Today's surge in financial shares, notably American Express, Synchrony Financial, and Huntington Bancshares, can be attributed to some compelling reasons.
Bank and credit card shares, including those of companies like American Express (AXP) dropping by 0.72%, Synchrony Financial (SYF) with a decrease of 1.84%, and Huntington Bancshares (HBAN) seeing a decline of 2.06%, surprisingly surged higher on Wednesday, recording gains of 6.3%, 17.8%, and 11.8% respectively, as of 11:49 p.m.
The financial sector witnessed a boost following last night's election of Donald Trump and the probability of a Republican majority in Congress. This widespread uptrend in financial stocks seems to be driven by optimism surrounding the possibility of financial deregulation, with stocks perceived as carrying higher risks recording the most significant increases.
Notable increases in banking and credit card stocks
The possibility of a Trump Presidency and a Republican Congress in office increases the likelihood of a relaxation in regulations and consumer protections put in place after the 2008 global financial crisis.
As an illustration, the Biden Administration had proposed tougher measures against excessive "junk" fees, such as bounced check and overdraft fees, and had instructed the Consumer Financial Protection Bureau (CFPB) to make it easier for consumers to switch banks, among other initiatives aimed at safeguarding consumers from certain banking charges. However, with a change in administration, these regulations may either be abolished or prevented from coming into effect.
Credit card companies, known for their high fee charges, stand to gain the most from this regulatory rollback. While American Express could benefit from the deregulation, Synchrony Financial, which predominantly issues private-label credit cards for other brands and serves a diverse clientele, witnessed an even more substantial rally. Synchrony's relatively low market value of just 8 times earnings at the start of the day, alongside the regulatory overhang, might have contributed to the stock's significant increase.
Furthermore, under Republican rule, banks may see a reduction in capital cushion mandates. This would allow banks to allocate more of their capital towards lending and shareholder returns, potentially bolstering earnings growth.
Moreover, deregulation is expected to bring relief on the merger and acquisition front. The Biden Administration had been known to challenge mergers vigorously. As a result, there could be an increase in mergers in the American regional banking system, with established regional banks like Huntington Bancshares, a $25 billion market-cap bank, potentially playing a role in these transactions, either as an acquirer or an acquiree.
In addition, a Trump Presidency may lead to larger government deficits and, in turn, higher interest rates and inflation. Although a post-pandemic period of high inflation was not favorable for banks, as it could potentially spark a recession, a higher interest rate environment absent a recession could theoretically result in higher net interest income for banks and credit card companies.
However, exercise caution is advised
While investors in the financial sector are celebrating today's developments, it is essential to recognize the two-sided nature of deregulation and increased interest rates for financial companies. On one hand, excessive regulation can hinder growth, innovation, and consolidation in the banking sector. On the other hand, insufficient regulation may pave the way for unethical behavior or reckless practices by bankers.
Keep in mind that deregulation played a part in the 2008 Financial Crisis, during which highly leveraged banks succumbed to a downturn in the housing sector. Therefore, investors in bank stocks must remain vigilant for signs of questionable management decisions or rampant inflation, both of which pose risks that could spoil the celebration they are currently enjoying.
The prospect of financial deregulation under a Trump presidency and Republican Congress could lead to significant earnings growth for banks, as they may allocate more capital towards lending and shareholder returns. Investors in the financial sector, such as those who have invested in companies like American Express and Huntington Bancshares, should exercise caution, as excessive deregulation might also lead to unethical behavior or reckless practices by bankers.
