After years of lagging other sectors, bank stocks have been on a tear since last week's election, and the rally likely has more than just a cyclical rebound at its center.
Investors are betting that the industry will be perhaps the biggest beneficiary of a Trump administration, where regulations are bound to be eased and where billions or even trillions in new infrastructure spending will provide new opportunities.
"Now the industry is transitioning from defense to offense," Mike Mayo, research analyst and managing director at CLSA, said in an interview.
"This decade, banks have played more defense while they shore up their balance sheets, which are now the strongest in a generation," Mayo added. "But with the new pro-growth administration, banks are likely to transition to offense, where they redeploy excess capital and liquidity to facilitate growth."
Indeed, the industry has spent most of the seven or so years since the Great Recession ended both building its capital base and rehabilitating its reputation.
Almost all the banks meet capital requirements, but they have been reticent to engage in traditional lending activities while they remained under an uncertain and progressively tighter regulatory yoke. As that has been ongoing, banks have been storing cash at the Fed, which now holds $1.9 trillion in excess reserves.
Trump, though, has vowed to ease or repeal Dodd-Frank regulations, though the party platform adopted this summer calls for the re-establishment of the Glass-Steagall act that separated commercial and investment banking.
"We believe President-elect Donald Trump's political agenda — which includes deregulation, lower taxes, increased spending, and a bias for higher interest rates — paves the road to the most favorable macroeconomic environment for financials since before the financial crisis," analyst at FBR Capital Markets said in a note.
Bank stocks have responded positively, with the KBW Nasdaq Bank index surging more than 13 percent since Nov. 8. The index was up about 2.8 percent in Monday trading amid mixed markets on the broader indexes. The big winners over the past week have been Regions Financial, Zions Bancorp and Bank of America.
"This decade has reflected non-stop increases in capital liquidity and regulation. That trend is over," Mayo said. "The current regulators can take a victory lap: Banking industry reinforced, mission completed, as much as you can say for any point in time."
The current regulators, though, may not be around for much longer.
Though Fed officials in particular are locked in for their designated terms, there's plenty of speculation that some names will be changing. Prominent among them is Daniel Tarullo, who oversees bank regulation for the Fed.
One scenario, according to Beacon Research: Trump fills one of the two vacant Fed governor slots with a person who will take over vice chair for supervision, which then would trigger Tarullo's resignation. Ultimately, Beacon sees a scenario where the Federal Open Market Committee would become "more hawkish" on rates and the Financial Stability Oversight Council would lean toward being "more restrained in new designations of systemically important financial institutions and regulations on non-bank actors."
A Fed spokesman declined comment on the Tarullo speculation.
Traders expect the Fed to hike rates for the first time in a year next month, though the market is still projecting a dovish path going forward. Banks thrive on higher rates, and government debt yields have been jumping as well since the Trump win.
