Reducing regulations to spark economic activity was a key campaign message promised by Donald Trump. While well-intentioned, the other mandates that the President enacted have unfortunately distracted the general public. Still, last Friday’s executive order, “Core Principles For Regulating The United States Financial System,” should prove to be a positive step forward. Regional banks and other non-major bank stocks are paying particular attention to the latest developments.
At issue is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by the Obama administration in 2010.
The direct result (and consequence) of Dodd-Frank was the establishment of the Consumer Financial Protection Bureau. Originally designed to make the markets fairer for retail investors, the Act instead created yet another government bureaucracy. Even then, Dodd-Frank could be justified if it actually performed as intended.
Instead, Dodd-Frank became the U.S. Postal Service, essentially useless and unprofitable. What made things worse was that all bank stocks regardless of size had to abide by the regulations. And institutions that meet a minimum threshold of asset value came under intense scrutiny. That means the same stress tests that JPMorgan Chase & Co. (NYSE:JPM) endured had to be taken by regional banks. Regardless of your political affiliations, such wanton waste simply makes no sense.
According to a study by the American Action Forum, Dodd-Frank incurred “$24 billion in final rule costs and 61 million paperwork burden hours.” The Wall Street Journal further added that the Act destroyed small and regional banks. During its first five years, the nation lost, on average, one small bank or credit union per day.
Since regional banks are integral to small businesses and communities, this executive order is personal to Donald Trump. Many believe that his promise to make America great again entails bringing jobs back. That’s only half the story. The other half involves shoring up our infrastructure, and helping small businesses. Because it’s the little guys that do most of the hiring, the President can’t ignore their needs. In turn, that means boosting regional banks.
Unlike other executive orders, the “Core Principles” should find much-needed bipartisan support. Here are three bank stocks that will soon find sustained relief.
Regional Bank Stocks to Buy: PNC Financial Services Group Inc (PNC)
You don’t have to look too far to see the kind of damage that Dodd-Frank has done on PNC Financial Services Group Inc (NYSE:PNC).
Although it’s one of the larger bank stocks among the regional banks category, PNC hurt just like everyone else. In 2013, management announced that they would shut down 200 retail branches as part of a $700 million cost-cutting campaign.
The reasons necessitating the cuts were of course varied. I don’t want to pin all the problems of regional banks on Dodd-Frank. For example, the economy was extremely slow during the early part of this decade thanks to the Great Recession. Low interest rates also stymied progress for PNC and virtually all other bank stocks as it killed profit margins.
However, compliance with Dodd-Frank was a big one.
As mentioned previously, the Act imposed billions of dollars of cost across all bank stocks — not just the big boys. Logically speaking, there were regional banks that just couldn’t pony up the sudden expenses. Sure, the financial services sector were involved in speculative and predatory practices. However, it doesn’t mean that PNC and other regional banks committed the same magnitude of crimes. Yet Dodd-Frank punished everyone the same.
With that unfair weight likely to be lifted soon, PNC should be a hot pick for 2017 and beyond.
Regional Bank Stocks to Buy: M&T Bank Corporation (MTB)
Due to Dodd-Frank, regional banks that exceeded a minimum asset value were interrogated under the standards of the “Big Four.”
That threshold is $50 billion, and unfortunately, M&T Bank Corporation (NYSE:MTB) fell into that dubious category. The profit incentive should be the prime motivator for any capitalistic country. Sadly, Dodd-Frank beat the snot out of that sentiment. For bank stocks like MTB, it was almost preferable to lose money.
Let’s just take a look at some facts. MTB has a market capitalization of $25.2 billion, and an enterprise value of $29.6 billion. On the flip side, we have the king of bank stocks, JP Morgan. JPM’s market cap is a whopping $310.3 billion, and an enterprise value of $267.4 billion. For both metrics, we’re talking about differentials of 800% or more. Yet thanks to government logic, MTB has to take a JPM-esque stress test, among other crazy regulatory standards.
It doesn’t matter if you’re a Republican or a Democrat — the well-intentioned Act is just bad policy. This is further affirmed by the technical performance of MTB stock. For the better part of the last three years, MTB has been trading sideways. However, as soon as Donald Trump took an unexpected victory, shares went bananas. On Nov. 9, MTB closed up 5%. Since then, it has been largely nothing but blue skies.
With President Trump’s executive order, I expect great things from regional banks like MTB.
Regional Bank Stocks to Buy: Sun Trust Banks, Inc. (STI)
If you think about it, Dodd-Frank is emblematic of the previous administration. The Act sounds great in principle, but not so great in practice. Unfortunately, SunTrust Banks, Inc (NYSE:STI) found this out the hard way.
Too small to be a major player, yet too big to fly under the legislative snare, STI became the worst of two worlds.
Like M&T Bank, SunTrust had to go through multiple and mandatory stress tests. But the principle of the matter is what really bothers STI and its investors. Dodd-Frank disproportionately affects small and regional banks because the regulatory platform isn’t staggered. The “Big Four” bank stocks have all the money in the world to hire attorneys to read this stuff. Regional banks have more important things to do, such as taking care of their customers.
And how bad has the Act been for STI and company? The New York Times — yes, that “fake news” outlet — ran op-eds denouncing these counterproductive regulations. More pointedly, Dodd-Frank may impart financial instability instead of reducing it. This is due to the introduction of complex rules on top of an already complex financial system. Such tactics are crippling to STI and regional banks, causing many of them to shutter their doors. Logically then, there will be more risk to spread across fewer institutions.
The only thing fake here was the promise of Dodd-Frank. STI is much better off without it.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.