As indicated by the rise in US bank shares after Donald Trump was declared victor in the race for the White House, the outlook for the banking sector is looking brighter, including a new swathe of industry consolidation
For a start, a higher terminal interest rate from the Federal Reserve is likely, with 3.75-4.00% possible at the end of 2025, the UBS analysts said, 100 basis points higher than was priced in a month ago.
This suggests a "reset" in net interest income (NII) forecasts for 2025 is needed, but could impact tangible book value (TBV) growth due to unrealized losses in their balance sheets due to declining values in bonds held for sale.
But another positive is an expected regulatory shifts under the new administration could also ease capital requirements and benefit stress-testing stability, while banks in the regulatory penalty boxes - Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C) "may have a clearer path to seeing themselves out".
Banks will also have more excess capital under this administration, UBS anticipates, believing a lighter regulatory touch could benefit major banks like JPMorgan Chase & Co (NYSE:JPM, ETR:CMC) and smaller banks.
The final implementation of Basel III banking regulations is seen as likely to be less strict than initially anticipated, which could reduce capital requirements or ease other compliance burdens, which would benefit banks by allowing them to hold less excess capital and potentially increase profitability.
Loan growth remains uncertain, with UBS noting that while corporate sentiment appears positive, much of the activity may end up in the capital markets rather than on bank balance sheets.
A return to mid-single-digit commercial loan growth is not "out of the question,” they added, while temping expectations in noting that "if rates are higher and the capital markets are wide open, we think a material rebound in corporate activity may not be as fully translatable into loan growth activity as the market hopes".
There is potential for bank consolidation, particularly among institutions with fewer securities portfolio challenges, with consolidation already seen as likely to have been "brewing under the surface".
The excited analysts said their recent meeting with JPM boss Jamie Dimon indicated that his bank is prepared for "emerging competitors", which the UBS translated into wondering "if potential industry consolidation could see new trillion dollar asset banks emerge?"
On specific stocks, UBS was positive on Capital One Financial Corp (NYSE:COF) if its merger of Discover Financial Services (NYSE:DFS) gains approval, which could provide “transformational” earnings gains and strengthen COF’s position in cards and share buybacks.