As you approach your portfolio heading into 2017, the most important thing you can remember is that the election of Donald Trump changed everything. It changed policy expectations, growth expectations, inflation expectations and more, and the ramifications of those changing expectations are just starting to play themselves out in the U.S. stock market.
With that in mind, we expect Zions Bancorp (NASDAQ:ZION) to be one of the top-performing stocks in 2017.
ZION is uniquely situated to take advantage of a growing number of the potential changes that may be coming in the U.S. economy and stock market next year. The Trump administration could bolster ZION by:
- Scaling back, or fully repealing, the Dodd-Frank Wall Street Reform and Consumer Protection Act;
- Boosting inflation expectations;
- Relaxing environmental regulations for drilling while OPEC caps oil production; and
- Lowering corporate tax rates.
ZION Stock Tailwinds: Scaling Back, or Repealing, Dodd-Frank
While the Dodd-Frank Act was considered by many to be a huge win for consumers, it was received with much less enthusiasm by bank executives and investors.
The act not only saddled financial institutions with additional layers of restrictions and red tape that required hiring teams of attorneys and compliance professionals to sort through but also — via the Volcker Rule — prohibited financial institutions from engaging in proprietary trading. The implementation of the act impacted ZION’s ability to generate revenue by trading through its own proprietary trading desk and its ability to raise additional capital to keep up with loan demand by creating collateralized debt obligations (CDOs) containing trust preferred securities (TrPS).
The scaling back, or repeal, of the Dodd-Frank Act would boost ZION’s revenue-generating potential by enabling the bank to trade more freely and issue more loans. It should also reduce expenses for the bank as compliance costs fall.
ZION Stock Tailwinds: Boosting Inflation Expectations
President-elect Trump’s economic policies have been getting a lot of attention for their potential to boost inflation here in the United States.
Much of the increase in inflation expectations stems from the increased economic growth analysts are hoping for, but some of it stems from concerns over the trade battles the administration may engage in. Restructuring trade agreements and/or imposing tariffs on foreign-produced goods (especially those from China) would push prices higher in the United States. If this happens at the same time oil prices start to rise, inflation is likely to grow faster in 2017 than it has for nearly a decade.
Rising inflation expectations have pushed bond yields higher to compensate bond investors for the increased inflation risks they are facing. This has led to a steeper yield curve, which is a boon for banks.
The steeper the yield curve is, the greater a bank’s net interest margin is going to be because it can borrow money from depositors at a lower interest rate by paying short-term rates on its checking accounts, savings accounts and certificates of deposit (CDs). It can then lend money to borrowers at a higher interest rate by charging long-term rates on commercial loans, business loans and residential mortgages.
A steep yield curve is a great revenue enhancer.