealed by the Clinton administration.in 1999.

For many it’s the repeal of this act that led to the financial crisis in the US. If Democrats take over Congress and the White House there is an argument that harder-left sympathies could find a voice - Senators Bernie Sanders and Elizabeth Warren, for example.

If Glass-Steagall comes back or some form thereof, it could rip apart some banks’ business activities.

Stocks to Watch

 

The key banking stocks to watch around the election and their most recent earnings figures.

Citigroup (C) - trading at YTD highs. Latest quarterly earnings per share of $1.24, versus $1.51 in the year-earlier period. This was on revenue of $17.548 billion, compared with $19.158 billion 12 months before. This topped analyst expectations of $1.10 EPS.

Bank of America (BAC) – trading at YTD highs. Bank of America recently reported its first rise in profit in three quarters thanks to higher bond trading revenue. EPS came in at 41 cents on revenue of $21.64 billion, while profit of $4.45 billion was up 6.6% from the year-earlier period.

BAC_Oct26th

JPMorgan (JPM) - trading at YTD highs. The bank topped estimates with earnings of $1.55 per share on revenue of $25.2 billion. This compared with $1.54 a share on revenue of $24.3 billion.

Wells Fargo (WFC) – trading down after scandal. Earnings were down 3% but still beat market expectations with EPS of $1.03 on $22.3bn in revenues.

WFC_Oct26th

Goldman Sachs (GS) - trading at YTD highs. Strong gains for the trading division saw the bank beat expectations, with third quarter EPS of $4.88 on revenue of $8.17 billion. This was up from $6.86bn from the year-earlier period, while profit rose 58%.

GS_Oct26th

Most US bank stocks suffered terrible declines in the first quarter of 2016, when a broader stock market collapse pushed stocks to their lowest levels in years. Bank stock prices troughed in February, around the same time as oil hit $26. Since then there has been a noticeable improvement.

After several quarters of declining revenues, banks are beginning to pick up. Q3 earnings were above forecast and the sector looks to be on the up, although earnings are still short of where they were a year ago. Wells Fargo, which has recently been rumbled for a mis-selling scandal, is the exception here as investors baulk at the potential losses - $4bn and 30% customer drop by one estimate.

Banking stocks are essentially flat for the year but that masks a considerable rally since their February lows.

Federal Reserve

 

The other question for the banking sector is whether the Federal Reserve will pull the trigger and raise rates. Markets expect the bank to raise the federal funds rate by 25 basis points this year, but for banks it’s arguably about how long it takes for the rates landscape to normalise.

Lower rates have trashed net interest margins so any signal that the Fed is going to raise rates tends to support bank shares.

A Clinton win – priced into markets as the odds and polls are in her favour – seems to be supporting the case for the Fed to hike come December. A Trump win could arguably roil financial markets and force the FOMC to step back.

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be  an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.