Why Invest in Banks? "Because That's Where the Money Is."

Our apologies to Willie Sutton, the famous bank robber who allegedly responded with this quote when asked why he robbed banks.

We have often said we like bank bonds, since banking is the one sector in the corporate bond market were credit fundamentals have improved dramatically since the financial crisis. Capital levels have doubled, risky assets have been shed, liquidity is vastly improved, and oversight by the Federal Reserve and countless other agencies has kept this industry, an engine of economic growth, purring along in 2nd gear.

Slow is good for bond investors; it’s safe and accidents are rare. And with the election of Donald Trump, we have another reason to like banks – they should be making more money under many of Trump’s proposed economic policies.

First, proposals for fiscal stimulus are already pushing up interest rates in the long end of the curve and improving the odds for an increase in the Fed funds rate. Banks have struggled with historically low interest rates over the last few years and should more easily grow net interest income with higher rates. 

Second, fiscal stimulus should help keep our slow and steady economic recovery in place and could even help increase wages. Banks make money when companies and consumers borrow more and pay off their debts. If we can push off the next recession, it will be very good for banks.

Third and finally, Trump has floated a number of proposals to reduce bank regulation. We would be the first to admit that stronger bank regulation has greatly reduced systemic risk in our financial system, and this is good for Main Street and Pennsylvania Avenue. However, after eight years of increasingly stringent and very costly regulation, banks are making a poor return on capital and are increasingly focusing on pleasing regulators rather than on pursuing innovation and prudent risk taking – two factors that help grow the economy and create jobs. This is bad for Main Street and Pennsylvania Avenue.

Bank stocks and bonds have rallied on the prospect of a more profitable and slightly less regulated banking sector. The chart bellows shows the big jump in the KBW Bank Index since the Trump election. Note this index has, even now, yet to recover from the financial crisis, while the S&P is up 40% from pre-crisis highs. Bank bonds are higher as well since the Trump election, especially money center banks where we prefer to invest.

Source: Barclays, Financial Times, Wall Street Journal, Bloomberg