World Economy

US Banks Seeking Post-Election Appetizer

US Banks Seeking Post-Election AppetizerUS Banks Seeking Post-Election Appetizer

The US banking sector’s dramatic rally post election day is likely just a taste of bigger gains to come, as investors expect banks to reap huge benefits from rising interest rates and lighter regulation under a Donald Trump presidency. In recent years, bank stocks have been held back by heavy regulation and historically low interest rates which have sapped the earnings potential of their massive cash holdings, Reuters reported.

But optimism about the sector’s outlook is growing. Interest rates are rising and investors are betting that Trump will follow through on his campaign promise to review the increased number of regulations put on the banking system after it nearly keeled over in the 2008 financial crisis.

The S&P 500 bank subsector rose 10.2% in the three days following Trump’s victory in the US presidential election. This was the index’s best three-day performance since August 2009. In those three days, Wells Fargo Co shares rose 13.6%, JPMorgan Chase & Co climbed 9.5% and Bank of America gained 11.9%. Some investors and analysts watching banks say the stocks are likely not near the end of their run.

“They are not close to being expensive yet,” said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.

The S&P 500 banks are currently trading at about 11.2 times forward earnings estimates as a group, up from about nine times in February, when the index hit its lowest since May 2013.

Valuation is still well off peak levels of over 33 times earnings estimates in May of 2009, though it trades near levels seen between 2002 and 2008, before many current regulations were put in place.

If rates continue to rise and the Trump administration gives some clarity on how regulations will change, then bank valuations “certainly can move higher,” Piper Jaffray analyst Kevin Baker said.

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