Banks have had double-digit runups in the past week on hopes of lower corporate taxes, higher rates and less regulation.
Not surprisingly, they have begun pulling back as the market has come to realize no one really knows what is going to happen. There have been several high-profile downgrades of big banks as analysts have come to believe that banks have gotten way ahead of themselves.
Today Piper Jaffray tried to put some flesh on the bones of this bank rally. They made the following assumptions: 1) a 100 basis-point move in interest rates, 2) reduced costs from de-regulation and 3) greater capital flexibility.
Based on this, they estimated that a "Trump bump" would see a modest gain to the earnings of banks, depending on size:
Banks: the Trump Bump
(impact on earnings)
Large banks (above $50 bilion in assets) up 10%
Midsize banks ($10-$50 billion in assets) up 7%
Community banks (<$2 billion in assets) up 2%
Source: Piper Jaffray
Those are pretty modest bumps up. Assuming this "Trump Bump," Piper concludes most large banks are trading at 110% of their historical P/E right now. Midsize banks are trading at 105% of their historical P/E. And community banks are trading at 117%.
Yikes. Seems like the market has already priced in most of the gains!
But there may be room for a further bump. In what Piper calls a "Super-Trump" scenario, where they assume all the above plus a reduction in the corporate tax rate from 35% to 15%, the impact could be even greater.
Banks: the Super-Trump Bump
(impact on earnings)
Large banks (above $50 bilion in assets) up 34%
Midsize banks ($10-$50 billion in assets) up 48%
Community banks (<$2 billion in assets) up 35%
Source: Piper Jaffray
These are much more substantial gains, implying that banks could indeed move up even more.
But that is assuming a near-perfect scenario. The Piper team acknowledged this: "While Trump has been outspoken about his intentions to lower corporate tax rates, re-assess Dodd-Frank and allow banks to lend, it remains to be seen how long it takes, and to what extent these changes can be enacted."
Bottom line: It's good we are seeing banks pull back. Way too big a move, even with optimistic assumptions.