The massive changes that took place in the past year and those that are well underway could actually help the banking industry enter a new golden age. Thus, the prospects for bank stocks look bright.
The key factors that could drive the industry’s growth are a new tax regime, a rising interest rate environment and rolling back of tough post-financial-crisis banking regulations.
Primarily, a continuation of interest rate hikes, reinforced by rising inflation expectations, and the Fed’s unwinding of its giant balance sheet, have the potential to lift banks’ profitability to levels not achieved since the last recession. And, if history is any guide, the high rate environment that the economy is reaching will last long and continue to help the industry thrive.
Secondly, the new tax legislation will significantly reduce the effective tax rates for some of the nation’s biggest banks, helping them pocket more profit. Moreover, the tax cuts are expected to provide a major impetus to the economy, which will indirectly increase business for banks.
Finally, the initiative to reduce the strictness of post-crisis strict banking rules (aka Dodd-Frank) will bring the much-needed relief to small and mid-size banks, primarily helping them reduce fixed costs.
Moreover, the industry has gained enough footing on its underlying structure to enhance business returns after dealing with challenges in the past several years. So chances of stagnation are dim.
Banks Capable of Standing on Their Own Feet
Business reorganization post-financial crisis, effective expense management, enhanced focus on non-interest revenue sources, technical affluence, ability to grab cross-selling opportunities with economic improvement and many more positive factors could support banks in augmenting profits steadily.
With increasing capability of consumers and businesses to borrow money, prospects of loan growth are rising. So, in case the industry doesn’t get significant support from the rate environment, high loan volume would back revenue growth.
