It isn’t often that a great opportunity for retired investors broadcasts itself in advance, but it’s happening right now in banking. And it’s all thanks to lower regulations.
Following the financial collapse in 2008 and early 2009, Congress went all out to prevent a repeat of the failures that almost drove us over the cliff. So it passed the Dodd-Frank Act.
But in the opinion of most analysts, the new banking regulations went too far and have been a drag on big banks’ performance.
There are so many new regulations in place now that banks have more compliance officers than loan officers.
M&T Bank (NYSE: MTB) alone saw its compliance costs increase from $90 million a year in 2010 to $440 million in 2016.
The system is out of balance, and Trump has promised to modify parts of Dodd-Frank.
The expected rollback in regulations will be a big boost in earnings across the board. Analysts are predicting a 30% earnings increase.
And that spells opportunity…
Capital requirements are one of the biggest drags on the performance of big banks. State Street (NYSE: STT) is required to have as much as 40% of its cash in risk-free Treasurys or the Federal Reserve. And the more cash it has tied up, the lower its performance is.
I also expect the Fed to scale back its Comprehensive Capital Analysis and Review (CCAR) assessments from once a year to once every two years.
This process has been a cement overcoat for the 34 largest banks. JPMorgan Chase (NYSE: JPM) alone has 500 employees who do nothing but deal with 130 qualitative reviews required by the CCAR process. Just backing off to once every two years will be a huge cost savings.
And banks’ recent favorable performance on the CCAR assessments means they can return nearly all their earnings to their stockholders in dividends and stock buybacks.
But most encouraging about the regulatory rollbacks is that most of the changes do not require congressional approval. Based on what has been going on in D.C. the last eight years – cough, nothing – that’s really good news.
