Ever since the Trump win, we’ve been bullish on US banks given Trump’s pledge to reduce corporate taxes and relax regulatory oversight. This week, Bloomberg released data which attempts to quantify the impact of the tax reduction plan on the six largest US banks.
Trump has stated that he plans to cut general corporate taxes from 35% to 15%. US banks stand to benefit from these cuts even more than corporations in other industries given that banks generally have fewer deductions than businesses in other sectors. The results of Bloomberg’s analysis suggest that annual profits for the six banks would increase by 14% annually.
The analysis only focused on the impact to profits based on the plan to reduce taxes. There was no attempt to determine the impact to the bottom line should regulatory policies relax, likely because it’s difficult to quantify such benefits especially since no details are currently available.
Fundamentally we liked and held US banks prior to the election primarily because they were cheap from a valuation perspective and because we knew interest rates in the US would eventually rise, thereby benefiting US lenders. We cannot take credit for the additional octane provided to the sector due to the Trump rally as we, like many, regardless of our political inclination, didn’t think Trump would win.
The 6th largest US banks trade at an average of about 15 times trailing 12-month price to earnings. While not as cheap as they were in November, they’re still cheaper than the S&P500 broader market, trading at about 24.5 times trailing 12-month PE. However, if earnings increase and share prices don’t move, those valuations would drop making the businesses even cheaper. As the market is forward looking, it’s more likely that valuations wouldn’t drop given that US banks will likely continue to trade higher, which we’re perfectly content with. When we couple this with the recent rally of the Canadian dollar against the USD (which we believe won’t last), it makes a case for continuing to add to our US Financials positions across our portfolios.
Have a great weekend!
Daniel Popescu CFP, CIM, FMA, FCSI
President & CEO
MNP Tower, 3100-1021 West Hastings St.
Vancouver, BC V6E 0C3
T: 604-558-6830/1(877) 588-6822
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